Margin and Margin Percentage
The term “margin” is a key benchmark of a project’s financial success. To put it simply, margin is the amount of profit earned on a project. To get to this number, you simply sum the revenue and subtract the cost. Margin’s close friend “margin percentage” is simply margin divided by revenue. Margin percentage can be calculated at the individual consultant level, dividing the total revenue the consultant will generate and by total cost to keep that staff member employed (salary plus burden). This core calculation can be rolled up to projects, practices and the entire organization, and is a key metric related to a consulting firm’s success.
Utilization
Utilization is frequently your key individual metric. The younger you are in your career, the higher likelihood this is the sole metric driving your performance reviews. Utilization is the rate at which you were—you guessed it—utilized on a billable project. This metric is simple: it is the number of hours you billed divided by the number of hours you could have billed (usually 40). Some companies remove PTO (Paid Time Off) from the denominator as that will not count against you in the calculation. Either way works, as long as the company is consistent about it. Most firms target 75-95% of utilization, especially for their younger resources.
It is possible to go over a 100% utilization for weeks leading up to deadlines, but do not focus on exceeding 100% every week of your life. I have learned that is unsustainable and not a fair ask from your employer. If you are trying to make a name for yourself early on in your career, you will need to mix some of these long weeks in, but if your firm expects this of you consistently, they do not respect your personal and emotional wellbeing. You should probably prepare yourself for a more balanced position once you have the experience.
The combination of getting great margin and high utilization for younger resources is the key to why someone right out of school or early in their career is a great candidate for consulting firms. It’s no secret that the salary of this type of person is going to be significantly less than someone with ten or more years’ experience, which consequently means the core cost of that resource is also significantly lower. If this resource is billed out at the same utilization rate and similar billable rate as a highly experienced counterpart, their margin will be significantly higher. In short, the lowered salaried resource will generate more cash for the firm. Firms can offset this by charging a higher rate for managers, senior managers and above, but the margin increase by the higher rate tends to not offset rising salaries. To let you in on a little secret, firms are often looking for folks that are good learners to be jack-of-all-trades style employees at the entry-level. This allows them to capitalize on the high margins they produce.
Meeting Cost Calculator
As a consultant, be prepared to sit through a lot of meetings. You may even have meetings about meetings. A lot of time and money can be burned by sitting in these meetings and it will benefit you to keep tabs on how much a single meeting cost. Simply multiply the hourly rate of each resource by the attendees in the meeting. It is typical to have a one-hour meeting cost the client two thousand dollars. Knowing the cost will make you think twice about inviting too many attendees, meeting too frequently and letting topics meander.
Project Overrun
Project overrun is the cost incurred by the project running
over time or budget. In fixed-bid projects or those where the client is unhappy,
projects may require remediation (fancy term for “free work”), and may affect
the profitability of your firm to eat up the cost of the overrun amount.
Are you interested in starting a career in consulting? Be sure do read the full book Jack of all Trades Master of Some; An Introduction to Consulting available on Amazon.