What is a Consulting Executive’s Time Worth?

Quite often, when I am working with an owner or executive of a small consulting company, I find that the person I am working with is hard put to tell me what they are worth. In some cases, the owner or executive is worth everything, as they are doing everything. But even those who are doing everything cannot answer my question because they don’t know.

The fact is, every hour that an owner/executive works is worth something, but the real question is, is the company capturing the value that the owner/executive is creating with every hour of work? Unfortunately, the answer is often no; here is why.

An owner or executive of a consulting company often has 2 roles; the first as a consultant working with clients and secondly as an owner/executive running a company. The consultant is billing hours to the client for work done, but the executive is not, as the client work they are doing is either selling or pre-sales, and the internal company work is simply not billable.

Yet, all of the work that the owner/executive performs creates value for the company. If the owner cannot find a way to monetize that value, the company is losing out on an important revenue stream. The answer on how to capture that value is overhead; bringing us to a discussion on how overhead is handled in many small companies.

When considering the P & L of small consulting company, look at where the cost of providing consulting services is placed; often under General and Administrative Expenses as part of salaries, even if the consultants are contractors paid on an hourly basis. The cost of providing consulting services more properly belongs at the top of the
P & L, under the Cost of Providing Goods and Services, it reflects the direct cost of providing the consulting services.

Any non-billable time then belongs under General and Administrative Services. The key reason for differentiating here is to be able to understand what part of the consultant’s time belongs in overhead. This applies in particular to the non-billable hours of the owner/executive, as including these hours in overhead is the only way to monetize non-billable hours.

Let’s take this one step further. In many small consulting companies, the owner/executive may not even paid a regular salary, simply paying themselves what the company can afford at the end of each month. However, if the owner/executive is truly worth their billing rate, then every hour that they work should be calculated at a cost that is the same as their billable rate. As a result, when the company’s overhead is calculated and added on to the billable rate of each consultant, the true value of the owner/executive will be captured.

As you can see, the value of an owner/executive of a consulting company is worth a lot, but only if that value is properly captured.

2 thoughts on “What is a Consulting Executive’s Time Worth?

  1. Scott Jenkins

    Kevin this is an important subject. The overhead needs to be captured in the billing rate, i.e., the multiplier. Further one must determine the expectation for each consultant’s level of bill-ability. The Principal may be only .50 where and associate may be at .85. When all other OH or nondirect (nonreimbursable) costs are added in then with a little fee (profit) to take to the bank we have a Billable rate to give the Client.

    In this economy where their aren’t many jobs but there is a lot of work, I see my friends start out billing at at an hourly rate based on their gross salary at their job but forgetting the have to sell, write proposals, do the accounting, buy the technology, put gas in the car, etc., etc. and then wonder why they aren’t doing well — they forgot the multiplier!

    • Kevin R Callahan

      Scott,

      A good point. Remembering a multiplier like you suggest makes it easier for the excutive to get it right!

      Kevin

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