Firehose #194: ⚖️ Operating leverage. ⚖️

Imagine another pair of businesses. The first makes $1 on each customer it signs up; the second makes $100,000 from each customer it signs up. To predict which company will grow faster, you need to know only one additional thing: how much it costs to sign up a new customer. Imagine that the first company uses Google AdWords to find new customers on

The market for the firm’s services will determine the fees it can command for a given project; its costs will be determined by the firm’s abilities to deliver the service with a cost-effective mix of junior, manager, and senior time. If the firm can find a way to deliver its services with a higher proportion of juniors

we would expect the expertise practice area to be relatively unleveraged, with low fixed costs and high margins. The firm would make its profits through high billing rates or some form of value billing, justifiable and sustainable because of the criticality, complexity, and risk in the client engagement.

dangerous. In my experience, many low-margin practices are more profitable, on a profit-per-partner basis, than higher margin practices with low leverage because of the effective use of leverage.