Revenue leakage in consultancy firms

Revenue leakage in consultancy firms is the difference between the value of the work consultants deliver and what is eventually invoiced and paid. It arises in six places: hours that are not logged, hours written off before they reach the invoice, scope that grows on fixed-price engagements without a change request, rates that fall behind at existing clients, rechargeable costs that are not recharged, and work in progress that sits so long it is never invoiced. None of these leaks is visible in revenue. They only become visible when you set worked against invoiced.

Revenue leakage in consultancy firms is often dismissed as unavoidable. Write-offs are part of the job, consultants simply do not log everything, clients expect a discount. All of that is a little bit true. But the difference between a firm that invoices 95 percent of its work and one that invoices 85 percent is, at the same revenue, the difference between a good year and a mediocre one. How to monitor this structurally is covered in Revenue Intelligence for consultancy. This article is about the leaks themselves: why they arise and how to measure them.

1. Hours that are not logged

How does it arise?

Most consultants do not log their hours daily but at the end of the week, or even later. They reconstruct their week from their calendar and their memory. Whatever is not in the calendar disappears: the twenty-minute phone call, the half-hour email, reading a document on the train. Senior consultants and partners suffer most from this, because their work is the most fragmented.

There is something else going on too. Many consultants log not what they did, but what they think the client will consider reasonable. An analysis that took six hours but, in their view, could have been done in four, gets logged as four. That feels fair, but it is a pricing decision taken in the wrong place: not by the partner who manages the client relationship, but by the consultant who did the work.

How do you measure it?

Compare, per consultant, logged hours with available hours over several months. Also compare with their own pattern: a sudden drop says more than an absolute number. If you want to do it carefully and with consent, you can put the calendar next to the time records for a sample: client meetings with no hours logged on that client.

2. Hours that are written off

How does it arise?

Before an invoice goes out, the partner or engagement manager reviews the hours. They strike out what they consider not billable. That is a useful check: not every hour deserves to be invoiced. But in practice it is often no longer a check, but a habit.

Write-offs have a few recognisable causes:

• The budget has run out. The engagement created an expectation, and anything above it is written off to avoid the conversation.
• Juniors took too long. Sometimes justified. But if it happens as a rule, it is a planning or training question, not an invoicing question.
• The relationship matters. The partner writes off because they expect a large engagement next year. That is an investment, but it is rarely tracked as one.
• The invoice is late. Work from three months ago is harder to justify than work from last week. The older the hours, the more gets written off.

How do you measure it?

Calculate realisation: invoiced value divided by recorded value. Per engagement, per client, per partner and per month. Look above all at the spread. If most partners sit at 94 percent and one at 82, that is no coincidence. If realisation on engagements with old work in progress is lower than average, you know that speed of invoicing matters.

3. Scope that grows without a change

How does it arise?

A fixed-price engagement has a scope. During delivery the client asks for something extra: an analysis of an additional market, an extra round of interviews, a board presentation that was not in the proposal. The team wants to help the client and does it. Nobody raises a change request, because it seems small, because the client is important, or because the team feels the original scope was not clear enough.

At the end of the engagement the budget has been exceeded by 30 percent. The post-engagement review says the engagement was badly estimated. But part of that overrun was new work.

How do you measure it?

Track budget consumption against progress for each fixed-price engagement. Record how many change requests are raised per engagement. If your engagements regularly go over budget and hardly any changes are raised, you know where the money is. This pattern is described more broadly for all project businesses in revenue leakage in project businesses.

4. Rates that fall behind

How does it arise?

The rate card is reviewed every year. New clients get the new rate. Existing clients get the new rate if someone announces it, and that is far from always the case. The partner does not want to strain the relationship, the client has a framework agreement with fixed rates, or nobody simply thought of it.

Then there is the discount that stays. An introductory discount for the first engagement, a volume discount on a large engagement, a temporary discount in a difficult year for the client. The discount is set up in the system and never removed.

