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How Consultants Overcharge Their Clients
Consultant ‘Profit Enhancers’
When an organization hires management or IT consultants, line managers must ensure that the consultants deliver the promised results. In this article, I summarize six techniques that consulting firms use to maximize their own profitability. Some of them are just good business, some are dishonest, some are fraudulent – all are prevalent in the consulting industry. By making organizations aware of these practices, I hope they will be better equipped to pay the generally generous fees and expenses of their consultants.
1. Excessive profitability
A junior consultant will typically be paid around £30,000 ($45,000) per year. So, with social and other costs, the consultancy can pay around £1,000 a week. But they will typically charge upwards of £7,000 ($10,000+) per week to private sector clients – for large public sector projects some consultants will go down to £5,000+ ($7,500) per week. A more experienced consultant may cost the council £2,000 ($3,000) per week, but may be billed at £12,000+ ($15,000+) per week. So while many manufacturing companies achieve gross margins of around 80% and retailers around 100%, management consultants typically target gross margins of 500% to 800% – quite a stark and huge difference. compared to margins that any of our clients would ever make. Surprisingly, very few clients do the simple math and ask why they should pay more than £300,000 ($450,000) a year for an inexperienced junior consultant who is probably paid just over a tenth of that amount.
2. Continuation of travel expense reimbursements
Last year, three consulting firms agreed to pay a former client around $100 million in compensation as they were sued for “unjustly enriching themselves at the expense of their clients”. agencies to obtain discounts of up to 40% on airfare and other costs that were not passed on to customers. »
The way it works is simple. The firm signs an agreement with a travel agency, hotel chains and the main airlines for an end-of-year rebate. The firm invoices the client for all travel and accommodation costs, sometimes adding administrative costs. At the end of the year, the consulting firm receives a rebate from the travel providers. No part of this discount is ever passed on to customers who paid for all travel and accommodation in the first place. The defendants claimed they had “discontinued this practice”, but this is contradicted by a recent email from a consultant for one of the companies, “This is how we do it every time. We state in our contract that we will charge for ‘real Then we charge them your airfare Then we get a bribe on your plane ticket But we don’t return the bribe to the client A consultant UK estimated his employer stole more than £20million from a single client in the process.
3. Billing for non-client work
In most consulting firms, partners or managers divide their time among their various clients and allocate a certain number of days each month to each client – even when that time isn’t actually spent working for that client. Additionally, you often find regular consultants who are asked to bill clients for time spent on in-house consulting activities. To quote a consultant at a company with over 100,000 employees, “I was at an internal meeting with over 100 other consultants. The partner told us to charge the day to the project so we could bill the client for it. because it was almost the end of term and we had to do our numbers.” This seemingly innocuous decision alone will likely have cost the client upwards of £100,000 ($150,000).
4. Surcharge for overhead costs
In many consulting firms, clients pay a notional overhead. At a large consulting firm, an additional 10% was automatically added to the consulting fees that were supposed to cover overhead costs. So, with each consultant costing £300,000 ($450,000) a year, clients would also be charged an additional £30,000 ($45,000) to pay for administrative overhead. Yet the London office, for example, had about three hundred consultants and about fifty administrative support staff – secretaries, receptionists, human resources, bean counters, marketing support, resource managers, trainers, information center researchers and production of documents. Yet with the 10% surcharge, our clients were billed for the equivalent of approximately three hundred administrative staff – hence the salaries of up to two hundred and fifty support staff were not being spent, because the staff simply did not exist.
5. Relocation of staff
Many management consulting firms are international and move their staff around the world at the expense of their clients. On a £2.3m ($4m) project I helped sell in Britain to a regional health authority, the consultancy did not have enough UK-based staff . As our CEO wrote in an internal memo, “The project took place at a time when we were still heavily supported by American expats. Naturally, we housed them and their families and some of those costs were invoiced to the customer”.
So our NHS client had to pay thousands of extra pounds a week for these imported consultants in what a subsequent official inquiry described as “a financial fiasco”.
6. Cheating on lump sum expenses
Often the consultants will agree with the client that the expenses will be around, for example, 12% of the fees. Each week, the client will be invoiced for this 12%, then at the end of the project, there will be a reconciliation between the 12% paid by the client and the actual expenses incurred.
On a project for a major manufacturer of military aircraft, missile systems and satellites, we had agreed to 12%, but were actually only at around 7%. The VP of the account informed the rest of the board that he had room to absorb the expenses from both other projects and our head office, rather than refunding the money to the client.
Very occasionally, clients would check our expenses. If they find any real eyesores, we’ll just say there was an administrative error and refund the minimum necessary to keep the customer happy.
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