The Great Inflatable Service Bill

Are companies paying too much for services? in the wake of recent billing scandals, CFOs could be forgiven for suspecting that they are.

In December, PricewaterhouseCoopers LLP settled charges that it had overbilled clients by hundreds of millions of dollars by not passing on rebates received from travel agencies (class-action suits against KPMG and Ernst & Young are still pending). The new year brought the indictment of executives at ad agency Ogilvy & Mather, which is charged with instructing employees to falsify time sheets for work done on a U.S. government account. And then there are the charges swirling around Halliburton, including the allegation that one of the firm’s food-service subcontractors vastly overcharged for meals provided to U.S. soldiers in Iraq.

One thing is certain—companies spend a great deal on services. According to CAPS Research, an organization that tracks corporate purchasing, the average company devotes 33 percent of its total spending to services, a broad category that ranges from legal and consulting advice to process outsourcing. The number can vary widely—for financial-services firms, such spending can exceed 80 percent of the total. And although companies cut many forms of spending during the downturn, services spending has continued to rise an average of 3.5 percent annually.

Fraud or Foolishness?

Although it grabs headlines, outright fraud appears to be relatively rare. More common, say experts, are simple carelessness and poor recordkeeping on the part of many service providers. “Overcharges happen all the time, but it’s rarely intentional,” says Stephen Broderick, chief operating officer at FirmDecisions, a London-based company that conducts audits of ad-agency compliance with client contracts. “It’s because [the agency] doesn’t have the systems to track [costs], doesn’t understand the agreement with the client, or is so busy looking ahead to the next year that the housekeeping is not really taken care of.” The recession has made matters worse as firms reduce back-office staff, including the finance professionals who handle billing.

To be sure, the errors—intentional or not—can be costly. Broderick cites a recent audit that revealed that an ad agency mistakenly billed a client $84,000 for 12 hours of secretarial work. In another example, a law firm’s partners were found to be charging all of their meals and transportation costs to a client, regardless of the time actually spent on the client’s work, according to Judie Bronsther, president of New York-based Accountability Services Inc., a company that provides advice on legal bills.

Companies can also fall victim to the pressure some professionals feel to extract additional business from clients. According to Tom Rodenhauser, president of Consulting Information Services LLC, in Keene, New Hampshire, one common tactic of management consultants is to come in for one project and use the opportunity to identify additional, expensive problems. “The challenge is for the client to keep the contract tight enough that the provider can’t navigate its way around the contract to get more business,” says Rodenhauser.

The Problem with Services

Overbilling can often be caught through an audit or prevented in the first place by developing a detailed billing policy (see “Grilling Your Lawyer,” at the end of this article). But what about the self-perpetuating consulting engagement (which most consultants would argue is a legitimate way of sustaining their business)? Or services for which a company is unknowingly paying above-market rates? Or services that may be unnecessary in the first place?

Discuss

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