Top 5 Consulting Scams

A demotivational slide about "Consulting" - intended as a joke.We’ve all heard the stories of the unscrupulous consultant who billed more hours than he actually put into a project; or the consultant who charges high rates for his work, and turns around and outsources the contract to a lower cost consultant or off-shore resource.

The truth is there are a lot of other scams going on – and they aren’t all being perpetuated by the consultants themselves.

Now I want to start off by saying that there are a lot of ethical consultants and recruiters out there; the practices listed below aren’t common across the industry – but they do occur.  Knowing about them in advance is a great way to recognize and prepare yourself accordingly – whether as a vendor, or as a client.

All the examples are hypothetical of course; we’re all friends here… so I’m borrowing liberally from academic examples.  I’ve crossed my fingers as well.

SCAM 1:  The kickback

Ever wonder where those huge markups some recruiters place on a contractors rate go?  Especially if the only “service” provided by that recruiter is collecting a cheque from the client and passing your share on to you – usually forcing you to wait the 30-days (+1 day for them to write a cheque) .

Well, in some cases, where multiple vendors are involved – each applies a markup to cover their “expenses” of maintain a sales force, office, etc. – and these multiple layers of markups have, on a few of my contracts, been as high as a 150% markup once everyone gets their cut (yes, that number is correct – I was being billed out at $2.50 for every 1.00 I billed).

Insane as it is, sometimes it takes multiple vendors leveraging their contacts to open the doors to a very lucrative client.

With single vendors however, it’s harder to understand where that 30%plus markup goes (I’m talking 45-60 or more)  – and in many cases it may just be going back to the hiring manager or procurement department with the client who, in turn, provides “preferential” treatment to some recruiters/vendors over others.

Look out for vendors that consistently win bids when they are often at a higher rate than others, or offer lower quality/less skilled consultants than other firms – but always seem to hold favor with key decision makers within the firm.

Likewise, if you know the rate being charged for the consultant is significantly higher than what you think the consultant is earning (not that you should be asking of course) – then be suspicious of the recruiter; unless they are offering lots of other incentives to the consultants, they could be exploiting them.

SCAM 2:  Hiring manager is the recruiter

Sometimes discovering that the hiring manager knows every detail of your negotiations with the recruiter, in an embarrassing level of detail?

On at least one occasion, after some careful research, I discovered that the “president” of the preferred recruiting firm/vendor just happened to be the hiring manager (or family of the hiring manager).

Similar to “kickbacks” – in this scenario someone within the company is directly double-dipping; taking both a salary from the company, plus taking a cut of your contract fee as your recruiter/representative.

Research your recruiters thoroughly as part of the due diligence you should be doing with any new business contract.  Getting to know your boss and some of the hiring staff isn’t a bad idea either; they are going to Google you – doing the same back isn’t necessarily a bad thing.

If you find a connection – get out.  You could be implicated in the mess as well, and criminal charges are possible.

SCAM 3:  Win and swap

This is similar to the recruiting scam of “bait and switch” – where an incredibly good “potential” offer is put on the table by a recruiter as an incentive to join them on a bid; once they get the contract however, they turn around and offer the position to a less senior (and less costly) resource.

From the hiring organization’s perspective they award a “win” to a vendor – and the vendor advises that the consultant whose resume was attached to the bid is no longer available; but, in accordance with the contract, they will provide an “alternate”.  This alternate, however, is often at a lower rate to the vendor – but the contract rate to the client/employer is not adjusted accordingly.

Be wary of these alternates, and ensure that your initial request for proposal includes the fact that you get to assess the suitability of any replacement contractors/resources due to lack of availability post-contract award.  Always have the ability to terminate the contract, adjust rates or change vendors should you find that the proposed very senior resource is no longer available.

SCAM 4:  Leveraging what you don’t know

Hey… we often hire consultants to bring us experience and skills that we don’t already have in the organization, and may not be able to afford in a long-term permanent resource; it goes to the heart of why we use consultants.

But be wary of those consultants who exploit the gats in knowledge of your employees.

I knew of one consultant who, during a financial crisis with his client, would go to great lengths to ensure they saw him finding ways to cut a few thousand here and there in savings from their primary outsourcer (a large international business machines company that I won’t name).

What the client didn’t realize (a former government organization, whose employees didn’t always understand the subtleties of cost of ownership and return on investment) that much of this consultants work was actually “billable effort” to the outsourcer (by using time and effort of front line delivery and support teams).

As a result, the client was actually SPENDING more money than they were getting back in savings.

Now, that’s not to say that there weren’t ways to secure those savings – by engaging business/portfolio managers and other customer relationship management teams between the client and the outsourcing partner.

The problem with that approach, of course, is that the consultant wouldn’t be able to readily claim that HE personally saved the client thousands of dollars at the end of the day.

He put his own interests before those of his client – and at their cost.

More interesting of course is the fact that one of the previous clients of that consultant happened to be that outsourcing company – so it’s not as if he didn’t know what he was doing was wrong in the first place.

SCAM 5:  Learning on your dime

Sometimes you can’t get employees or consultants who are already highly skilled with your new system, service or tools – so you need to train them or, at the minimum, give them time to gain experience and confidence with those new tools.

While there’s nothing wrong with that scenario – just be careful to ensure that you aren’t necessarily taking on the full burden for training a vendor’s team and giving them skills that they can turn around and sell elsewhere on your dime.

If it’s a long term engagement you have with the vendor, or it’s a unique system/service not readily used elsewhere (or again) – then fine; you should carry the burden.  If, however, this is a short engagement, and the training creates significant value for the vendor, it would not be unreasonable to expect some kind of discount or reduced pricing on the time of the staff while they are being trained (and before they can bring their full value to bear for you).

During the height of the PeopleSoft/SAP/other ERP craze, many many integrators exploited their clients for training and experience – often slipping a junior into the team – but billing them at top rate as they gained the hands-on experience they needed to really be useful post training.

A BONUS SCAM

I couldn’t resist throwing in a “bonus” one – and I’m not quite sure how to fit this one in – but it’s great, and subtle.

Senior Manager X decides to launch a multi-year project just prior to his retirement.

He selects an independent contractor to take on the assignment at a very good rate.

Now after a year the senior manager retires.  The organization has a standing order that retirees cannot immediately return as contractors without either at least a 1 year break of employment, or special (and difficult to get) waivers from the most senior levels.

Oddly enough, however, due to the background knowledge and history retained by this former manager, he turns out to be the “ideal” candidate to become the assistant to the contractor – and since this was technically a different company in an existing B2B relationship, not technically a conflict under the rules.

Conclusion

Now don’t get too depressed; I’ve generally found more ethical individuals than unethical ones in my 20+ years as a consultant/professional.

That said, situations like these do happen – but they are the exception.  Knowing what to look for in advance can help you prepare, and take action if necessary.

Author: Stephen Holton, PMP, CISSP, SSGB, ITIL, CD

After completing over twelve years service in the Canadian Armed Forces, Stephen moved to private industry where he was employed as a Director of Information Technology, Director of Operations and CIO for a number of private sector companies before finally electing to become an independent consultant in 2000. Since then he’s served as a management consultant, project/program manager and business analyst/solution architect in a number of industries and organizations - including a big-5 consulting firm. These industries and organizations have included the airline, railway, telecommunications and banking industries, the Canadian and US Governments, as well as mandates in Brazil and Bermuda. Presently Steve lives in Ottawa, Canada.

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