Consultant ‘Profit Enhancers’
When an organization hires IT or management consultants, line managers must ensure that the consultants deliver the promised results. In this article, I summarize six techniques used by consultancies to maximize their own profitability. Some of these are just business insights, some are dishonest, some are fraudulent, all are widespread in the consulting industry. By making organizations aware of these practices, I hope they will be better prepared to pay for their consultants’ often generous fees and expenses.
1. Excessive profitability
Typically, a junior consultant will be paid around £30,000 ($45,000) a year. So, with social and other costs, the consultancy may be paying around £1,000 a week. But typically they will be charged at more than £7,000 ($10,000+) per week to private sector clients; For larger public sector projects, some consultancies will drop to £5,000+ ($7,500) per week. A more experienced consultant may cost the consultancy £2,000 ($3,000) per week, but can be billed at upwards of £12,000 ($15,000+) per week. So, while many manufacturing companies get gross margins of around 80% and retailers are around 100%, management consultancies typically target gross margins of 500% to 800%, quite a striking difference and huge relative to the margins 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.
2. Maintenance of bonuses for travel expenses
Last year, three consulting firms agreed to pay a former client around $100 million in compensation, when they were sued for “unfairly enriching themselves at the expense of their clients. The claim was that for a decade the three firms worked with outside providers, such as airlines and travel companies. agencies to obtain discounts of up to 40% on airfare and other costs that were not passed on to customers.
The way this works is simple. The consultant establishes an agreement with a travel agency, hotel chains and the main airlines for a year-end discount. The consultancy bills the client for full travel and accommodation costs, sometimes even adding an administrative charge. At the end of the year, the consultancy receives a reimbursement from the travel providers. None of this refund is returned to customers who paid for all travel and accommodation in the first place. The defendants claimed that they had “discontinued this practice”, however 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 bill for ‘actual’ expenses. Then we charge them for their air travel expenses. Then we receive a bribe on their air ticket. But we don’t pay the customer back for the bribe.” A British consultant estimated that his employer had stolen more than £20 million from a single client in this way.
3. Billing for non-client work
In most consultancies, partners or directors divide their time among their various clients, allocating a certain number of days each month to each client, even when this time is not spent working for that client. In addition, you will often find ordinary consultants who are told to charge clients for the time they put into the internal consulting business. To quote a consultant from a company with over 100,000 employees, “I was in an internal meeting with over 100 consultants. The partner told us to charge the day to the project so we can bill the client, since it was almost the end of the day.” quarter and we needed to do our numbers. This seemingly innocuous decision alone has likely cost the client over £100,000 ($150,000).
4. Overcharging for overheads
In many consultancies, clients pay fictitious overheads. In a major consultancy, an additional 10% was automatically added to the consultancy fee supposedly to cover overhead costs. So, with each consultant costing £300,000 ($450,000) per year, clients would also be billed another £30,000 ($45,000) to pay for administrative overhead. However, the London office, for example, had around 300 consultants and around 50 administrative support staff: secretaries, receptionists, human resources, bean counters, marketing support, resource managers, trainers, data center researchers. information and document production. However, with the 10% top-up, our clients were charged the equivalent of about three hundred administrative employees; therefore, the salaries of up to two hundred and fifty support staff were not being spent, as the staff simply did not exist.
5. Relocation of staff
Many management consultancies are international, moving their staff around the world at the expense of their clients. On a £2.3 million ($4 million) project I helped sell in Britain to a regional health authority, the consultancy was understaffed in the UK. As our CEO wrote in an internal memo, “The project was carried out at a time when we still had strong support from American expats. Naturally, we housed them and their families and a portion of these costs were charged to the client”.
So our NHS client had to pay thousands of extra pounds a week for these imported consultants in what a subsequent official investigation described as “a financial fiasco”.
6. Cheating on flat-rate spending
Frequently consultancies will agree with the client that the expenses will be around, for example, 12% of the fees. Each week the client will be billed 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 leading manufacturer of military aircraft, missile systems, and satellites, we had agreed to 12%, but were actually only executing 7%. The VP of Accounts informed the rest of the consultancy that he had room to absorb expenses from both other projects and our head office, rather than pay the client back.
Very occasionally, clients audited our expenses. If they found some real horrors, we would simply say there was a clerical error and return the minimum necessary to keep the customer happy.
