Working to devise a fair way to distribute profits among partners in a professional service business. Need to reward business development and project profitability. Any ideas would be welcome.
Profit Distribution Schemes For Closely Held Professional Service Firms
Answers
Bob,
I've spent many years consulting with law firms and am yet to find two firms that distribute profits in the same way. Yet, for the most part, they each believe their system to be very good. The more enlightened ones accept that their system is good for them, but maybe not for others. What the majority seem to have in common is to start with a draft distribution based on objective measurements, but the final distribution tempered by the application of subjective criteria, known in advance and applied consistently and fairly.
With respect to rewarding business development, I assume you are referring to business - and the cash therefrom - actually received. I think most professional service firms place too much weight on "book of business", with far too little consideration given to the actual profitability of same. If you can objectively quantify project profitability, and the method of measuring profitability is agreed upon (oftentimes difficult to achieve in professional service firms), then the objective distribution of profits pro rata should fall into place.
Though there is much common ground among firms concerning subjective criteria, the relative weight of each criterion varies considerably from firm to firm. One would need a good understanding of the internal workings of the firm in question before one could offer much of value there.
2
All of what you say makes sense. By business development, I mean the effort to bring in new clients or expanded work from existing clients. The Firm is on Deltek and project profitability is known and agreed both at a gross level and after applying overhead.
I am struggling with the comparative weighting to be given to bringing in the work with the value of doing the work. We need to compensate rainmakers to keep them happy but want to be fair to others. Any ideas on this part?
I think being "fair" to hard-working professionals who do not generate any business requires getting as much marketplace data as you can. If they're not bringing any business, and assuming they are busy and everyone likes their work, then you only need to make sure they cannot go across the street and do the same thing for significantly more compensation. In theory, after direct and indirect costs have been paid, and the non-rainmaking professionals have been awarded bonuses, what is left should be distributed among the rainmakers.
One way to approach this is to first decide how much money there is to distribute. Then consider all the people who you wish to participate in the distribution, and rank the relative values of each one's contribution. In my experience, determining the bottom person's number and the top person's number can be achieved fairly quickly, but the difficult part is figuring what the people in between get.
You mention rewarding "effort to bring in new clients or expanded work." I honestly do not think you can reward effort; you have to stick to rewarding results. Results are objectively measurable; effort not so much. The one exception to that would be if a conscious decision is made to divert someone from their normal revenue-generating work to allow them to spend a significant amount of time on a new business proposal. If the time required for that is significant, then there should probably be some bonus consideration for that person even if the proposal fails and does not result in new business. Obviously, however, the bonus for an unsuccessful proposal will be much smaller than the successful proposal bonus.
This discussion reminded me of a few Sesame Street (yeah I know...bear with me and watch the videos) skits entitled "The King's Picnic" https://youtu.be/Zwn3QvIvH3E and "The King's Problem" https://youtu.be/qiKzx2EeGqg
It pains me to be reminded how often we abandon childhood lessons as we become adults.
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Human Capital