Bankruptcy

Cost-Cutters Caught Out

Companies cut costs by cutting consultants hired to help cut costs.
John ZhuApril 2, 2009

The circular logic is dizzying. Last month, Magenta netLogic, a consultancy, sued BT for depriving it of up to £80m (€85m) in fees after the UK telecoms firm didn’t implement all of its recommendations for a cost-cutting plan. The consultancy alleges that it would have received between 10% and 20% of the savings achieved. For its part, BT called Magenta’s plan “hopelessly flawed” and “wholly disputes” the £8m of unpaid invoices the consultant claims it is owed for services rendered.

Elsewhere, external consulting services are being put under heavy scrutiny at companies on a quest to cut costs. In January, German industrial group Siemens announced that it would forgo the use of external management consultants to assist it as it executes a €1.2 billion cost-savings plan. Some reports claimed that the company would save millions of euros as a result of such action.

Naturally, the consultants are fighting back. In their defence, some external consultants are arguing that they can rein in finance chiefs who may otherwise cut costs too deeply. Alan Leaman, chief executive of the Management Consultancies Association, a trade group, says that “consultancies are working hard to ensure that cost savings do not do long-term harm to company prospects.”

Others are keen to emphasise their cost-effectiveness. Alan Braithwaite, chairman of LCP Consulting, a supply chain specialist, says his firm is pitching “short-term savings equal to three times fees deliverable in six to nine months,” although this may require “some initial investment.” Well, nothing comes for free.