By Jason Parks, Director – Strategic Advisory Services, Equiteq.
Gross margin is an important metric in consulting organizations. It can be the difference between steady growth, and running to keep the lights on. It’s also one of the key metrics potential consulting firm buyers focus on as they look to acquire firms with strong profitability.
We recommend that gross margin should represent 50% of a firm’s revenue. If it’s less than that then you’re unlikely to be generating the funds needed for growth or delivering a net margin that will drive equity value.
The challenge with improving gross margins lies in the fact that they rarely have a singular root cause.
There are three main areas to focus on to improve profitability in a consulting or professional services firm, and they are all intertwined:
- Increase revenues generated by the business by selling higher value work
- Improve the leverage structure of the delivery organization (i.e., people, IP, QA)
- Optimize overheads