01 September 2006
New Labour has embraced the world of management consultancy with great enthusiasm. But what has the public sector got back in return? Former management consultant David Craig offers a user-friendly guide to getting the most out of a tricky relationship
How times change. In opposition, the Labour Party lambasted the Conservatives for spending up to £500m a year on management and IT systems consultants. This, it thundered, was a disgraceful waste of money that should be spent on frontline services.
Once in office though, New Labour seemed to change its mind. In its grand plans for modernising public services, the government has sidelined both the Labour Party and the civil service and decided instead to rely on management and IT consultants to formulate and implement its policies.
This is turning out to be an expensive exercise. It is estimated that by 2009, it will have cost taxpayers well over £70bn in consultancy fees more than £20bn for management consultants and at least another £50bn for IT systems consultants. This vast investment could be seen as evidence of a dynamic, forward-looking government but only if the strategy worked.
Unfortunately, judging by the record of the past few years, this is far from the case. In fact, in July 2004 the Commons Public Accounts Committee concluded that the British government's record on consulting projects was 'an appalling waste of public money which Whitehall was trying to conceal behind a cloak of commercial confidentiality'.
Every single government department has had at least one and more often several major consulting disasters. The list is seemingly endless. Customs and Excise wasted more than £100m on an e-VAT system that nobody used and then spent £28m on 300 consultants without any clearly identifiable results.
The Child Support Agency is being disbanded after blowing more than £500m on consulting (£50,000 per employee). Almost £700m was squandered on a benefits card system that was scrapped. The Criminal Records Bureau cost more than twice its original £200m budget, as will the IT system for magistrates courts.
GCHQ managed to spend £450m on an IT system originally budgeted at £21m and the Ministry of Defence pays hundreds of millions of pounds for project management consulting while its results get ever worse. Meanwhile, the catastrophic new system for tax credits has led to overpayments of more than £4bn and more than 80,000 cases of fraud costing further hundreds of millions of pounds.
Indications are that only around 30% of management consulting is successful and for IT systems consulting, the success rate is well below 20%. Yet there are many very talented consultants who are dedicated to providing the best possible results for their clients. Too often they are prevented from delivering value and are even put in ethically questionable situations by the way the consultancy industry works. By looking at some widespread practices within consulting, we can identify what public sector buyers must do to ensure they get value from their consultants.
In many consultancies, executives' bonuses depend on them reaching certain 'utilisation' targets usually about 70%. This means that 70% of their consultants' time must be sold to clients, whether they have problems to be solved or not. Failure to achieve the target can result in a consultancy director losing several hundred thousand pounds in bonuses. So many consultants waste their time working on projects that are just lucrative 'billing slots', with little value for clients.
Many consultancies have few experienced experts; most of their employees are just 'warm bodies' or 'billing fodder'. The consultancy's profitability depends on using teams mostly made up of lower-paid, inexperienced staff, with their more highly paid experts working on several projects at once. With proper direction, the 'warm bodies' can provide good work, though the recruits are sometimes of dubious quality. Clients would get much better value if their consulting teams were mostly made up of experts.
A junior consultant will typically cost a consultancy around £1,000 per week. Yet they will usually charge a new consultant out at £5,000+ per week to public sector clients. Surprisingly, very few clients do the simple maths and ask why they should be paying more than £200,000 a year for an inexperienced junior consultant who is probably getting a fraction of that. In addition, many consultancies will make millions through charging for partners' time, administration costs and excessive travel expenses.
A further problem is that too many IT systems are still based on 'time and materials' contracts, where the supplier is paid according to time and resources
used. This means there is no incentive to finish systems projects within a tight timeframe or to control resources carefully. Other IT projects might appear to be based on a fixed price and timeframe. However, when you study the small print, there are often many 'get out of jail free' clauses that allow consultancies to increase costs and the time taken. Many IT consultancies end up making stupendous profits despite their projects costing hundreds of millions of pounds more than budgeted for, and taking years longer than originally planned.
Time after time, public sector organisations are encouraged by consultants to build completely new IT systems rather than adapt something that already works. The NHS tried to build a system that already existed in the US. After £32m had been squandered, they gave up and just used the US system. Similarly, the MoD spent £41m and eight years failing to build a system that they eventually bought off the shelf for just £6m. There are strong indications that several of the new NHS systems could have been built for a fraction of the current £12bn budget had existing systems been adapted rather than new ones built.
Over the past few years, the law concerning the duties of consultants to deliver what they have promised has changed dramatically to the benefit of buyers. Yet an analysis of more than 100 public sector contracts showed that not one had taken advantage of these changes.
Despite all these pitfalls, the public sector can get value from consultants, but only if it changes the way it buys consulting services. Here are some dos and don'ts:
Buy the consulting you need, not what your consultancy wants to sell you. Split each project into clearly identifiable phases with measurable results. Do not allow a new phase to be started until the preceding one is successfully completed. Do not let your department become a lucrative parking lot for consultants that nobody else wants. If you are buying an IT system, explore whether an existing system can be inexpensively adapted before throwing away millions of pounds in a probably futile attempt to reinvent the wheel
Do not let yourself become a training ground for the consultancy's new hires. Either have your HR people interview all consultants on your project and reject those with insufficient experience or insist that trainees are free
Look in detail at what you are paying. On most of the products and services you buy, your suppliers are making margins of around 30% or less so why are your consultants getting 500%? Examine your consultants' expenses are you providing facilities for them yet being charged for a vast variety of additional expenses and are they pocketing generous end-of-year kickbacks on travel expenses?
Pay your consultants according to the measurable results or working systems they deliver, not on the days they claim they have worked. If a consultancy does not want to be paid on results, then you probably should not be working with that consultancy
Understand the changes in the law regarding the obligations of consultants to deliver on their promises, and ensure that your contracts express a clear business result that the consultancy must achieve. For example, if the CSA had simply contracted to buy systems and processes that allowed it to collect £8 for every £1 spent on administration, hundreds of millions of pounds of taxpayers' money could have been saved. The simpler the contract, the more likely it is that it can be enforced.
New Labour has provided the consulting industry with the biggest and most lucrative contracts it has ever seen. Yet it is far from clear that British taxpayers are getting the massive improvement in public services they have paid for. Unless the public sector dramatically and rapidly changes the way it buys consulting, up to £70bn will disappear with very little delivered in return.
David Craig is a former management consultant. His book, Plundering the public sector, is published by Constable Books. More details are available on www.consulting-moneymachine.com
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