After a few years a wide spread develops: the same senior consultant is invoiced at EUR 165 to one client and EUR 125 to another, without anyone being able to explain why.

How do you measure it?

Calculate, per client, the average realised rate per seniority level. Put it next to the rate card. Sort by deviation. For the clients with the largest deviation, find out whether there is an agreement that explains it and, if so, whether that agreement still applies. How to do this systematically is covered in how do you find missed price increases.

5. Costs that are not recharged

How does it arise?

Travel, hotel stays, bought-in data or research, printing, venue hire for workshops. Many engagement letters allow these to be recharged, sometimes with a mark-up. But the costs come in through a different route: an expense claim from the consultant, a purchase invoice in the finance team. They are booked as general overheads instead of to the engagement.

How do you measure it?

Take all expense claims and purchase invoices from a quarter that can be linked to a client or engagement. For each, find the recharge. Whatever you cannot find, and the engagement letter allowed, is leakage.

6. Work in progress that sits

How does it arise?

Hours that have been recorded but not yet invoiced make up work in progress. On time and materials engagements it should be a month old at most. But invoices get postponed: the partner has no time to review them, the client wants one invoice at the end, there is a dispute about an earlier invoice. Work in progress grows and ages.

Old work in progress is a problem for two reasons. It is money you have pre-financed, and it is written off far more often than fresh work. Work from six months ago is hard to defend.

How do you measure it?

Run an ageing analysis of work in progress: how much is younger than thirty days, thirty to sixty, sixty to ninety, older than ninety. The last bucket is where the money disappears.

Worked example

Worked example: suppose a firm with 30 consultants and EUR 4.5 million in revenue, an average rate of EUR 130 and 1,300 billable hours per consultant per year.

That is over 7 percent of revenue, which is substantial. The worked example is built on assumptions that will be too high for some firms. For a first estimate of what can really be recovered, count on a third to half: around EUR 115,000 to EUR 170,000. For a firm of this size that is still a considerable share of profit.

There is no reliable industry average for revenue leakage in consultancy. The only way to know your own figure is to measure it.

The checklist for this month

1. Realisation per partner. Calculate over the past twelve months. Discuss the outliers.
2. Work in progress older than sixty days. A decision per engagement: invoice it, write it off with a reason, or make an arrangement with the client.
3. Rate spread per client. The ten clients with the largest deviation from the rate card. Is there an agreement? Does it still apply?
4. Budget against progress. All live fixed-price engagements. Where is consumption running more than ten percentage points ahead?
5. Logged against available. Per consultant, over three months. Who logs structurally less than expected?
6. Rechargeable costs. A sample of expense claims and purchases. Was everything recharged that could have been?

For the wider group of professional services firms, from accountants to engineering firms, the same patterns apply with different emphases. Those are covered in revenue leakage in professional services. The general principle of the check, for any sector, is in how do you check that all revenue is invoiced.

Frequently asked questions

Is a realisation of 90 percent good or bad?

That depends on your firm, your market and your mix of engagements. There is no benchmark you can simply adopt. More important than the absolute number are the trend and the spread: is it falling, and does it differ widely between partners or clients?

Should every write-off be approved?

Not every one, but those above a threshold, yes. A write-off of a few hours does not need a procedure. A write-off of a few thousand euros does: with a reason and seen by a second partner. That alone changes behaviour.

How do I get consultants to log hours daily?

Make it easy and make it normal. Time registration on a phone, a reminder at the end of the day, and partners who do it themselves. Sanctions work less well than visibility: a monthly overview of logged against available hours, per person, without judgement.

How do I introduce a rate increase at a long-standing client?

Announce it well in advance, back it up with your costs and the market, and tie it to a natural moment such as a new year or a new engagement. A client who has been below the rate card for years can also be brought up in stages.

What is the difference between an overrun and scope creep?

An overrun is more work for the same scope. Scope creep is work for a larger scope without the price growing with it. You fix the first with better estimating, the second with change requests. If you do not keep them apart, you learn from neither.