| Consultants' 'Profit enhancers' | | | | allocate a certain number of days each month to |
| When an organization hires management or IT | | | | each client - even when this time is actually not |
| consultants, line managers must ensure that the | | | | spent working for that client. Moreover, you often |
| consultants deliver the results promised. In this | | | | find ordinary consultants being told to charge |
| article, I summarise six techniques used by | | | | clients for time spent on internal consultancy |
| consultancies to maximize their own profitability. | | | | business. To quote a consultant from a 100,000 |
| Some of these are just savvy business, some | | | | plus employee firm, "I was at an internal meeting |
| are dishonest, some are fraudulent - all are | | | | with more than 100 other consultants. Partner told |
| widespread throughout the consulting industry. By | | | | us to charge the day to the project so we could |
| making organizations aware of these practices, I | | | | bill it to the client as it was almost quarter end |
| hope they will be better armed as they pay out | | | | and we needed to make our numbers." Just this |
| their consultants' usually generous fees and | | | | one apparently innocuous decision will probably |
| expenses. | | | | have cost the client over £100,000 |
| 1. Excessive profitability | | | | ($150,000). |
| A junior consultant will typically be paid around | | | | 4. Overcharging for overhead |
| £30,000 ($45,000) a year. So with social | | | | In many consultancies, clients pay for fictitious |
| and other costs, the consultancy may be paying | | | | overhead costs. At one major consultancy an |
| around £1,000 per week. But they will | | | | extra 10% was automatically added to |
| usually be charged out at £7,000+ | | | | consultancy fees supposedly to cover overhead |
| ($10,000+) per week to private sector clients - | | | | costs. So, with each consultant costing |
| for larger public sector projects some | | | | £300,000 ($450,000) a year, clients would |
| consultancies will go down to £5,000+ | | | | also be billed for another £30,000 ($45,000) |
| ($7,500) per week. A more experienced | | | | to pay for administrative overhead. Yet the |
| consultant may cost the consultancy | | | | London office, for example, had about three |
| £2,000 ($3,000) per week, but can be billed | | | | hundred consultants and around fifty |
| at £12,000+ ($15,000+) per week. So while | | | | administrative support staff - secretaries, |
| many manufacturing businesses make gross | | | | receptionists, human resources, bean counters, |
| margins of around 80% and retailers are at about | | | | marketing support, resource managers, trainers, |
| 100%, management consultancies generally target | | | | information centre researchers and document |
| gross margins of 500% to 800% - a rather | | | | production. Yet, with the 10% add-on, our clients |
| striking and enormous difference from the | | | | were being charged for the equivalent of about |
| margins any of our clients would ever make. | | | | three hundred administrative staff - hence the |
| Surprisingly, very few clients do the simple | | | | salaries of up to two hundred and fifty support |
| mathematics and ask why they should be paying | | | | staff were not being spent, as the staff simply |
| over £300,000 ($450,000) a year for an | | | | did not exist. |
| inexperienced junior consultant who is probably | | | | 5. Relocating staff |
| being paid just over a tenth of that. | | | | Many management consultancies are international |
| 2. Retaining travel expenses rebates | | | | and move their staff around the world at their |
| Last year three consultancies agreed to pay a | | | | clients' expense. On £2.3 million ($4m) |
| former client around $100m compensation, when | | | | project I helped sell in Britain to a regional health |
| they were sued for "unjustly enriching themselves | | | | authority, the consultancy did not have sufficient |
| at the expense of their clients The lawsuit was | | | | UK based staff. As our CEO wrote in an internal |
| that for a decade the three firms worked with | | | | memo, "the project took place at a time when |
| outside suppliers such as airline firms and travel | | | | we were still heavily supported by U.S. expats. |
| agencies to obtain rebates of up to 40% on | | | | Naturally we accommodated them and their |
| airfare and other costs that were not passed | | | | families and a proportion of these costs were |
| along to clients." | | | | charged to the client." |
| The way this works is simple. The consultancy | | | | So our NHS client had to pay thousands of |
| sets up a deal with a travel agent, hotel chains | | | | pounds a week extra for these imported |
| and the main airlines for an end-of-year rebate. | | | | consultants in what a subsequent official |
| The consultancy invoices the client for the full | | | | investigation described as "a financial fiasco." |
| travel and accommodation costs, sometimes | | | | 6. Cheating on flat rate expenses |
| even adding on an administration charge. At the | | | | Frequently consultancies will agree with the client |
| end of the year, the consultancy receives a | | | | that expenses will be around, for example, 12% |
| rebate from the travel providers. None of this | | | | of fees. Each week the client will be billed for this |
| rebate is ever passed back to the clients who | | | | 12%, then at the end of the project there will be |
| have paid for all the travel and accommodation in | | | | a reconciliation between the 12% paid by the |
| the first place. The defendants claimed they had | | | | client and the actual expenses incurred. |
| "discontinued this practice" however this is | | | | On a project for a leading manufacturer of |
| contradicted by a recent e-mail from a consultant | | | | military aircraft, missile systems and satellites, we |
| from one of the companies, "Here's how we do it | | | | had agreed 12% but were actually only running at |
| every time. We state in our contract that we will | | | | about 7%. The account vice president informed |
| bill for 'actual' expenses. Then we bill them for | | | | the rest of the consultancy that he had room to |
| your air travel expense. Then we get a kickback | | | | soak up expenses both from other projects and |
| on your air ticket. But we don't give the client | | | | from our head office, rather than paying money |
| back the kick-back." One British consultant | | | | back to the client. |
| estimated that his employer had stolen over | | | | Very occasionally, clients would audit our |
| £20m from just one client in this way. | | | | expenses. If they found some real horrors, we'd |
| 3. Billing for non-client work | | | | just say there had been an administrative error |
| In most consultancies, partners or directors divide | | | | and refund the minimum necessary to keep the |
| their time up amongst their various clients and | | | | client happy. |