How 'The Three Rules' guides strategy and investment at Deloitte Consulting LLP

The three rules

​Several years ago, two Deloitte colleagues, Michael Raynor and Mumtaz Ahmed, set out to answer the question, “Why do some companies achieve long-term exceptional performance while so many others are not able to sustain the same kind of success?” They began a large-scale research project that identified patterns in the way exceptional companies think. Their key findings were summarized in their 2013 book The Three Rules.

The rules are:

1. Better before cheaper
2. Revenue before cost
3. There are no other rules

The findings

The conclusions in The Three Rules emerged from a database of over 25,000 companies from hundreds of industries operating during a 45-year span From the data, Raynor and Ahmed uncovered companies that qualified as statistically “exceptional,” a group that the authors reduced to just 344 companies after their further analysis separated the truly skillful from the merely lucky. The study identified the three principles as central to the decision process executives and leaders of exceptional companies practiced to shape their thinking about a range of difficult issues – when to invest, when to step back from competition, when to focus on cost-cutting and what it means to emphasize growth.

Practicing what we preach

Since the release of the research, Deloitte has been asked numerous times how it uses the Three Rules. Using the Three Rules – and the research behind them – as a mental model has helped us see what works and what doesn’t. This model has helped us identify and understand the underlying principles behind our success, and even more critically, the importance of applying those principles rigorously in the years ahead.

Three questions for leaders

Leaders who want to assess whether their organizations use the Three Rules in their decision-making can ask themselves several key questions:

1. Have we taken actions that emphasize quality over price competitiveness?
2. Do we emphasize revenue growth over cost-cutting?
3. Have we prioritized anything else over quality and revenue growth?

Knowing the answers to these questions – and how frequently decisions have aligned with those principles – will help you assess whether the Three Rules are understood and applied in your business.
 

A "Three Rules" culture positions an organization for the future

Our approach, in short, reveals a bias towards non-price value over price and revenue over costs. We can’t claim this bias was established by dictate – rather, it is part of the culture of our organization, nurtured over many decades and by many leaders. It is a culture that says: If we need to invest in our people to provide better service, we do it. If we see an opportunity to grow our business long-term at the expense of near-term results, we make it. And if we see a way to make our clients more successful even if we can’t immediately profit, we have that conversation with them – not in the interest of capturing revenue but in the hope that they can position themselves best for the future.

Our favorite exercise is helping clients see around the corner, and so whatever it takes to help them achieve that, we will invest in it. It’s not one of the Three Rules, but it is a natural extension of the principles of better before cheaper, revenue before cost, and not letting anything else come before those two guiding principles.