Tag Archive for: Consulting

The US Government Department of Justice recently issued a news release.  

Booz Allen Hamilton Holding Corporation has agreed to pay the United States $377,453,150 to resolve allegations that it violated the False Claims Act by improperly billing commercial and international costs to its government contracts. Booz Allen, which is headquartered in McLean, Virginia, provides a range of management, consulting, and engineering services to the Government, as well as commercial and international customers”.

I do love the precision of the final $150 on that number! Couldn’t they have rounded it slightly?

The accusation was that between 2011 and 2021, the consulting firm charged costs to its government contracts and subcontracts that should instead have been billed to its commercial and international contracts. That particularly applied to some indirect costs. So the government was allegedly paying for activities and services that had nothing to do with the work the firm was actually doing for government organisations.

Now allocating overheads can be a tricky issue, as many of us know. And Booz Allen issued a statement, as you might expect.

“Booz Allen has always believed it acted lawfully and responsibly. It decided to settle this civil inquiry for pragmatic business reasons to avoid the delay, uncertainty, and expense of protracted litigation. The company did not want to engage in what likely would have been a years-long court fight with its largest client, the U.S. government, on an immensely complex matter. The company fully cooperated with the government and is pleased to move forward.”

So there is no admitting liability or guilt here. I can understand why the firm does not want a long, expensive fight – on the other hand, if you were 100% sure of your position, many firms would choose to take it further rather than handing over quite such a large amount of cash.

The most amazing element of this story is this. The investigation was sparked by a whistleblower, a former Booz Allen employee, Sarah Feinberg, who tipped off the authorities about the alleged misconduct from 2011 to 2021. And now she will receive no less than $69,828,832 as a thanks (it’s that precision again…)  

$69.8 million!  Good grief, I’m going to have a good think now about every firm I’ve ever worked for and whether they might have done anything “naughty” in their dealings with the US government …  

The moral of thee story is simple. Check your billing from professional service firms. I once took on a senior interim commercial/procurement role in government with an organisation that had around 100 consultants from one firm working on its major programme. That was £500K A WEEK we were paying this firm (it better be nameless…)  

I took a look at the invoices – incredibly there was no contract manager for this contract – and found that amongst other things, we were being billed for the senior partner’s assistant. The partner was only working about a day a week on our project, but we appeared to be paying a grand a day, every day, for his PA. We were also billed for the whole day for the whole team when I knew they had stopped work at lunchtime for their office Christmas Party! “An unfortunate error” I was told.  I saved £50K with one phone call there…

Of course, if you can structure any professional services assignment on a fixed price basis, most of these issues are avoided. That approach is usually – although not always – better for the buyer and actually arguably for the provider too. That is another question in this Booz Allen example. Why was so much government work being done on what sounds like a pretty loose “time and materials” basis?

Unfortunately, procurement as a function has failed.  Not everywhere, not in every organisation, but across some huge and important markets, we have failed.

Reports last week in the Evening Standard – and elsewhere – lead to that unfortunate conclusion.

“UK partners at accountancy and consulting firm PwC were paid an average of more than £1 million for the first time last year. The London-based giant said consulting revenues were up by a third reflecting “exceptional clients demands to challenges and opportunities on multiple fronts”.

Group profits grew 24% to £1.4 billion in the year to end June and profit per partner averaged £920,000, up 12%. This was topped up by an average of £105,000 per partner in the firm of a distribution from the sale proceeds of PwC’s global mobility and immigration arm …”

And there are almost a thousand partners in the UK; 944 to be precise earning this huge amount. But they’re not entrepreneurs. They have not built a business, they don’t run a business and most of them are looking after relatively small teams, not the thousands of people many CEOs manage. They might create some value for clients, but I don’t think you can compare their work to being CEO of even a fairly small business, or being a business owner and entrepreneur trying to build a successful enterprise. Yet somehow, they are extracting a million each, every year, from the economy.

