The 1/3-1/3-1/3 Rule for Professional Firms – Is the Rule correct for all Professional Service Firms?

The 1/3-1/3-1/3 rule is defined as a formula that is used by many professional service firms – legal, accounting, etc. to give structure and incentive opportunities for their professional staff.

For many companies in the field of management consulting, the reward system mimics this well established and proven compensation program.

Beyond what happens within the management consulting firm is what firms do when outsiders – affiliates or sales professionals bring in new business.  In my research on this topic, compensation varies from a straight “finder’s fee/commission” to a percentage of the project on a on-going basis.  Inbetween is any number of permutations and combinations.

Since professional firms, lawyers, accountants, professional engineers and management consultants have very similar business models, the use of the 1/3-1/3-1/3 rule may be useful to determine what the value of internal or outsider delivered business is worth to the firm.  Knowing that helps firms significantly motivate all who deliver business.

Simply put, the following often applies:

1/3 of the total fees projected by the firm is budgeted for salaries – including the salaries of partners both junior and senior as well as managers and line staff.

1/3 of the total fees projected by the firm is budgeted for operating costs – including technology, offices, utilities and the like.

1/3 of the total fee is allocated specifically to pay for marketing costs and to reward the “rain makers” – those individuals who bring in business to the firm – for their contribution to the firm ($’s).  Typically of this 1/3, 20% typically is paid in some form or another to the rain maker – the balance goes for paying direct marketing costs including memberships in golf clubs, yacht clubs – the cost of attendance at various conventions/conferences, etc.

Using this formula, a firm can monetarily motivate both senior and junior members of the firm to bring in new business.  Salaries, on the other hand, are paid based on standards for the profession – so a senor partner besides being rewarded for his/her “rain making” is also assured of a regular income throughout the year.

Coming from a family of lawyers, I realized early on that their biggest challenge was to find lawyers who didn’t just “sit there” waiting for someone to bring in business.  These “staff lawyers” were often the first ones to ask why they didn’t make the BIG BUCKS.  Yet their contribution to the firm was based almost entirely on their ability to do the work – not build and maintain the client universe.

The reality is that most lawyers are NOT rain makers.  The same thing applies to accountants or almost any other professional service firm.  More often than not, the senior partner (often the founder of the firm) is or becomes the “rain maker”.

In the case of my family’s law firm of 10+ professionals, upwards of 93% of all new client acquisition comes from one partner – in this case the senior partner.  Two other lawyers produce the balance – with the remaining attorneys being, in reality, staff lawyers – doing the work but not contributing directly to the firms long-term economic success.
I wish this statistic above wasn’t reflective of the majority of professional firms.  It is!  Far more than most professional are willing to admit.

WHAT OPTIONS ARE AVAILABLE TO CHANGE THIS SCENARIO?

1.    Training – few professionals are trained to sell services.  I don’t know of one law school or school of accounting that has a course in “rain making”.  So assembling a formal training program that not only trains but mentors juniors to “show” them how to build relationships and convert them into clients is critical.  Such programs need to be customized to reflect the firm – whether a law firm, an accounting firm or a firm of management consultants.  And it needs to be never-ending.

2.    Rewarding Success – Self Explanatory – see 1/3-1/3-1/3 rule above.

3.    Encouraging External Business Development – from peers – or from outside affiliates who have good connections with your marketing sweet spot – or – recruiting contractor business development professionals who would be rewarded on a on-going basis (percentage of received $’s – escalating their ability to make a very good living accordingly).

For more information on compensation and rewarding professionals in service provider firms, contact Craig Stimmel at SPIA cstimmel@spiainc.com or call him at (978) 640 0803.  Please feel free to share this article with others who you believe would find it valuable.