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How Consultants Overcharge Their Clients

Consultants’ ‘Profit enhancers’

When an organization hires management or IT consultants, line managers must ensure that the consultants deliver the results promised. In this article, I summarise six techniques used by consultancies to maximize their own profitability. Some of these are just savvy business, some are dishonest, some are fraudulent – all are widespread throughout the consulting industry. By making organizations aware of these practices, I hope they will be better armed as they pay out their consultants’ usually generous fees and expenses.

1. Excessive profitability
A junior consultant will typically 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 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 experienced consultant may cost the consultancy £2,000 ($3,000) per week, but can be billed at £12,000+ ($15,000+) per week. So while many manufacturing businesses make gross margins of around 80% and retailers are at about 100%, management consultancies generally target gross margins of 500% to 800% – a rather striking and enormous difference from the margins any of our clients would ever make. Surprisingly, very few clients 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 probably being paid just over a tenth of that.

2. Retaining travel expenses rebates advice
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 three firms worked with outside suppliers such as airline firms and travel agencies to obtain rebates of up to 40% on airfare and other costs that were not passed along to clients.”

The way this works is simple. The consultancy sets up a deal with a travel agent, hotel chains and the main airlines for an end-of-year rebate. The consultancy invoices the client for the full travel and accommodation costs, sometimes even adding on an administration charge. At the end 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 first place. The defendants claimed they had “discontinued this practice” however this is contradicted by a recent e-mail from a consultant from one of the companies, “Here’s how we do it every time. We state in our contract that we will bill for ‘actual’ expenses. Then we bill them for your air travel expense. Then we get a kickback on your air ticket. But we don’t give the client back the kick-back.” One British consultant estimated that his employer had stolen over £20m from just one client in this way.

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