Fiona Czerniawska and I wrote “Buying Professional Services – How to get value from  consultants and other professional services providers” back in 2010. It remains I believe pretty much the only book focused on that specific area of procurement. Our focus was consultancy, audit and legal services, and we tried to lay out how buyers could achieve better value in these tricky markets. Procurement has a relatively short history in these spend areas – 30 years ago there was little procurement involvement in these categories even in the largest organisations. So you would hope that the more recent involvement of the profession would have helped make these markets more competitive and we would see better value for users.

But year after year, we see audit scandals, unsatisfactory consulting work, and yet the earnings of partners seems to just go up and up.  Surely, if procurement had really got to grips with these spend categories, we wouldn’t be seeing this? It is even more startling in the legal world, with Freshfields partners hitting the £2 million mark this year.

Clearly, there must be market issues here as well as questions of competence.  In the audit area, the greater regulation of that profession, put in place with good intent to raise quality, has succeeded in also raising the barriers to entry. So it has been very difficult for smaller firms to challenge the big four.

In the consulting and legal world, there are more complex factors at work. I believe that many CEOs and CFOs are happy to pay high fees and see partners earning so much, because it helps them justify their own salaries.  The executive remuneration consultants ( another highly questionable branch of the professional services world) can say to a Board, “if a PWC partner earns a million, you better pay your CEO at least that”.

Another problem is that procurement often comes up against the user of professional services who doesn’t want to see competition and just wants their favourite law or consulting firm, probably engaged on a day rate basis so the user doesn’t have to think too hard about outcomes or deliverables.   But we all know how important competition is to moderate costs; too often we still don’t see that in this world. And ongoing “contract management” of assignments is often dreadful or non-existent. How much of a partners’ earnings can be traced back to “land and expand” strategies, for instance, or projects that run on and on beyond their supposed delivery dates?

The hollowing out of businesses (and public sector bodies) over the years in the cause of efficiency is another factor. Downsizing and outsourcing has left organisations unable to resource new projects or anything out of the ordinary – so the consultants get called in.  For instance, PWC partners must be delighted to hear that the UK Tory government wants to cut civil service numbers by 25% – that will mean yet more lucrative work for them!  Which will no doubt be based on a Crown Commercial Services framework contract with consulting firms that when put in place made little attempt to drive real competition or push the firms into offering better value. 

The growing complexity of the business world is another driver, and we can’t blame the providers for that. Whether it is leading-edge technology or international patent law, organisations face more and more complexity and it is not surprising that external expertise has become more critical to success.

But even given that caveat, it seems clear that we have failed to get to grips with professional services procurement.

Two more awards today.

UK (Private sector): The UK Water Industry

Not spending enough money (and failed regulation…)

There were a number of long-running procurement-related scandals which continued to rumble on this year, notably the investigations into the Grenfell tower disaster, and the Horizon Post Office scandal.  Both showed appalling behaviour from various suppliers along with failures on the buy-side. Procurement weakness allowed supplier failings to translate into tragic consequences for those affected by the Grenfell fire and those who lost their livelihoods or wrongly went to prison in the case of the Fujitsu / Post Office Horizon IT system. The judges were also tempted to look into the causes behind the global shortage of chips (electronic, not potato), which affected supply of all sorts of items. But they decided that was all a bit too complicated …

So the multiple winners here are the private water and sewage companies. Research by the Financial Times showed that they slashed investment in critical infrastructure by up to a fifth in the 30 years since they were privatised.  That reduction in spending came about despite bills going up 31% in real terms – and some £372 billion has been paid out in dividend payments to parent companies and investors. In 2019, only 16 per cent of England’s rivers and seas met the minimum “good or better” ecological status as defined by the EU’s water framework directive. And 2021 saw reports of raw sewage being regularly discharged straight into rivers and the sea whenever it rained hard. My friends who swim in the Thames thought it was algae coating their skin after their river swimming this autumn … 

Of course, this is a regulated industry so we might call it a joint public / private sector award as the government must share the blame for inadequate regulation and what is in effect a market failure. But this is a case where the “bad buying” failure is in not spending enough (rather than overspending). So we will hold our proverbial noses whilst awarding the water industry the Bad Buying UK (Private Sector) Award.

…….

