When an organization hires management or IT consultants, line managers have to assure that the consultants deliver the benefits promised. In this short article, I summarise six strategies 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 industry. By creating organizations aware of these practices, I hope they will be improved armed as they spend out their consultants’ commonly generous costs and costs.
1. Excessive profitability
A junior consultant will generally be paid around £30,000 ($45,000) a year. So with social and other costs, the consultancy could be paying around £1,000 per week. But they will usually be charged out at £7,000+ ($10,000+) per week to private sector clients – for larger public sector projects some consultancies will go down to £5,000+ ($7,500) per week. A more skilled consultant may perhaps cost the consultancy £2,000 ($3,000) per week, but can be billed at £12,000+ ($15,000+) per week. So though many manufacturing businesses make gross margins of about 80% and retailers are at about one hundred%, management consultancies usually target gross margins of 500% to 800% – a rather striking and huge distinction from the margins any of our clientele would ever make. Surprisingly, pretty couple of clientele do the simple mathematics and ask why they should be paying over £300,000 ($450,000) a year for an inexperienced junior consultant who is in all probability becoming paid just more than a tenth of that.
2. Retaining travel expenditures rebates
Last 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 clients The lawsuit was that for a decade the 3 firms worked with outside 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 consumers.”
The way this operates is uncomplicated. The consultancy sets up a deal with a travel agent, hotel chains and the primary airlines for an end-of-year rebate. The consultancy invoices the client for the full 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 clients who have paid for all the travel and accommodation in the very first place. The defendants claimed they had “discontinued this practice” even so this is contradicted by a recent e-mail from a consultant from one particular of the organizations, “Here’s how we do it each and 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 more than £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 clients and allocate a particular number of days each month to each client – even when this time is actually not spent functioning for that client. Furthermore, you generally locate ordinary consultants getting told to charge customers for time spent on internal consultancy enterprise. To quote creditassociates complaints 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 a single apparently innocuous decision will likely have expense the client more than £100,000 ($150,000).
four. Overcharging for overhead
In quite a few consultancies, consumers pay for fictitious overhead charges. At a single significant consultancy an extra 10% was automatically added to consultancy fees supposedly to cover overhead charges. So, with each and every consultant costing £300,000 ($450,000) a year, consumers would also be billed for one more £30,000 ($45,000) to spend for administrative overhead. However the London workplace, for instance, had about 3 hundred consultants and around fifty administrative help employees – secretaries, receptionists, human sources, bean counters, marketing and advertising assistance, resource managers, trainers, details centre researchers and document production. But, with the 10% add-on, our customers have been being charged for the equivalent of about 3 hundred administrative employees – hence the salaries of up to two hundred and fifty support employees have been not becoming spent, as the employees basically did not exist.
5. Relocating employees
Several management consultancies are international and move their employees about 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 enough UK primarily based employees. As our CEO wrote in an internal memo, “the project took place at a time when we have been nevertheless heavily supported by U.S. expats. Naturally we accommodated them and their families and a proportion of these costs had been charged to the client.”
So our NHS client had to spend thousands of pounds a week extra for these imported consultants in what a subsequent official investigation described as “a monetary fiasco.”
six. Cheating on flat price expenditures
Often consultancies will agree with the client that costs will be around, for example, 12% of fees. Every 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 top manufacturer of military aircraft, missile systems and satellites, we had agreed 12% but were really only running 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 cash back to the client.
Quite occasionally, clientele would audit our expenses. If they discovered some real horrors, we’d just say there had been an administrative error and refund the minimum vital to maintain the client happy.