Growing micro consultancies is hard.
Being in this position (1 to 5 full-time employees, with fee billings per employee under $150k/year) is typically not very pleasant. You can't close shop and take some time off like freelancers or solo advisors. But you also can't step away from the business without it breaking.
And the worst thing is: Most founders and managing partners of micro consultancies would earn more by taking a corporate job.
Growing your practice into a lifestyle boutique consultancy while being fairly compensated by it is the goal. And to achieve it, it might be helpful to reason from first principles.
Your total compensation as a consultancy partner might be composed of different things, such as a fixed salary, bonuses, and your share of profit. How do you get this number up? To simplify the explanation, let's assume your compensation equals your net profit.
An easy way to visualize the main levers at play is by looking at how we calculate profitability, and invert it.
If profit margin = profit/revenue, then profit = margin x revenue.
So, pragmatically speaking:
To improve partners' compensation your consultancy can focus on increasing revenue, increasing your operating margins, or both.
Anyone who sits for a few minutes to think about this problem will recognize it is not as simple as it initially seems. Bringing in more clients, for example, increases your top line. But also forces you to spend more on service delivery, administration, and client support, which hurts margins.
This is not a theoretical example. I've personally met several consultancy founders who invested huge energy in acquiring more clients and increasing capacity, only to see that their financial compensation was similar to the one they had with half as many clients.
Just like escaping every freelancer's feast-and-famine cycle, increasing partners' compensation in a sustainable way requires strategy work.
There are two types of business strategies for boutiques. There are firms built around a small number of clients who are each spending a lot. Some refer to these as elephant hunters. They live and die on the big deal. And there are firms built around a large number of clients who are each spending a little. Some refer to these as rabbit hunters. They live and die on volume.(...)
The type of engagement you sell and deliver has many implications. It determines who you market to. It determines how you charge and how you staff. It impacts the number of clients you can serve. The list goes on and on. Therefore, it is essential that you know exactly the type of engagements you deliver.
Source: Greg Alexander, "The Boutique"
Owners are earning less than during COVID: The remuneration consulting business owners received in the last 12 months has dropped significantly. In 2020, 28% of respondents earned over £200k. In 2022, that dropped to 18%.
Source: Consultancy BenchPress 2023
Are you paying yourself a salary based on external benchmarks?
Your margins are an important number to check, but they need to be combined with other KPIs - especially for solo and micro consultancies. The reason for this is that it's easy to cheat the numbers.
The more you underpay yourself, the more you will subsidize net profit. It artificially inflates your margins.
If you are looking at huge profit margins, you probably are not paying yourself a market salary. There's a cost to your time. You need to add it to the equation.