What is operating margin in professional services?

Unlike gross profit margin (which only accounts for direct delivery costs), operating margin captures the full operational reality of your business – including office space, non-billable time, marketing, and administrative overhead.

Operating margin measures how efficiently your firm converts revenue into profit from core operations before accounting for interest expenses and taxes. It's expressed as a percentage of total revenue, and it takes into account general administrative costs and the costs incurred by your marketing and sales functions.

A positive operating margin is a good sign - it means your core business is operating well and had good potential to scale.

Calculation: ((gross margin – general and admin costs – marketing and sales costs) ÷ gross margin) × 100 = operating margin %

Learn how to calculate your gross margin here

What are general and admin costs?

The General and Admin costs factored into operating margin are broad and usually include executives' time and overhead, fees for services like lawyers and accountants, and other overhead type costs that aren't billed elsewhere.

Often building leases and associated costs (e.g. utilities) are billed here (if they are not divided up among the staff and added to the overhead in account or gross margin). Most commonly they are included at the operating margin level.

What operating margin doesn’t measure is whether your company’s admin and your go-to-market are healthy.

Why operating margin makes or breaks consulting firms

Do you know your operating margin right now, without checking with finance?

If not, you're flying blind on three critical business questions:

• Is your core business model actually profitable?
• Are you properly pricing your services to cover operational expenses?
• Can your firm sustain growth without constant cash flow crises?

For professional services leaders, operating margin isn't just another financial ratio – it's the definitive health indicator for your core business. While gross margin reveals project profitability, operating margin shows whether your entire delivery model works.

When properly tracked, your operating margin immediately alerts you to:

• Unsustainable overhead creep that erodes profitability
• Service lines that can't support their operational costs (if you calculate operating margin by service line)
• Pricing strategies that fail to account for true delivery costs
• Resource allocation inefficiencies across your organization

Calculating operating margin: The professional services approach

Ready to get clear on this key operating metric? Plug your numbers into the interactive calculator below to calculate the operating margin at your professional services firm.

Operating margin vs. gross margin vs. net profit margin

Stop conflating these metrics. Each answers a fundamentally different business question:

Gross margin answers: "Are our client projects profitable at the delivery level?"

Operating margin answers: "Is our core service delivery model financially viable?"

Net profit margin answers: "What remains after ALL costs, including interest and taxes?"

The relationship between these margins reveals crucial insights about your business.

If the gap between your gross and operating margins is abnormally large, you're likely carrying excessive operational overhead.

If your operating and net margins are nearly identical, you might have little or no debt (not paying much or any interest) and you've probably optimized your tax structure.

However! No or little difference between operating and net margins could indicate that you are not reinvesting or taking on strategic debt to accelerate growth. Keep this in mind if you have ambitions to scale.

Operating margin reveals your strategic options

Beyond basic financial health, operating margin directly determines what strategic moves your firm can make, like growing or getting acquired (or even both):

Low operating margin

What it enables: Basic survival

Strategic constraints: Cannot invest in growth; vulnerable to market shifts

Moderate operating margin

What it enables: Modest reinvestment

Strategic constraints: Limited ability to weather downturns or make significant changes

High operating margin

What it enables: Market dominance potential

Strategic constraints: Ability to disrupt competitors, acquire talent, and define market terms

Common mistakes in calculating operating margin

Calculating operating margin for professional services firms can be complex, and various errors can compromise your accuracy. Here are common mistakes to avoid:

1. Including general/admin costs and marketing/sales costs in your gross margin calculation (these belong in operating margin, not gross margin)
2. Failing to properly categorize practice leadership time (it belongs in gross margin, not operating margin)
3. Using outdated information that gives the wrong idea of your business's financial health
4. Failing to recognize costs in the same period as associated revenue

Transform operating margin from finance metric to strategic weapon

You know you have experts at your firm who do good work. Don't let a lack of financial clarity and discipline be the thing that trips your business up.

When partners and practice leaders understand operating margins, they make fundamentally different decisions about:

• How to structure teams for optimal profitability and delivery
• When to walk away from revenue that actually costs money to deliver
• Where operational inefficiencies are hiding in plain sight
• How to price work to ensure sustainable growth

Ready to join the professional services firms that are actually on top of their finances? 

Book a demo to see how Projectworks helps leading consultancies track and improve their margins without sacrificing client project quality or team wellbeing.

For an overview of the key margins you'll need to understand in professional services, see our comprehensive guide: How to Calculate Your Margin: Professional Services 101

Operating margin FAQs

Q: What's the difference between EBIT and operating margin? 

A: Operating margin is EBIT (Earnings Before Interest and Taxes) expressed as a percentage of revenue. Both measure profitability from core operations before financing costs and tax impacts - but one measure is a percentage and one measure is an amount.

Q: How often should consulting firms calculate operating margin? 

A: Monthly at minimum. Operating margins can deteriorate rapidly during growth phases when overhead increases faster than revenue.

Q: Can operating margin be too high? 

A: Potentially. While high margins indicate efficiency, sustained margins above industry benchmarks may signal underinvestment in talent development, technology, or innovation – potentially sacrificing long-term growth for short-term profits.

Q: How do variable costs affect operating margin calculations? 

A: Variable costs that scale with project volume (like subcontractors or success fees) should be included in your operating margin calculations. They represent true costs of your service delivery model, even if they fluctuate with volume.

Q: How does cash flow relate to operating margin? 

A: They're distinct but related. Strong operating margins should eventually produce positive cash flow, but timing differences between recognizing revenue and collecting payment can create temporary disconnects. Many seemingly profitable firms struggle with cash flow despite decent margins.