Leverage is one of the more common concepts in the professional services industry, but it is often misunderstood. Leverage is commonly correlated with the percentage of junior-level employees in the firm, but it is more about profitability than the employee demographics or organizational model.

Simply put, leverage is the spread between the client bill rate and labor cost for a unit of work. The larger that spread, the higher the profit margin and the greater the leverage. Professional services firms can only improve project gross margin through two means: charging higher rates/fees for the work or delivering the work at a lower labor cost. Since bill rates are somewhat bound by the market forces of supply and demand, it is usually easier for firms to improve profitability by focusing on the cost side of the equation.

Firms that deploy a “leverage model” assign project tasks to the least expensive resource that is capable of delivering the work at the needed level of quality. Senior personnel in a leverage model usually only deliver those tasks that require their high level of experience and expertise. The remainder of their time is focused on overall engagement management, nurturing the client relationship, sales, and keeping the team productive.

Within the past couple of decades, leverage models have evolved to include offshore labor arbitrage. Instead of assigning project tasks to capable junior personnel, firms have been able to drive their labor costs down even further by sending the work to an offshore team (that usually includes junior and senior members). This offshoring trend started with IT services but has since expanded to other professional services segments such as accounting and legal.

Leverage is about maximizing the profitability of the services your firm provides. When the services are complex or require decades of experience to deliver, a senior member of the firm should be assigned to the work in order to ensure a high-quality result. But when tasks are more rote in nature, it is possible to assign a less-experienced and less-expensive person to deliver the work at higher margin.

Determining the Leverage Model Fit

The most important thing to understand about leverage is that the services mix of the firm determines the amount of leverage possible. In order to assess whether a leverage model is viable for your business, you must first analyze the services and individual tasks that the team delivers. If the overwhelming majority of those services and tasks need to be delivered by an experienced person, there likely isn’t much leverage potential in the model. But if a good portion of the services and tasks are more procedural in nature, there is an opportunity for leverage.

Some types of firms have more difficulty deploying a leverage model than others. For example, boutique management consulting firms usually lack significant leverage. In these firms, the client interaction is often with C-level executives and it takes highly-experienced senior personnel to sell and deliver the services. Deploying junior-level employees to execute senior-level work usually results in a poor client experience. Thus, boutique management consultancies rarely have many junior personnel and typically lack leverage.

Leverage Requires Maturity

As stated above, only firms that have tasks suitable to junior (or offshore) personnel have the option to use a leverage model. But, is a leverage model right for every firm that qualifies? Absolutely not!

While the profitability upside of deploying a leverage model is attractive, it requires a meaningfully higher level of organizational maturity. It’s not as simple as hiring a bunch of juniors and throwing them on projects. There is significant organizational weight that comes with a leverage model. Pursuing a leverage model without fully evaluating your firm’s readiness will usually hurt profitability and client satisfaction.

When a firm is comprised of highly-experienced personnel, it doesn’t require a great deal of administrative overhead. But as junior personnel are added, that changes considerably. Some of the things you must consider when evaluating a leverage model include:

• Junior employees need managers. Are your senior employees willing to manage and coach juniors? Some senior people dislike being in the manager role.
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• Junior employees will expect (and deserve) regular performance evaluations. Juniors want to understand their goals and how to achieve them. They want to know what they are doing well and what they could improve upon. This requires weekly check-ins with managers, annual evaluations, peer reviews, and the like.
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• Utilization will go down for senior personnel. Given that senior personnel will have many more “overhead tasks” to complete in a leverage model, they will have less time available to bill on client engagements.
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• Inexperience requires process definition. Whereas senior people may “know how to do everything”, junior people do not. The firm will need a detailed employee handbook of policies and procedures, a well-documented delivery methodology, and similar process artifacts.
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• Leverage models generally correlate into larger headcount firms. If you have 20 senior employees in your current firm, you could end up with 2-3 times that number in a leverage model. Some firm leaders love that notion, while others would rather keep the team small.
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• Larger firms need larger HR and recruiting functions. Larger companies need a robust recruiting operation that is able to quickly replace exiting employees or hire for growth. Also, leverage model firms typically need a strong on-campus college recruiting program to attract and hire the best juniors. A side effect of this larger recruiting function is that many more interviews get completed and most of those will require the time of senior-level personnel.
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• Junior personnel will expect training. Inexperienced hires don’t just want to gain experience via “on the job” training. They will want formal in-house or third-party training to improve their skills.
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It is important to realize that the project profitability benefits achieved in a leverage model can be nullified by the additional organizational overhead. While the firm might be delivering much more attractive per-project gross margin, the higher operating expenses to support the model could result in no improvement in net margin. Or worse, the net margin could actually be lower in the leverage model.

At the end of the day, the decision should be based on the leverage potential in the business and the preferences of the firm leaders. If there is a significant portion of tasks (say, 30% or more) that could be delivered by juniors or offshore personnel, it could make sense to deploy a leverage model and take on the additional administrative expense. But if most of the work requires senior-level personnel, deploying a leverage model will likely have no financial benefit and only introduce organizational pain.