UK (Public sector): Covid Test and Trace Programme

Incompetence in Managing Consultants

The judging panel had a difficult task in this category, with continued overspend on HS2 (and every other rail project), and more revelations about PPE expenditure. Social care is experiencing a sort of market failure, whilst the MOD Ajax armoured vehicles programme was particularly unfortunate not to win the prize given the various elements of that particular fiasco. And the panel argued long and hard about whether the crazy regulatory structure of the energy market which ended up with dozens of firms going bust might count as “bad buying”.

But ultimately, for a clear waste of money through inappropriate procurement and even worse ongoing contract management, the UK pandemic Test and Trace programme was finally declared the narrow winner.  

The programme kicked off during the first wave of Covid in early 2021, and we could understand why initially consulting resource was needed to make things happen quickly. But for 18 months now, various officials in the Department of Health and Social Care (DHSC) have promised that the number and cost of consultants was going to be dramatically reduced. But nothing appears to have happened, as hundreds of millions have been spent with the big consulting firms.

David Williams, then the DHSC second permanent secretary, assured Parliament’s Public Accounts Committee back in January that there was a plan in place to “reduce markedly” the number of consultants from Deloitte who were working on the programme. (Williams has since become permanent secretary at the Ministry of Defence – that bodes well for sorting out waste in that area!)  But at the time he claimed there were “around 900” staff from the consultancy working on Test and Trace, who he expected were costing £1,000 a day each – meaning the daily total was close to £1 million just for one firm.  Some Deloitte staff were charged at a rate of over £6 a day too.

Dr Jenny Harries, chief executive of the UKHSA which now runs NHS Test and Trace, said in July 2021 that there was a ‘very detailed ramp-down plan’ to reduce the number of contractors. But 1,230 consultants were still employed at the end of October, figures showed. At the sort of rates paid, that was still costing over £1.3 million A DAY.

This is not “consulting” in the true sense of the word. It is “warm reasonably intelligent bodies sitting at desks / at home on their laptops”. It is staff substitution, not consulting, and those people should not be costing £1000+ a day.

DHSC has had 18 months to actually recruit people on fixed term contracts at maybe £50K a year to replace the £250K a year consultants.  The profit for Deloitte partners (and indeed those of other firms who have been involved on the programme) is enormous, all based on undeserved income from the public purse. And it is not even as if the programme has been a great success … but let’s not get into that.

Despite the tough competition we are confident that this case is a worthy winner as it represents a basic old-fashioned lack of concern for spending public money with consultants – something that is far too common, unfortunately.  So the Test and Trace programme wins the Bad Buying UK (Public Sector) Award.

Look out for the final two awards tomorrow!

UK government procurement related to the pandemic continues to be a source of some concern and confusion. More consulting contracts were published on the Contracts Finder website last week, showing the vast sums of money that are finding their way into the pockets of the partners at major consulting firms.

Deloitte were awarded two further consultancy contracts, via a call off from a Framework Agreement, worth a total of £8.7 million for:  “Buy Support for Ventilators – ICU equipment & consumables, ventilator sourcing, hard to source products” (£6.7m) and  “Support programme delivery including the identification and procurement of PPE” (£2.2m).

Two other unusual consultancy contracts were awarded to Boston Consulting Group to support the chaotic Test & Trace programme. That represented £4,992,059 for “strategic support” and £4,996,056 for “digital support” (very precise values!)

We don’t know whether there was any competitive process – for those of you who aren’t public procurement experts, you are not allowed to simply choose a “random” or favoured supplier from a “Framework” in most cases without running a competition between firms who are listed on it. Did that happen here? I have my doubts but we don’t know. There have also been comments from within the NHS suggesting that no-one quite knows what Deloitte actually did in terms of ventilator procurement. But hey, it was only £6.7 million.

But there was some good news as well. Gareth Davies, who heads up the UK National Audit Office, was interviewed by the Guardian and amongst other points, he confirmed that a report into government procurement processes during the coronavirus pandemic would be published later this year.

“We’re looking at the procurement process, a lot of public comments and concern about the transparency of some of the procurement contracts around PPE and other areas. We’re doing a detailed piece of work,” he said.

