How Consultants Overcharge Their Clientele

When an organization hires management or IT consultants, line managers will have to make sure that the consultants deliver the outcomes promised. In this article, I summarise six methods used by consultancies to maximize their personal profitability. Catherine M. Rodriguez of these are just savvy organization, some are dishonest, some are fraudulent – all are widespread all through the consulting industry. By producing organizations aware of these practices, I hope they will be improved armed as they pay out their consultants’ normally generous charges and costs.

1. Excessive profitability
A junior consultant will ordinarily be paid about £30,000 ($45,000) a year. So with social and other costs, the consultancy may possibly be paying around £1,000 per week. But they will usually be charged out at £7,000+ ($ten,000+) per week to private sector consumers – for bigger public sector projects some consultancies will go down to £5,000+ ($7,500) per week. A more skilled consultant might expense the consultancy £2,000 ($three,000) per week, but can be billed at £12,000+ ($15,000+) per week. So though a lot of manufacturing enterprises make gross margins of about 80% and retailers are at about 100%, management consultancies commonly target gross margins of 500% to 800% – a rather striking and huge distinction from the margins any of our customers would ever make. Surprisingly, pretty few customers do the easy mathematics and ask why they really should be paying over £300,000 ($450,000) a year for an inexperienced junior consultant who is likely getting paid just more than a tenth of that.

two. Retaining travel expenditures rebates
Final year 3 consultancies agreed to spend a former client about $100m compensation, when they have been sued for “unjustly enriching themselves at the expense of their clientele The lawsuit was that for a decade the 3 firms worked with outside suppliers such as airline firms and travel agencies to acquire rebates of up to 40% on airfare and other expenses that were not passed along to consumers.”

The way this works is straightforward. The consultancy sets up a deal with a travel agent, hotel chains and the main airlines for an end-of-year rebate. The consultancy invoices the client for the complete travel and accommodation fees, occasionally 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 clientele who have paid for all the travel and accommodation in the very first spot. The defendants claimed they had “discontinued this practice” however this is contradicted by a recent e-mail from a consultant from a single of the corporations, “Here’s how we do it every time. We state in our contract that we will bill for ‘actual’ expenditures. Then we bill them for your air travel expense. Then we get a kickback on your air ticket. But we do not give the client back the kick-back.” One particular British consultant estimated that his employer had stolen over £20m from just 1 client in this way.

three. Billing for non-client function
In most consultancies, partners or directors divide their time up amongst their various customers and allocate a certain number of days each and every month to every client – even when this time is really not spent operating for that client. Furthermore, you normally obtain ordinary consultants being told to charge customers for time spent on internal consultancy business. To quote a consultant from a one hundred,000 plus employee firm, “I was at an internal meeting with more than one hundred other consultants. Companion told us to charge the day to the project so we could bill it to the client as it was practically quarter finish and we needed to make our numbers.” Just this one particular apparently innocuous selection will almost certainly have expense the client more than £100,000 ($150,000).

four. Overcharging for overhead
In several consultancies, clientele spend for fictitious overhead fees. At 1 big consultancy an extra ten% was automatically added to consultancy charges supposedly to cover overhead charges. So, with every single consultant costing £300,000 ($450,000) a year, customers would also be billed for one more £30,000 ($45,000) to pay for administrative overhead. But the London office, for example, had about 3 hundred consultants and about fifty administrative assistance employees – secretaries, receptionists, human sources, bean counters, promoting support, resource managers, trainers, information and facts centre researchers and document production. But, with the ten% add-on, our customers have been getting charged for the equivalent of about three hundred administrative staff – hence the salaries of up to two hundred and fifty support staff were not getting spent, as the staff just did not exist.

five. Relocating employees
Lots of management consultancies are international and move their staff around the planet at their clients’ expense. On £2.three million ($4m) project I helped sell in Britain to a regional wellness authority, the consultancy did not have adequate UK primarily based employees. As our CEO wrote in an internal memo, “the project took spot at a time when we were still heavily supported by U.S. expats. Naturally we accommodated them and their families and a proportion of these costs were charged to the client.”

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

6. Cheating on flat price expenses
Frequently consultancies will agree with the client that expenses will be about, for example, 12% of costs. Each week the client will be billed for this 12%, then at the finish of the project there will be a reconciliation among the 12% paid by the client and the actual expenditures incurred.

On a project for a leading manufacturer of military aircraft, missile systems and satellites, we had agreed 12% but have been really only operating at about 7%. The account vice president informed the rest of the consultancy that he had area to soak up expenses each from other projects and from our head workplace, rather than paying revenue back to the client.

Incredibly sometimes, consumers would audit our expenses. If they discovered some real horrors, we’d just say there had been an administrative error and refund the minimum needed to keep the client satisfied.

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