If you ask a principal at a consulting firm about the value of their time, many will reference their billing rate, typically between $200 and $250 per hour. However, this figure only reflects the value of the tasks performed for clients from the client’s perspective, not the true value of the principal’s time.
Principals not only handle client-related tasks but also contribute to the overall success of the firm. To make informed decisions about how to optimize their time, it’s essential to better understand the value of their contributions to the firm.
While different companies may have varying expectations for their principals, these leaders are generally responsible for the growth and performance of the organization. This responsibility can include activities like marketing, process improvement, training, and mentoring, all aimed at continuous improvement.
Quantifying the value of each principal’s task is challenging. While it may be difficult to assign an exact dollar figure, it is possible to start assessing how principals add value and the potential magnitude of their contributions. Consider this example:
A midsize consulting firm with a market value of $10 million has four principals. If one principal spends a year growing the firm’s revenue by entering a new market or opening a new office, what is their time worth? If this effort leads to a 10% increase in net revenue while maintaining the same profit margin, the firm’s earnings and market value would also rise by at least 10%, or approximately $1 million. In this scenario, the principal’s time, over 2,000 hours a year, could be valued at around $500 per hour.
A few points to note about this example: First, we used market value, which is driven by earnings. The same applies to book value, influenced by accounts receivable and revenue. Additionally, the market value would likely increase by “at least” 10% because an increase in earnings can also boost the earnings multiplier used to estimate market value. This “double” value effect could result in a 21% increase in value and a potential $1,000 per hour value if both the earnings and multiplier increase by 10%.
Similarly, improving profit margins through process enhancements, client optimization, or training would also increase profits and overall value. Whether a principal is focused on increasing revenue or profit margins, their contribution to the firm’s value often far exceeds what is represented by their billing rates.
Shifting principals’ mindsets to routinely recognize the actual value their daily tasks contribute to the business is crucial for optimizing their actions. A key first step is understanding that principals, who are often considered overhead, should not perform tasks that others in the firm can handle simply because their time is seen as “free.” For example, I’ve seen the president of a 250-person consulting firm conduct a quality review for a specific billable project, rationalizing that it would boost the project’s profit margin since his time was 100% overhead. This scenario overlooks the opportunity cost—the lost value that could have been achieved if those four hours had been spent on growing and improving the firm’s performance. Additionally, this approach skews the profit data for that client, making it harder to assess the efficiency of processes and identify areas for improvement.
Another valuable step is to read “Who Not How” by Dan Sullivan. The book highlights the importance of finding the right people (“Who”) to help achieve your goals, rather than getting bogged down by figuring out “How” to do everything yourself. By leveraging others’ expertise, you can accomplish more, reach your goals faster, and focus your time and energy on what you do best. This mindset shift from “How can I do this?” to “Who can do this for me?” is key to unlocking greater productivity, success, and personal fulfillment.
Recognizing the value of time spent building your organization and identifying the right people to handle tasks that free up your time for higher-value activities are critical steps toward building a high-performance consulting firm.