So here are a few of the questions NAO might like to ask the buyers of those consultancy services if they choose to examine that area in particular.

  • Did you understand what it was you really wanted to buy?
  • Did you consider the market in an appropriate manner, and use competition to arrive at the best fit / best value supplier to meet your needs?  
  • Do you understand the difference between the three basic reasons or needs behind buying consulting services – specialist knowledge & skills, intellectual horsepower, or execution / implementation capability?   
  • Did you think about the different commercial mechanisms and models – fixed price, time and materials, target pricing and all the variations? Are you clear you chose the most appropriate for your contract?
  • Do you understand the economics of consulting firms and therefore did you use that to negotiate confidently on daily rates (or fixed price)?
  • If you didn’t use competition, how did you arrive at a fair price for the work?
  • Did you make the deliverables, outputs or outcomes that you were expecting very clear?
  • Did you define the contract management process and the interim reporting that you wanted to see from the firm, and then follow through with professional contract management practice?

Let’s hope those responsible for spending money with these firms avoided Bad Buying and can answer these questions confidently and robustly.

Psssttt! Wanna buy a cheap consultant? Top quality, only £20 a day. Or, tell you what, you can have some for a tenner if you like. Yeah. Just £10 a day!

The UK’s central government procurement arm, Crown Commercial Services, has various frameworks in place that enable users to select and engage from a list of management consulting firms.  So how was it that the rate card for the different levels of consultants on certain “lots” includes the bargain rate of £10 a day for a junior consultant from one of the world’s very biggest and most highly regarded strategic consulting firms? Or how about the same rate for a junior and only £30 a day for a senior consultant from one of the big four audit / consulting giants?

What’s going on here? Well, it is almost certainly related to how the firms “gamed” the evaluation process in order to win a place on the framework list of approved suppliers. CCS has had some unhappy experiences with consulting frameworks, including having to pull an entire exercise in 2017 when it became clear that the big firms weren’t going to make it onto the list!

Generally, when price is evaluated in the tender (along with quality and other service factors), the buyer asks for day rates for the different levels of consultant – perhaps junior, senior, manager, director, partner. Then there is some sort of adding up process, maybe weighted to reflect different likely use of the different levels, to arrive at an overall cost.

So let’s suppose your rates are something like this,

Junior                    £1000

Senior                   £1200

Manager              £1400

Director                £1800

Partner                 £2400

Let’s also suppose that the buyer is weighting each at 20% to arrive at a composite average rate – in our case here, that would be £1560 per day.

I might worry as a bidding firm that such a number could be on the high side. So how can I adjust that, without actually reducing my profit margins (and hitting my £600K a year partner’s salary)? Well, we are unlikely to be putting many Partner level people into these projects, particularly for government work. So we can take a bit of a hit on that rate. And as for juniors – well, let’s just work on the basis that when the Department for Internal Affairs comes looking for a proposal, we’ll say we haven’t got any available. Let’s face it, clients don’t really want the graduate trainees who can barely run a spreadsheet anyway.

But we might want to up the middle levels a bit to recover the lost margin on Partners, as that is where we really will be supplying people. So how about this?

Junior                    £0 (free!!)

Senior                   £1300

Manager              £1500

Director                £1800

Partner                 £2000

Our average rate now is £1320. That’s a 15% improvement in overall pricing and a lot more marks when it comes to the evaluation. And in reality, the likely revenues if anything might be a touch higher.

So why did CCS allow this to happen in this particular case? Well, it might have been difficult to stop – you can reject “unfeasibly low” bids under EU procurement regulations but the overall prices aren’t unfeasible. And of course CCS desperately wanted these firms on their list, so users will access the contract and CCS will make their margin, which funds the organisation.

Maybe all this doesn’t really matter, but it is worth remembering the lengths and the creativity that the partners in these firms will go to in order to protect their £500,000 – £1 million+ annual salaries. But do think carefully about your evaluation process if you want to avoid this sort of game-playing.

Finally, if you want to hear more interesting stories about buying professional services, positive and negative, I’m a keynote speaker at a (free) virtual conference on that topic organised by Matrix MM on Tuesday next week, 21st July. More details here!