Now let’s return to one of our examples in the previous Lesson and take a closer look.
Corinne, our 26-year-old MBA graduate, is thrilled with her $180,000 salary. Not only is it well above the average of her graduating class, it will help her pay down her $120,000 MBA debt more quickly. On top of all this, she will work for one of the premier firms and get great experience across multiple industries. So, we know what she’s getting from the deal, and on its surface, it sounds pretty good.
The consulting firm is also getting a good deal. For her $180K, the firms’ partners will expect her to bill between 2,000 and 3,000 hours per year at a rate between $350 and $500 per hour. As a result, she will produce between $700,000 and $1,500,000 in revenues per year for the firm. At the low end, the firm will make a small profit; at the top end, it will reap a 733% return on its investment—not a bad bet on a 26-year-old. Most of the firm’s new associates will earn the firm around $900,000, a 400% return.
The pressure will be on Corinne to produce at the average of $900K or better year after year. If not, then she will not last more than a year or two since the firm will not carry those who can’t carry more than their own salary. This holds true even if the firm does not log and bill hours. (Some firms tell their associates how many hours to bill, not how many hours they actually worked.) Nevertheless, these firms still have a bogey in mind that each associate must meet to stay employed.
For Corinne to bill 2,000 hours, she will probably have to work 2,500, which means 50-hour work weeks (these 500 non-billable include internal meetings, proposal writing, training, travel time, and other activities). To bill 3,000 hours, she will work 3,500+ hours, which results in 70-hour work weeks. At that rate her $180K begins to look like two jobs: one pays $103,000/year for a 40-hour work week, while the other pays $77,000 for 30 hours per week.
So, who is the winner in this deal: Corinne or the consulting firm? Corinne is making a bundle of cash—$180,000 for 50 to 70 hours of work is still $180K and a heck of a lot better than working two minimum-wage jobs where 70 hours for 52 weeks at the 2020 federal minimum wage of $7.25/hour (established by law in 2009) would only put $26,390 in her pocket each year. (If the minimum wage gets raised to $15/hour, minimum-wage Corinne would make $54,600.) Plus, she gets good experience, the chance to hobnob with corporate big-wigs, and a skill set that will allow her to boost her salary considerably either within the firm or by jumping to another job.
The firm, however, is probably getting the better end of the deal. For every dollar that Corinne makes, the firm makes $4 on average. After subtracting overhead costs for both Corinne and the entire firm, the partners will pocket $2 for Corinne’s $1, a better investment than the stock market, which on average returns $1.10 for every $1 invested. In essence, the consulting firm is “leveraging” Corinne for its benefit.
Sure, the firm will argue that Corinne’s input of labor is small compared to everything that the firm brings to the table—they absorb the cost of training and paying Corinne while she learns the consulting craft, as well as all the overhead associated with a firm that has to be paid regardless of client revenues. Likewise, it absorbs the risk that Corinne will not work out and they will lose their investment in her. Plus, they bear the risk of making sure enough client work is in the pipeline to keep Corinne billing those 2,000 to 3,000 hours each year. If not, then Corinne sits idle, and just like an idled manufacturing plant, she bleeds money for the firm. Finally, they provide access to clients, consulting projects, and the firm’s deep intellectual capital, all of which give Corinne the experiences that she desires.
What they don’t say is that they will hire 20 to 50 MBA grads like Corinne. Just as they might have a couple mis-hires who only bring in $200 to $300K, they will also have some winners who produce $1.5 million in revenue. If they get a bell-shaped performance curve, then they will average $900K across all the new hires. Since they are hiring the highly motivated best students, the performance distribution will be skewed more towards success than failure. This “portfolio” approach reduces their risk considerably, just as it does for stock market investors. Although there is no guarantee that it will work out this way, the odds are stacked in the firm’s favor.
Critical Path Action Items
How, like Corinne, have you been leveraged in the workplace?
How much benefit did you give up due to being leveraged?
How have you leveraged other or the company for your benefit?