How Consultants Overcharge Their Clients

When an organization hires management or IT consultants, line managers ought to make sure that the consultants provide the outcomes promised. In this article, I summarise six procedures made use of by consultancies to maximize their personal profitability. Some of these are just savvy company, some are dishonest, some are fraudulent – all are widespread all through the consulting business. By producing organizations conscious of these practices, I hope they will be much better armed as they spend out their consultants’ generally generous costs and expenditures.

1. Excessive profitability
A junior consultant will usually be paid around £30,000 ($45,000) a year. So with social and other expenses, the consultancy may well be paying around £1,000 per week. But they will typically be charged out at £7,000+ ($ten,000+) per week to private sector customers – for larger public sector projects some consultancies will go down to £5,000+ ($7,500) per week. A a lot more skilled consultant may expense the consultancy £2,000 ($three,000) per week, but can be billed at £12,000+ ($15,000+) per week. So though numerous manufacturing businesses make gross margins of about 80% and retailers are at about one hundred%, management consultancies commonly target gross margins of 500% to 800% – a rather striking and massive distinction from the margins any of our clients would ever make. Surprisingly, pretty few customers do the uncomplicated mathematics and ask why they really should be paying more than £300,000 ($450,000) a year for an inexperienced junior consultant who is in all probability becoming paid just over a tenth of that.

two. Retaining travel costs rebates
Final year three consultancies agreed to pay a former client around $100m compensation, when they were sued for “unjustly enriching themselves at the expense of their clientele The lawsuit was that for a decade the 3 firms worked with outdoors suppliers such as airline firms and travel agencies to receive rebates of up to 40% on airfare and other fees that were not passed along to clientele.”

The way this works is straightforward. The consultancy sets up a deal with a travel agent, hotel chains and the most important airlines for an end-of-year rebate. The consultancy invoices the client for the full travel and accommodation costs, often even adding on an administration charge. At the finish of the year, the consultancy receives a rebate from the travel providers. None of this rebate is ever passed back to the customers who have paid for all the travel and accommodation in the initially place. The defendants claimed they had “discontinued this practice” having said that this is contradicted by a current e-mail from a consultant from a single of the organizations, “Here’s how we do it each and every time. We state in our contract that we will bill for ‘actual’ expenses. Then we bill them for your air travel expense. Then we get a kickback on your air ticket. But we don’t give the client back the kick-back.” 1 British consultant estimated that his employer had stolen over £20m from just a single client in this way.

3. Billing for non-client function
In most consultancies, partners or directors divide their time up amongst their numerous clientele and allocate a particular number of days each month to each and every client – even when this time is truly not spent functioning for that client. Moreover, you typically locate ordinary consultants becoming told to charge clients for time spent on internal consultancy organization. To quote a consultant from a one hundred,000 plus employee firm, “I was at an internal meeting with additional than 100 other consultants. Companion told us to charge the day to the project so we could bill it to the client as it was virtually quarter finish and we needed to make our numbers.” Just this one apparently innocuous decision will probably have cost the client over £100,000 ($150,000).

four. Overcharging for overhead
In several consultancies, clientele pay for fictitious overhead expenses. At one particular key consultancy an extra ten% was automatically added to consultancy charges supposedly to cover overhead fees. So, with each consultant costing £300,000 ($450,000) a year, customers would also be billed for an additional £30,000 ($45,000) to spend for administrative overhead. Yet the London workplace, for example, had about 3 hundred consultants and around fifty administrative support employees – secretaries, receptionists, human resources, bean counters, marketing assistance, resource managers, trainers, information and facts centre researchers and document production. But, with Dori Foster-Morales Reviews % add-on, our clients were becoming charged for the equivalent of about three hundred administrative employees – hence the salaries of up to two hundred and fifty help staff had been not getting spent, as the staff merely did not exist.

five. Relocating employees
Many management consultancies are international and move their employees about the globe at their clients’ expense. On £2.three million ($4m) project I helped sell in Britain to a regional health authority, the consultancy did not have sufficient UK based employees. As our CEO wrote in an internal memo, “the project took location at a time when we had been nonetheless heavily supported by U.S. expats. Naturally we accommodated them and their families and a proportion of these costs have been charged to the client.”

So our NHS client had to spend thousands of pounds a week added for these imported consultants in what a subsequent official investigation described as “a economic fiasco.”

6. Cheating on flat rate expenditures
Often consultancies will agree with the client that costs will be about, for instance, 12% of charges. Each week the client will be billed for this 12%, then at the end of the project there will be a reconciliation in between the 12% paid by the client and the actual expenditures incurred.

On a project for a major manufacturer of military aircraft, missile systems and satellites, we had agreed 12% but were essentially only running at about 7%. The account vice president informed the rest of the consultancy that he had area to soak up costs each from other projects and from our head office, rather than paying revenue back to the client.

Pretty occasionally, clientele would audit our expenses. If they discovered some genuine horrors, we’d just say there had been an administrative error and refund the minimum essential to hold the client pleased.

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