How Consultants Overcharge Their Customers

When a company hires management or IT consultants, line managers must be sure that the consultants do the trick guaranteed. In the following paragraphs, I summarise six techniques utilized by consultancies to maximise their very own profitability. A few of these are simply savvy business, many are dishonest, many are fraudulent – each one is prevalent through the talking to industry. By looking into making organizations conscious of these practices, I really hope they’ll be better armed because they shell out their consultants’ usually generous charges and expenses.

1. Excessive profitability

A junior consultant will typically be compensated around £30,000 ($45,000) annually. So with social along with other costs, the consultancy might be having to pay around £1,000 each week. But they’ll usually be billed out at £7,000 ($10,000 ) each week to personal sector clients – for bigger public sector projects some consultancies goes lower to £5,000 ($7,500) each week. A far more experienced consultant could cost the consultancy £2,000 ($3,000) each week, but could be billed at £12,000 ($15,000 ) each week. So even though many manufacturing companies make gross margins close to 80% and retailers are in about 100%, management consultancies generally target gross margins of 500% to 800% – an extremely striking and huge difference in the margins any one of our clients would ever make. Surprisingly, very couple of clients perform the simple mathematics and get why they must be having to pay over £300,000 ($450,000) annually to have an unskilled junior consultant who’s most likely being compensated approximately a tenth of this.

2. Retaining travel expenses rebates

This past year three consultancies decided to pay an old client around $100m compensation, once they were accused of “unjustly enriching themselves at the fee for their customers The suit was that for any decade the 3 firms labored with outdoors suppliers for example air travel firms and travel agencies to acquire rebates as high as 40% on airfare along with other costs which were not passed along to clients.”

The way in which this works is straightforward. The consultancy creates an offer having a tour operator, hotel chains and also the primary airlines to have an finish-of-year rebate. The consultancy invoices the customer for that full travel and accommodation costs, often even including an administration charge. In the finish of the season, the consultancy gets to be a rebate in the travel providers. None of the rebate is ever passed to the clients who’ve compensated for the travel and accommodation to begin with. The defendants claimed they’d “stopped this practice” this really is contradicted with a recent e-mail from the consultant from among the companies, “Here is how we all do it each time. We condition within our contract that we’ll bill for ‘actual’ expenses. Only then do we bill them for the airline travel expense. Only then do we obtain a kickback in your air ticket. But we do not provide the client back the kick-back.” One British consultant believed that his employer had stolen over £20m from only one client in this manner.

3. Billing for non-client work

In many consultancies, partners or company directors divide time up among their various clients and allocate a particular length of time every month to every client – even if this time around is really not spent employed by that client. Furthermore, you frequently find ordinary consultants being told to charge clients for time allocated to internal consultancy business. To pages and use a consultant from the 100,000 plus worker firm, “I had been in an internal meeting using more than 100 other consultants. Partner told us to charge your day towards the project therefore we could bill it towards the client because it was almost quarter finish so we required to make our figures.” This one apparently innocuous decision will most likely have cost the customer over £100,000 ($150,000).

4. Overcharging for overhead

In lots of consultancies, clients purchase make believe expenses. At one major consultancy an additional 10% was instantly put into consultancy charges supposedly to pay for expenses. So, with every consultant costing £300,000 ($450,000) annually, clients would be also billed for an additional £30,000 ($45,000) to cover administrative overhead. The London office, for instance, had around three hundred consultants and around fifty administrative support – secretaries, receptionists, human sources, bean counters, marketing support, resource managers, trainers, information center researchers and document production. Yet, using the 10% add-on, our clients appeared to be billed for the same as around three hundred administrative staff – therefore, the salaries as high as 300 support weren’t being spent, because the staff simply didn’t exist.