The most profitable consulting-type businesses have profit margins >=50%, before distributing profits to equity holders. But either way I'm not sure about your implicit assumption here that the profits should be comparable to the pay of the employees.
Hey, you began your comparison with the most profitable consulting firms…
2 things -
1) Accenture has an EBIT of 20%.
2) The tippy top of the consulting pyramid plays on branding in a way that the average firm does not.
The VAST majority of service driven firms will not become McKinsey etc. making this a poor comparison
Finally - I doubt that the top firms have those margins, I would most definitely like to be corrected though. If you could clarify or share your source, I’d appreciate it.
Note I mention profit before distributing to equity holders. The highest prestige and therefore most profitable consulting companies are all partnerships.
Some highly profitable consulting companies that are partnerships have very high margins, if you don't include the profit sharing component of the pay of equity partners (but do include bonus and fixed salary). The primary public source I can point to is that many top law firms publish their margins to be >=50%.
As for McKinsey, according to Google, McKinsey has 10k consultants and 2700 partners. There are 30k employees, so I give you that the overhead rate is higher than law firms. But
given how different pay is between partners and non-partners, and there is still a relatively large portion of partners compared to other employees, the margins, if calculated this way, is probably still pretty high.
Now is this the right way of considering profit margin? There are some good reasons to disagree with it. But in the same way people can like or dislike EBITDA. At least, it's like nobody discounts Larry and Sergey's cut from Google's profit.
In this context, I would argue it is indeed a good way, especially for the purposes of discussing the discrepancy between grunt pay and hourly charge. It tells us that a very large part of that discrepancy goes to equity partners (who aren't those doing the execution work), rather than "overhead" as it's being argued. This is very different from big-corp type public companies where, even though executive pay is a lot, the bulk of the pay goes to shareholders ans a large number of rank and file and moderately paid middle-managers, which I suspect to be closer to accenture's profile.
The idea of equity in a consulting-type business is pretty strange, on the face of it.
Leaving aside the partnership fair/unfair model, equity = access to capital.
But consulting-type businesses are essentially headcount machines, because the product is 1 person's time.
So why do you need access to capital?
Granted, it makes expansion easier (hire ahead of work), but as far as profit distributions go, what are equity holders providing in exchange for their slice of the profits?
Primarily, you want an apples to apples comparison. A law firm is a service provider, however not a consultancy. The service the two types of firms provide are not directly comparable.
Furthermore, a law firm is a place where your assertion - “ discrepancy goes to equity partners (who aren't those doing the execution work)…”
Senior partners are pretty critical in bringing and keeping clients.
In my previous service company, we aimed for 10%, which was considered the norm. However, we were particularly bad at achieving this, with only 8-9%, though we did have a good atmosphere and happy employees
Getting to profit through pure people power is hard. Every next person you add doesnt double your output. It’s maybe increases it by some %. (This includes overhead costs)
