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You see OP, when a man and a woman love each other very much...
How did you get hired?
Take it easy, guys. If you’re new to our profession I can understand how the partnership and our income/expense model might be mysterious. I read the question as an inquiry of whether partners carry their own cost centers and whether we share income. Probably not the best articulated question but fair enough for a rookie to ask
We bill our clients for services, our gross revenue. We pay you and overhead. The balance, net income, is divided among the Partners and Principals based on the number of shares that have in the firm. It’s a little more complex with things like retained earnings and capital costs but that’s the gist
OP- the way it works is: Partners sell or get referred some client work. SM/Mgr draw up a budget based on the requirements estimating the number of hours it will take to complete the project and layer in Expenses and Admin charges. This is then used to negotiate with the client and a reasonable number is reached (the more critical/unique the work, lesser flexibility available to the Client). Negotiate too hard and the Client will ask other consulting firms for quotes and cut you out, so the Client always has an upper hand.
The billing frequency and A/R days is agreed with the Client (typically 60-90 days). The SM/Mgr/Admin Assistant bills the Client every two weeks, which the Client then pays 60-90 days from receiving the invoice.
But, the overall firm (Top of the House) pays your salary bi-weekly regardless of collections.
Once cash is collected, the house gets paid. The house charges a NWC fee on the A/R, which is deducted from the engagement’s profitability.
At quarter end, the firm counts the total cash collected (net of any NWC charge), apply its own topside fee (for the office space, CEO, marketing etc), deducts all salaries paid and then whatever is left over is paid to the Partner! (Some adjustments are made for Partners being too over or too under the norm).
Partner1, did I miss anything?
Your firm charges the client $200 per hour for the work that you do for them. From that $200, $40 goes to pay your salary. Thus, your company keeps the remaining $160 for essentially doing nothing. Now repeat this thousands of times over.
Lol consultant trying to tell the partner how it works and that it’s more accurate...then it all ends up being a guess lol
KPMG 3.
The Client is so much more important than grammar.
But thank you for your on point and helpful comments.
Thanks Partner1
Your comp is tied to market pay rates. Your bonus is mostly tied to your rating at PwC but the size of the bonus pool depends on firm performance. An individual partner’s performance isn’t really a factor because we are so big
Partner 1 - Im sure everyone loves working with you just by the way you’re handling this post
Partner1. Your EQ is off the charts impressive. I'm sure folks love working with you.
D2 generally got it right. Here’s some clarity on the profit center aspect:
Every partner has targets in terms of revenue, sales, and profitability. Every partner also has some number of shares. The value of the shares depends on the overall profitability of the firm (across all partners).
We get evaluated every year on our ability (or inability) to hit targets, and can earn additional shares (or lose them). So, yes, our comp depends on our performance, but we aren’t taking a “cut” of profits from individual engagements.
We don’t have our own pools to pay staff/set compensation. Groups of partners in an industry or practice may have a bonus pool that’s somewhat performance driven. It’s all done in the name of diversifying / reducing volatility for individual practices...the benefit to being part of a big firm, vs “Joe Schmedley’s Consultants, LLC”. Does that help?
AC1 takes a guess by telling someone who is doing their job that they do not know how to do it without any experience. I hope you do not act like this in real life, I can honestly say right or wrong you’d be ripped apart.
Maybe my question wasn’t clear to the rest. I was asking how the firm makes money. Basically I was trying to find out if how much you make i.e. the annual raise/bonuses n such, depends entirely on how well your partner can sell (assuming other factors like performance etc are all consistent)
P1 - I don't think you answered the question of whether partners carry their own cost centers, but the answer is probably closer to this: partners have many different responsibilities as part of their role. Some of them manage specific practices, including the p&l of individual groups (not all partners have this responsibility though) for whom part of your salary would be taken from (as an expense). Part of your compensation is taken from a shared cost center run by some version of hr which gets focused investment from leadership. This is a guess - but from what I've gathered is closer to the truth than the above.
I’m just glad this guy/gal isn’t Deloitte
D2: please learn the rules about when words should be capitalized. Client is not a proper noun.
OP: your wages are usually set by your practice group with inputs from all the partners in that group (vs any single partner you may think you "report to"-- we aren't that hierarchical for that reporting line to have any real meaning), plus HR who helps keep everything balanced access the larger practice area, eg Advisory as a whole
I like P2, would not mind working with him.
K3, did you honestly think the partner didn’t know? I mean dude you wrote a response above regarding SOW grammar and proper use to a partner who is responsible for writing, reviewing, and approving them on a daily basis. Here is some free advice before you lecture someone, especially someone more senior- stop and think about it a bit or just don’t say anything as it might work wonders.
Thanks D2! Appreciate the break down