What Percentage of the Hourly Rate in SAP Services is Taken by the Partner?

Executive Summary

• The percentage of the SAP consulting billing rate that goes to the management is quite high.
• This margin promotes SAP consulting companies to try to staff as many consultants as possible.

Introduction to Partners in Consulting Firms

Getting to a partnership position in a large consulting firm is quite competitive. Partners in SAP practices must show the ability to “bring in” $2 million (roughly per year) per year in consulting billing. Around 1/3 of this will go out in salary for the consultants, approximately $500,000 will go to the partner (depending upon how senior they are, more senior partners get more, and the other $800,000 will go to the firm for associated expenses such as offices and computers, and then to senior partners. Partners and directors who cannot maintain their quota will be let go after a couple of years (and depending upon the economic environment). This model is very top-heavy as a massive chunk of money is going to people who are not doing the work. While already very top-heavy, the US’s major firms have moved to increase the distribution of income even more unequally through importing H1-B workers. They are at a disadvantage in negotiation and are motivated to immigrate from lower-paid countries with many infrastructure and political problems. The major firms continue to pull H1-B workers from overseas using quotas set up during the tech bubble even as the US real unemployment rate is somewhere between 15 and 10%.

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What is the Percentage Take?

Generally, the partner is taking 60% of the rate for permanent employees. This means if you are paying for consultants at $200 per hour, the consultant is getting on average $65 of that indirect money compensation and possibly another $15 in non-monetary compensation benefits. If you are hiring a contractor, the recruiter attempts to take ½ of the rate. If $200 per hour is being paid out, the recruiter is taking $100 per hour.

Secondly, you pay again for partners or directors that don’t do any work on the project. Although this is rather uncommon. In normal operations, the major consulting companies have the market well wrapped up.

Overly Marked Up Employees and Puffery

Consulting companies used extreme puffery to build up the perception of their resources. The superlatives are amusing when one compares them to the actual resources that they present. This puffery finds its way into the RFP responses that large consulting companies present to clients. The way consulting companies perform most of the justification is puffery, as described in the Marin County Case court documents.

How This Affects Your Project

What are the problems with this system? The partner is taking the lion’s share of the money, but the partner does not do the work. This means as a client, you are paying quite a lot for resources that are far less motivated than you believe because most of the money you pay is being consumed by an intermediary. Now partners will argue the money does not go to them but to the company. However, the way consulting companies work is to split up the revenues – expenses and or profits among the partnership. That is why everyone wants to be a partner because you make money from other people’s work. A second argument is that they have a lot of expenses.

This is entirely untrue.

Investing as Little as Possible

They invest as little as possible in their employees and the laptops they give them don’t cost very much. There is very little investment in systems (for example, their internal SAP systems are far worse than what I can rent for $75 per month from an online SAP provider.) The firm does incur sales and marketing costs, and litigation costs, as many of the largest consulting companies get sued.

End Result

The result is if you are a client, you are paying a lot of money that is just not being efficiently distributed. More of it should go to the people doing the work rather than talking about the work, selling your work, or “motivating” the people who do the job. If companies were to hire directly, they would get far more motivated consultants. The work would be of higher quality and the percentage of successful supply chain implementations (which are now hovering at about 50% would go up). Managing consultants is not all that challenging; managing the consulting partner is much more difficult. The consulting partner controls the consultants, often encouraging them to lie. When a consultant is working for a consulting company, and the larger the consulting the company, the more of a problem this is, you are not getting their actual opinions. Instead, you are getting the views of the people that are senior to them.

Dispensing with Large Consulting Companies

So the first thing to understand is that partners in consulting firms are under a great deal of pressure to keep their billing up. What most often happens is that this need to bill hours overtakes the desire to provide clients value. Furthermore, consulting companies are not compensated based upon whether projects go live but on the consulting’s perception being delivered. They are often shielded from responsibility because they have connections very high in the client.

This is why consulting companies can provide very little value or negative value to clients still not be removed from an account. The reasons why essentially break down to the fact that consulting services are freely competitive. They could be made competitive, but that would require intervention from the government, which will probably not happen in the foreseeable future.

For companies, if they can dispense with the large consulting companies, the consultants’ source is clear — LinkedIn. If consultants are not performing, they can be removed rather quickly. Most SAP contracts have 1-week termination clauses in them. By bypassing the consulting firms and the recruiters, you can get higher quality, more experienced resources for quite less money. Secondly, individuals consultants are far more controllable than large consulting companies.

SAP implementation clients often tell me that although they are not satisfied with their big consulting partner, they realize they are mostly the same, and only a handful of companies can pull off these types of big projects. I have recently concluded that this assumption is not true. When one thinks about what the big consulting companies do, there is certainly nothing special about it. They intermediate between those with IT skills and clients who are interested in those skills. They talk a lot about their ability to manage SAP implementations, but their skills in this area t tend to be poor — and entirely driven around trying to maximize the amount of money pulled from the client.

The Rise of LinkedIn and Similar Sites

Contractors generally get 1/2 of the rate paid to the consulting company, and more of their time goes to you because they spend no time being manipulated by big consulting company partners or attending consulting company get-togethers. 

I am surprised move companies have not dispensed with the large consulting companies and built their team. It is not particularly difficult, and it is both far less expensive and will more likely than not improve your project’s success ratio.

Conclusion

Major consulting companies are doing a business of reselling extremely marked-up employees to companies. Most consulting companies don’t add much value to the consultants’ skills that they are charging so much money for.