In the past few months I have seen far too many firms who are working very hard at full utilisation but struggling to build any real equity value. That's not to say that they're not growing. Often revenue growth looks good but profit margins are in single digits or even worse. A quick analysis of their financials almost always shows the same root cause. Gross Margin (GM) ie the difference between what you charge a client and what you pay consultants is way too low.

What do I mean by 'low Gross Margin'?

Well if your GM is less than 60% on a project and less than 50% at the company level, it is unlikely that you will be creating the funds for growth at the same time as delivering a net margin that will drive equity value. For a firm to have intrinsic equity value, not only does it need to produce a good net profit, year on year, but it needs to be able to grow that profit in absolute terms each year. So let's investigate why GM's are so low.

Fortunately we don't have to look too far for the symptoms even if the remedies are more complex!

Take a look at your 'blended fee rate'. This is the weighted average, taking into account the quantity of different skills at different rates, that you charge your clients.

For most firms in most sectors in today' market, if your blended rate is less than £750 then you are in the 'busy fool' trap! There are always exceptions to this rule of course depending on the type of work you are doing and the type of client. We all know that SME's and local government don't pay good rates. Moving to sectors that do might be an answer! But for most of us a good test of whether you are charging enough for your services is to go out to the contract or associate consultant market and find out how much per day you would need to pay to get the skill level required for your client.

If you are not charging twice as much, i.e. a GM of 50%, to the client for this work then you are probably selling yourself short.

"Why would a client pay twice as much for my firm to do the work as opposed to employing a contractor to do the same at half the price?", I hear you say! The answer to this question is a large part of the solution to how you build equity value in your firm and it all revolves the Unique Value Proposition that you present to prospective clients.  If you are selling individual technical skills then don't expect to make much of a margin on each consultant - employed or contract - that you provide to the client. If on the other hand; you help the client diagnose their problem, you craft a solution to that problem with them, you commit to solve that problem at a fixed price with a well thought through ROI and maybe even put some of your fees at risk to demonstrate your commitment and confidence, you programme and project manage the delivery of the solution and have case studies and testimonials to prove your worth. 

If you do some or all of this then 50% plus GM's are achievable

If you're already do some of this and are not charging for it, well maybe there is a problem with either your marketing or sales approach or it just could be that you haven't tried. Remember it's easy to sell a £10 note for £5! Getting full value for your services takes more effort and occasionally you will fail but that's good because you will know then just how much your services are valued. Of course it could be that you really just do sell bodies and that's fine so long as you realise that the path to equity wealth will be a tough one!