Profitability Metric for a Consulting Firm

In analyzing profitability of any business, two factors matter: the margin and velocity (or volume).

In simple terms R = M x V

(R is return, M is margin, V is Velocity or Volume).

Take the airline business; profit from each flight is margin, number of flights that can be squeezed in a given amount of time is velocity. The efficiency of Southwest in turning flights around quickly and put them back in air in order to squeeze in more number of point-point trips in a day is what drives its profitability, not just its no-frills operation.

Similarly for a restuarant, margin per customer times the number of customers served over a given amount of time is the return that matters.

So what is the equivalent metric that matters in the consulting business?

Consulting firms today obsess over margin per consultant and utilization. The logic driving it being, the return is margin per consultant times number of consulting days in a quarter or a year that you are able to sell and deliver of the consultant’s time.

Instead, think margins on projects and number of projects you are able to sell and deliver in a year. The value from a project is what customers care for, and what they should pay for, what the consulting firm ought to focus on for its profitability metrics.