How consultants overcharge their clients

Consultant ‘Benefit Enhancers’

When an organization hires management or IT consultants, line managers must ensure that the consultants deliver the promised results. In this article, I outline 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 the usually generous fees and expenses of their consultants.

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 per week. But typically, private sector clients will be charged at upwards of £7,000 ($10,000+) per week; for larger public sector projects some consultancies will be reduced to £5,000+ ($7,500) per week. A more experienced consultant can 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 are getting gross margins around 80% and retailers are around 100%, management consultancies typically target gross margins of 500-800%, 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 over £300,000 ($450,000) a year for an inexperienced junior consultant who is probably paid just over a tenth of that.

2. Preservation of travel allowances

Last year, three consultancies 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 lawsuit was that for a decade the three firms worked with outside vendors, such as airlines and travel companies. agencies to get discounts of up to 40% on airfare and other costs that were not passed on to customers.

The way this works is simple. The consultancy establishes an agreement with a travel agency, hotel chains and the main airlines for a discount at the end of the year. The consultancy bills the client for the full costs of travel and accommodation, sometimes even adding an administrative fee. At the end of the year, the consultancy receives reimbursement from the travel providers. None of this refund is returned to clients who paid for all travel and accommodation in the first place. The defendants claimed 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 get 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 and allocate a certain number of days each month to each client, even when this time is not spent working for that client. Also, you often find ordinary consultants being told to charge clients for the time they spend on internal consulting business. To quote a consultant from a company with more than 100,000 employees, “I was in an internal meeting with more than 100 consultants. The partner told us to charge the day to the project so we could invoice the client, since it was almost the end of the project.” quarter and we needed to do our numbers. This seemingly innocuous decision alone has likely cost the client more than £100,000 ($150,000).

4. Overcharging for overhead

In many consultancies, clients pay fictitious overhead. On a major consultancy, an additional 10% was automatically added to the consulting fee supposedly to cover overhead costs. So, with each consultant costing £300,000 ($450,000) a year, clients would also be billed another £30,000 ($45,000) to pay for administrative overhead. However, 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, research center researchers, etc. information and document production. However, with the 10% supplement, 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 spent, as the staff simply did not exist.

5. Relocation of personnel

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 that I helped sell in the UK 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 the strong support of American expatriates. Naturally, we housed them and their families and a portion of these costs were borne 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 inquiry described as “a financial fiasco”.

6. Cheat on flat rate expenses

Often the 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 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 7% executing. The VP of accounts informed the rest of the consultancy that he had room to absorb the expenses of both other projects and our head office, instead of paying the client back.

Very occasionally, clients audited our expenses. If they found some real horrors, we’d just say there was a clerical error and refund the minimum necessary to keep the customer happy.