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The Anatomy of a Consulting Firm By David H. Maister Leverage Structure This is chapter two of The Advice Business: Essential Tools and Models The consulting firm may be viewed as for Managing Consulting (Pearson the modern embodiment of the medieval Prentice Hall, 2004) edited by Charles J. craftsman’s shop, with its apprentices, Fombrun and Mark D. Nevis. journeymen and master craftsmen. The early years of an individual’s association It has been adapted (with permission) with a consulting firm are, indeed, from material contained in David H. usually viewed as an apprenticeship, and Maister’s Managing the Professional the relation between juniors and seniors Service Firm (Free Press, 1997) and is the same: the senior craftsmen repay True Professionalism (The Free Press, the hard work and assistance of the 1993). juniors by teaching them their craft. Every consulting project (and hence The structure and management of every consulting firm) has its own consulting firms is driven primarily by appropriate mix of three kinds of people. two key factors: the degree of By tradition, these are called “finders, customization in the firm’s work minders and grinders.” This refers to the activities and the extent of face-to-face three main activities that make up interaction with the client. Both of these consulting work. Finders (usually the characteristics (customization and client most senior level) are responsible for contact) imply that the value of the firm bringing in the business, scoping and is often embedded less in the properties designing the projects, and engaging in of the firm and more in the specific the high-level client relations necessary talents of highly skilled individuals. The during the work. The main responsibility consulting firm must therefore compete of minders is to manage the projects and actively in two markets simultaneously: the team of people working on it. the “output” market for its services, and Grinders (the lowest level) perform the the “input” market for its productive analytical tasks. Naturally, this is an resources, the professional workforce. It idealized structure and, depending on the is the need to balance the often firm, all may participate in analysis conflicting demands and constraints and/or junior people may be delegated imposed by these two markets that tasks associated in the ideal model with creates the special challenge of higher levels. structuring and managing the consulting The required shape of the organization firm. (the relative mix of juniors, middle-level staff and seniors) is usually described as Copyright 2005 David H. Maister Page 1 of 1 www.davidmaister.com The Anatomy of a Consulting Firm its leverage structure, and is primarily this period will seek greener pastures determined by the (aggregate) skill elsewhere, either by their own choice or requirements of its work: the mix of career ambitions or at the strong senior-level, middle-level and junior- suggestion of the firm. level tasks involved in the projects that Few firms offer career positions at the the firm undertakes. middle-level or junior ranks. Partnership Getting the leverage structure right is or ownership is usually restricted to key to the consulting firm’s success. If a those who attain the highest levels. In firm brings in a mix of client work that recent years, however, which have seen requires more juniors, and fewer seniors, a people shortage or “war for talent,” than the firm has in place, higher-priced some firms have experimented with people will end up performing lower- offering profit sharing, stock options or value tasks (probably at lower fees), and other financial incentives to allow those there will be an underutilization of who are not at the highest levels to share senior personnel. The firm will make in the firm’s overall success. This has less money than it should be making. not removed the expectation that most The opposite problem is no less real. If a staff will continue to strive for firm brings in work that has skill promotion to the highest levels. requirements of a higher percentage of This promotion system serves an seniors and a lesser percentage of essential screening function for the firm. juniors, the consequences will be (at Not all young professionals hired will least) equally adverse: a shortfall of develop the project management and qualified staff to perform the tasks and a client relations skills required at the consequent quality risk. Matching the higher levels. While good initial skills required by the work to the skills recruiting procedures may serve to available in the firm (i.e., managing the reduce the degree of screening required, leverage structure) is central to keeping they can rarely eliminate the need for the the firm in balance. promotion process to serve this Leverage and the People Marketplace important function. The existence of a “risk of not making it” also serves the The connection between a firm’s firm in that it puts a degree of pressure leverage structure and the people on junior personnel to work hard and marketplace can be captured in a single succeed. sentence: people do not join consulting for jobs but for careers. They have The promotion incentive is directly strong expectations of progressing influenced by two key dimensions: the through the organization, from grinder to normal amount of time spent at each minder to finder, at some pace agreed to level before being considered for (explicitly or implicitly) in advance. promotion and the “odds of making it” (the proportion of juniors promoted.) For While the pace of progress may not be a any given rate of growth, a highly rigid one (“up or out in x years”), both leveraged firm (one with a high ratio of the individual and the organization juniors to seniors) will offer a lower usually share strong expectations about probability of making it to the top, since what constitutes a reasonable period of there are many juniors seeking to rise time for each stage of the career path. and relatively few senior slots opening Individuals who are not promoted within Copyright 2005 David H. Maister Page 2 of 2 www.davidmaister.com The Anatomy of a Consulting Firm up. A less leveraged firm at the same shown in Figure 1. This defines four rate of growth will need to bring along a kinds of professional practice, which for higher percentage of its juniors, thus the purposes of example we’ll call providing a greater promotion incentive. Pharmacist, Nurse, Brain Surgeon and Psychotherapist. Leverage and Profitability A consulting firm’s leverage is also The Pharmacist central to its economics. The rewards of A Pharmacy practice is one where the partnership or ownership (the high levels client is trying to buy a relatively of compensation attained by vice familiar service and does not require presidents or senior partners) come only very much counseling, consultation or in part from the high hourly (or daily) contact. The client wants the service rates that the top professionals can performed to strict technical standards at charge for their own time. A significant a minimal cost. Notice that this type of portion of profits derives from the practice is defined as a standardized surplus generated from hiring staff at a process conducted with little, if any, given salary and billing them out at client contact. This does not mean that multiples of that salary. By leveraging the result cannot be highly customized, its high-cost seniors with low-cost merely that the process to be followed in juniors, the professional firm can lower producing the result is well specified. its effective hourly rate and thus reduce While this type of work is common in its cost to clients while simultaneously systems installation and other IT firms, it generating additional profit for the can also be found in high-end strategy partners. firms, where component analyses of cost structures, market shares, competitive The market for the firm’s services will positioning and many other studies, as determine the fees it can command for a valuable as they can be, have been given project; its costs will be highly proceduralized and can be determined by the firm’s ability to conducted with thoroughness and deliver the service with a cost-effective accuracy by junior staff. The method of mix of junior, manager and senior time. conducting these analyses does not vary If the firm can find a way to deliver its from job to job. services at the same quality with a higher proportion of juniors to seniors, it Quality standards, in the sense of will be able to achieve lower service- “conformance to specifications,” must delivery costs. (Note that this is true be high for this work, since the client whether the firm bills by the hour or on a will be “swallowing the pills.” However, fixed-fee basis.) The project team the client does not require that the pill be structure of the firm is therefore an specifically designed for him or her. The important component of firm client wants to buy well-established profitability. methodologies and procedures, not innovation and creativity. The Client Marketplace Degrees of client contact and The client is in effect saying, “I have a customization vary from to firm, or even headache, and I know that you, along with many others, are licensed to practice area to practice area. Some dispense aspirin. Don’t waste your time differences between types of practice are and mine trying to convince me that it’s Copyright 2005 David H. Maister Page 3 of 3 www.davidmaister.com The Anatomy of a Consulting Firm brain surgery that I need. I’ve done this assignment. Here, the client says, “I before, and I can tell for myself the have a bet-your-company problem.

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