How Consultants Overcharge Their Clientele


When an organization hires management or IT consultants, line managers ought to ensure that the consultants deliver the final results promised. In this short article, I summarise six procedures utilised by consultancies to maximize their personal profitability. Some of these are just savvy organization, some are dishonest, some are fraudulent – all are widespread throughout the consulting sector. By producing organizations conscious of these practices, I hope they will be far better armed as they pay out their consultants’ usually generous charges and expenses.

1. Excessive profitability
A junior consultant will normally be paid around £30,000 ($45,000) a year. So with social and other charges, the consultancy might be paying about £1,000 per week. But they will commonly be charged out at £7,000+ ($ten,000+) per week to private sector clients – for bigger public sector projects some consultancies will go down to £5,000+ ($7,500) per week. A far more seasoned consultant may perhaps price the consultancy £2,000 ($three,000) per week, but can be billed at £12,000+ ($15,000+) per week. So when lots of manufacturing businesses make gross margins of about 80% and retailers are at about 100%, management consultancies frequently target gross margins of 500% to 800% – a rather striking and massive distinction from the margins any of our customers would ever make. Surprisingly, quite couple of consumers do the straightforward mathematics and ask why they really should be paying more than £300,000 ($450,000) a year for an inexperienced junior consultant who is likely getting paid just more than a tenth of that.

2. Retaining travel costs 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 customers The lawsuit was that for a decade the three firms worked with outdoors suppliers such as airline firms and travel agencies to get rebates of up to 40% on airfare and other expenses that were not passed along to clientele.”

The way this performs is easy. The consultancy sets up a deal with a travel agent, hotel chains and the most important airlines for an finish-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 customers who have paid for all the travel and accommodation in the initially place. The defendants claimed they had “discontinued this practice” nonetheless this is contradicted by a recent e-mail from a consultant from one particular of the firms, “Here’s how we do it just about 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 never 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.

3. Billing for non-client work
In most consultancies, partners or directors divide their time up amongst their different consumers and allocate a particular quantity of days each month to each client – even when this time is actually not spent working for that client. Additionally, you normally uncover ordinary consultants getting told to charge clients for time spent on internal consultancy business. To quote a consultant from a 100,000 plus employee firm, “I was at an internal meeting with far more 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 required to make our numbers.” Just this one apparently innocuous choice will almost certainly have price the client more than £100,000 ($150,000).

4. Overcharging for overhead
In quite a few consultancies, consumers pay for fictitious overhead expenses. At one big consultancy an extra ten% was automatically added to consultancy charges supposedly to cover overhead expenses. So, with each and every consultant costing £300,000 ($450,000) a year, clientele would also be billed for one more £30,000 ($45,000) to spend for administrative overhead. However the London workplace, for instance, had about three hundred consultants and around fifty administrative help employees – secretaries, receptionists, human sources, bean counters, advertising and marketing support, resource managers, trainers, data centre researchers and document production. However, with the ten% add-on, our customers had been getting charged for the equivalent of about 3 hundred administrative employees – hence the salaries of up to two hundred and fifty support employees were not being spent, as the employees basically did not exist.

5. Relocating of management consultancies are international and move their staff around the globe 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 enough UK based staff. As our CEO wrote in an internal memo, “the project took location at a time when we have been nonetheless heavily supported by U.S. expats. Naturally we accommodated them and their households and a proportion of these fees were charged to the client.”

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

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

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

Really sometimes, customers would audit our expenditures. If they located some real horrors, we’d just say there had been an administrative error and refund the minimum vital to preserve the client delighted.

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