A professional service firm’s leverage is also central to its economics. The “rewards of partnership” (the high levels of compensation attained by senior partners) come only in part from the high hourly (or daily) rates that the top professionals can charge for their own time. Profits also come, in large part, from the firm’s ability, through its project team structure, to leverage the professional skills of the seniors with the efforts of juniors.

The successful leveraging of top professionals is at the heart of the success of the professional firm. As demonstrated below, a significant portion of partnership profits derives from the surplus generated from hiring staff at a given salary and billing them out at multiples of that salary. By leveraging its high-cost seniors with low-cost juniors, the professional firm can lower its effective hourly rate and thus reduce its cost to clients while simultaneously generating additional profit for the partners.

The market for the firm’s services will determine the fees it can command for a given project; its costs will be determined by the firm’s abilities to deliver the service with a cost-effective mix of junior, manager, and senior time. If the firm can find a way to deliver its services with a higher proportion of juniors to seniors, it will be able to achieve lower service delivery costs. The project team structure of the firm is therefore an important component of firm profitability.

Excerpted from ‘Managing the Professional Service Firm’ by David Maister, pages 8-9