How to Get Value From Consultants

Research on over 25,000 consultancy projects has shown that about one third deliver what was promised and the other two thirds end in embarrassing and expensive failure. Yet it is not difficult to get truly high value from consultants. But for this to happen, all of the following nine conditions must be met. Too many clients embark on costly consulting and IT systems projects without checking that these commonsense elements are in place.

1. Your people cannot solve the issue
If you are thinking of buying consultancy to redesign your processes, develop a new organisation structure or whatever, you must ensure that nobody in your organisation is capable of doing the job and establish exactly how much consultancy help you need. Would it be enough just to buy one or two experts’ time to help guide your own staff? If so, then you should not let the consultancy sell you an army of “warm bodies”. Firstly, because this will be a huge waste of money. And secondly, because employees are more likely to accept changes to which they themselves have contributed and are more inclined to reject changes forced upon them by young inexperienced consultants who will not be around to bear the consequences of the changes they are proposing.

2. Your management team has correctly identified that issue
The next question to ask is whether you and your management team could in any way be responsible for the situation with which you want your consultants to help you. It is unusual for an organisation to have a problem that is not in some degree related to the way management leads the place. If you are able to make a reasonably honest and objective assessment of your own role in creating a situation where you believe you need consultants’ help, you are much more likely to buy the correct consultancy.

3. Your consultancy is selling a solution and not a product
Before hiring a consultancy, you need to be aware of what they can and cannot offer. In particular you need to assess whether they are genuinely trying to provide a customised solution to your situation or whether they are trying to foist some pre-made service on you. And if your consultants are in any way connected with an IT systems house, all the warning bells should be sounding. It is probable that they will be under great pressure to flog you some IT – make really sure you need it before they convince you to buy it.

4. Your consultancy has the right skills
When a consultancy shows interest in working for you, there is nothing wrong with insisting on seeing the CVs of the consultants who will be running riot in your organisation. Many consultancies will resist this request – if they do, they are probably not the kind of consultancy you would want to work with anyway.

5. The consultants with the right skills will work for you
When your consultancy is trying to sell to you, they will probably give you loads of face time with their experts with the skills relevant to your situation. Too often, once you have signed the contract, the experts become scarce and you’re left mostly with inexperienced “billing fodder”. You should demand that the consultancy includes in your contract a firm written commitment as to how many days per week the experts will be on site working on your project. And you should not ever accept bland assurances that their experts will always be available on the phone to help your “billing fodder” out and give them guidance when necessary.

6. Your consultancy agrees to a fixed timeframe and fixed budget
Look closely at the contract your consultancy offers you. In particular, check whether the total fees they plan to charge you are fixed and whether they clearly commit to how long your project will take. Many consultancy contracts, especially those including some IT systems work, may at first look like they are offering a defined service for a fixed price within a fixed timeframe. But if you look in the small print, you will often find several “get out of jail free” clauses that allow the consultancy to charge an awful lot more and take considerably longer than they initially promise.

7. Your consultancy agrees to base part of their fees on results
There are few consultancies that will risk basing any significant part of their fees on the results they achieve. They will normally give all kinds of excuses – they cannot be responsible for external events in the market, the economic situation might suddenly change, one of your major customers might move to another supplier, a competitor might implement a new more aggressive strategy affecting your profits and so on. While there is some validity to all these excuses, you should still be able to find some performance measures that will indicate whether your consultancy delivered the dreams they promised. If they do refuse to base at least thirty percent of their fees on their results, you should consider giving the business to someone else.

8. Your consultancy charges ‘reasonable’ fees and expenses
Your consultancy will probably try not to tell you how much they pay their staff and they will attempt to give you an overall price for your project rather than revealing what each consultant will actually cost you. However, you can reckon that a junior consultant is getting paid somewhere between £30,000 and £50,000 a year, an experienced consultant £60,000 to £80,000 a year and a project manager £100,000 to £150,000 per year. So if your consultancy are paying a junior consultant less than £1,000 a week and yet appear to be charging you £8,000 a week for their time, then this 800% gross profit margin may be excessive. Likewise, if they are paying an experienced expert around £2,000 per week and you are forking out £15,000 a week for them. Then look out for extra administration charges, excessive travel expenses and only pay for consultants’ time spent working on your project.

9. Try adapting existing IT systems before deciding to build new ones
If you think you may need to improve your IT systems, most IT consultants will recommend you build a completely new system. Their argument will be that your needs are unique, so to give you the best solution, they need to design something exactly matching your needs. It may be true that overall the system they propose is different from other systems in existence. However, if you split your required system up into its individual elements, you will probably find that most of these already exist in other organisations. You will save many millions and huge organisational effort by thinking creatively about how existing systems can be adapted to serve your needs. And always ask yourself the question: with over 700 million people living in the developed world, is it really possible that your organisation is so unique that there is no other organisation in existence that has similar IT system needs to yours?

David Craig is the author of “Rip-Off! The scandalous inside story of the consulting money machine” which exposes how consultants fleece their business clients and “Plundering the Public Sector” which reveal

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
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.

3. Billing for non-client work
In most consultancies, partners or directors divide their time up amongst their various clients and allocate a certain number of days each month to each client – even when this time is actually not spent working for that client. Moreover, you often find ordinary consultants being told to charge clients for time spent on internal consultancy business. To quote a consultant from a 100,000 plus employee firm, “I was at an internal meeting with more than 100 other consultants. Partner told us to charge the day to the project so we could bill it to the client as it was almost quarter end and we needed to make our numbers.” Just this one apparently innocuous decision will probably have cost the client over £100,000 ($150,000).

4. Overcharging for overhead
In many consultancies, clients pay for fictitious overhead costs. At one major consultancy an extra 10% was automatically added to consultancy fees supposedly to cover overhead costs. So, with each consultant costing £300,000 ($450,000) a year, clients would also be billed for another £30,000 ($45,000) to pay for administrative overhead. Yet the London office, for example, had about three hundred consultants and around fifty administrative support staff – secretaries, receptionists, human resources, bean counters, marketing support, resource managers, trainers, information centre researchers and document production. Yet, with the 10% add-on, our clients were being charged for the equivalent of about three hundred administrative staff – hence the salaries of up to two hundred and fifty support staff were not being spent, as the staff simply did not exist.

5. Relocating staff
Many management consultancies are international and move their staff around the world at their clients’ expense. On £2.3 million ($4m) project I helped sell in Britain to a regional health authority, the consultancy did not have sufficient UK based staff. As our CEO wrote in an internal memo, “the project took place at a time when we were still heavily supported by U.S. expats. Naturally we accommodated them and their families and a proportion of these costs were charged to the client.”

So our NHS client had to pay thousands of pounds a week extra for these imported consultants in what a subsequent official investigation described as “a financial fiasco.”

6. Cheating on flat rate expenses
Frequently consultancies will agree with the client that expenses will be around, for example, 12% of 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 12% but were actually only running at about 7%. The account vice president informed the rest of the consultancy that he had room to soak up expenses both from other projects and from our head office, rather than paying money back to the client.

Very occasionally, clients would audit our expenses. If they found some r