How Consultants Overcharge Their Consumers

When an organization hires management or IT consultants, line managers must guarantee that the consultants deliver the outcomes promised. In this write-up, I summarise six methods made use of by consultancies to maximize their own profitability. Some of these are just savvy enterprise, some are dishonest, some are fraudulent – all are widespread all through the consulting market. By producing organizations conscious of these practices, I hope they will be much better armed as they pay out their consultants’ typically generous fees and expenses.

1. Excessive profitability
A junior consultant will generally be paid about £30,000 ($45,000) a year. So with social and other fees, the consultancy may perhaps be paying around £1,000 per week. But they will normally be charged out at £7,000+ ($10,000+) per week to private sector clientele – for larger public sector projects some consultancies will go down to £5,000+ ($7,500) per week. A additional skilled consultant may well price the consultancy £2,000 ($3,000) per week, but can be billed at £12,000+ ($15,000+) per week. So although lots of manufacturing enterprises make gross margins of around 80% and retailers are at about one hundred%, management consultancies normally target gross margins of 500% to 800% – a rather striking and massive distinction from the margins any of our customers would ever make. Surprisingly, very couple of clientele do the easy mathematics and ask why they ought to be paying over £300,000 ($450,000) a year for an inexperienced junior consultant who is almost certainly becoming paid just over a tenth of that.

two. Retaining travel expenditures rebates
Last year three consultancies agreed to pay a former client about $100m compensation, when they had been sued for “unjustly enriching themselves at the expense of their clients The lawsuit was that for a decade the 3 firms worked with outside 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 consumers.”

creditassociates debt relief performs is basic. The consultancy sets up a deal with a travel agent, hotel chains and the major airlines for an finish-of-year rebate. The consultancy invoices the client for the complete 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 consumers who have paid for all the travel and accommodation in the initially spot. The defendants claimed they had “discontinued this practice” even so this is contradicted by a current e-mail from a consultant from one of the organizations, “Here’s how we do it every single 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 do not give the client back the kick-back.” One British consultant estimated that his employer had stolen over £20m from just 1 client in this way.

3. Billing for non-client perform
In most consultancies, partners or directors divide their time up amongst their many clientele and allocate a particular number of days every month to each client – even when this time is basically not spent operating for that client. Moreover, you generally uncover ordinary consultants getting told to charge clientele for time spent on internal consultancy enterprise. To quote a consultant from a 100,000 plus employee firm, “I was at an internal meeting with a lot more than 100 other consultants. Partner told us to charge the day to the project so we could bill it to the client as it was just about quarter end and we required to make our numbers.” Just this one apparently innocuous decision will likely have price the client over £100,000 ($150,000).

four. Overcharging for overhead
In many consultancies, clients pay for fictitious overhead fees. At 1 significant consultancy an further 10% was automatically added to consultancy costs supposedly to cover overhead charges. So, with each and every consultant costing £300,000 ($450,000) a year, clientele would also be billed for an additional £30,000 ($45,000) to spend for administrative overhead. But the London workplace, for instance, had about three hundred consultants and around fifty administrative assistance employees – secretaries, receptionists, human sources, bean counters, marketing assistance, resource managers, trainers, details centre researchers and document production. Yet, with the 10% add-on, our customers had been becoming charged for the equivalent of about 3 hundred administrative staff – hence the salaries of up to two hundred and fifty assistance employees had been not becoming spent, as the staff just did not exist.

five. Relocating employees
Many management consultancies are international and move their employees about the world 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 sufficient UK based employees. As our CEO wrote in an internal memo, “the project took spot at a time when we were nonetheless heavily supported by U.S. expats. Naturally we accommodated them and their families and a proportion of these charges were charged to the client.”

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

6. Cheating on flat price costs
Frequently consultancies will agree with the client that expenses will be about, for example, 12% of fees. Each and every week the client will be billed for this 12%, then at the finish of the project there will be a reconciliation amongst 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 12% but have been basically only running at about 7%. The account vice president informed the rest of the consultancy that he had space to soak up expenses both from other projects and from our head workplace, rather than paying dollars back to the client.

Quite occasionally, customers would audit our costs. If they discovered some actual horrors, we’d just say there had been an administrative error and refund the minimum essential to keep the client content.

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