There is no necessary relation between growth and profits. Why is this so? If a firm grows subject to two conditions whereby:

(a) the mix of client projects (and hence fee levels) remains the same; and

(b) the project staffing (or leverage) is such that the same proportion of senior or partner time is required to handle each project; then the number of seniors or partners that the firm requires will correspond exactly to the growth rate. In consequence of this, the profit pool may increase because of the higher volume, but it must be shared among a correspondingly increased number of partners.

If per-partner profits are to increase, then one of the two conditions must be broken. Either the firm must bring in a different mix of business commanding higher billing rates (ie., find higher-value work for its people to do), or it must find ways to serve the same kinds of work with an ever increasing proportion of junior time, and a declining proportion of senior time.

It is interesting to note that few prominent professional firms act as if growth were profit neutral. Indeed, rapid growth is often listed as a primary goal of the firm, and advances in top-line growth are used as a primary internal and external measure of success. If justified in the name of providing career opportunities for staff, this indeed makes sense. However, if desired on profitability grounds, it would appear that many professional firms are fooling themselves!

Excerpted from ‘Managing the Professional Service Firm’ by David Maister, pages 17-18