Our public services spent $1.25 billion on outsourced help last year. Are consultants worth their inflated price tags and industry jargon? By Danyl mclauchlan
When you drive into Wellington from the airport, you travel along Cobham Drive, a windblown stretch of road with a school, sports fields and industrial buildings on one side and the choppy grey harbour on the other. Halfway along it, you’ll drive over a new pedestrian crossing. It doesn’t look like much, but its construction was a political car crash, partly because of the location (the airport claimed it would cause congestion and initiated a judicial review to halt construction, which it subsequently withdrew) but mostly because of the cost, which came in at an astonishing $2.4 million: $1.8 million to a private construction firm and $535,000 on consulting advice.
Once in the heart of Wellington, you’ll arrive at the parliamentary precinct, a cluster of government buildings dominated by the Beehive. Two brand-new structures grace the area: opaque black rectangles of steel and glass. They’re not occupied by public servants. Instead, they house EY and KPMG, two of the largest corporate consultancies in the world. They sit at the heart of New Zealand government – both figuratively and literally – alongside their fellow consultancy firms PWC and Deloitte. These companies were key players in the Covid response and they’ve had input into almost every major government policy over the past five years. During that time, the Big Four, as they’re known, have earned nearly $370 million from the core public service alone – that’s excluding fees earned from local and regional government, universities, hospitals and state-owned enterprises.
Unlike the capital’s lobbyists, who cluster around the Beehive trying to influence politicians, consultants are endemic throughout the public sector. Seemingly every ministry, organisation and department teems with gleaming young men and women with advanced degrees and beautiful suits. What do they do? How much power do they have? Why does it all cost so much, and do they actually deliver any value?
Promises & politics
In mid-2018, Chris Hipkins was the Minister of State Services. When he entered government, there was a cap on the number of permanent staff in the core public sector, which National had imposed 10 years earlier on the grounds that the civil service was bloated and they were reducing waste. But, Hipkins revealed, National had not actually saved taxpayers any money: they’d simply increased spending on consultants and contractors. By 2017, the amount had blown out to $550 million, nearly double the amount the previous Labour government under Helen Clark had spent on consultants in 2008. The new Labour government would bring this down, Hipkins declared, and invest the money in permanent staff.
Jump to 2023. Chris Hipkins is suddenly Prime Minister and he’s under attack from the opposition for doubling the amount of money his government spends on contractors and consultants. It surged to $1.25 billion in 2021-22 – nearly 15% of public service workforce expenditure –while the number of public servants has increased by 14,000 over five years. In his State of the Nation speech, Opposition Leader Christopher Luxon accused Hipkins of creating a gravy train for the consulting industry and vowed National would reduce the spend by $400 million. During question time in Parliament, Hipkins admitted that not everyone in government got his memo about reducing consulting fees, citing the Prime Minister’s Business Advisory Council. Back in 2018, it hired management consulting company McKinsey to write a report. The head of the advisory council was Luxon (who maintains he and a CEOs group did all the work).
Gouging out the core
Everyone is hiring consultants and everyone is angry about it. It’s been described as the world’s newest profession and it is wildly lucrative – but the industry has come under increasing scrutiny. Its highest-profile critic is the economist Mariana Mazzucato, who has co-authored a book about the industry with doctoral student Rosie Collington. Their title leaves little doubt about their viewpoint: The Big Con: How the Consulting Industry Weakens our Businesses, Infantilizes our Governments and Warps our Economies.
When I talk to Mazzucato over Zoom, she’s just returned from Barbados. “And I’mhipkinsexhausted. Shattered!” She wasn’t there on holiday; never made it to the beach. Instead, she was advising the country’s Prime Minister, Mia Mottley, on reforms to transition the island nation to a high-growth green economy.
Mazzucato, a professor at University College London, has over the past 10 years become one of the world’s most influential economists, advancing a critique of the modern bureaucratic state. Her ideas are especially popular with elected politicians, many of whom find that once they finally win power, it’s almost impossible for them to do anything. Mazzucato’s theories tell them what’s gone wrong and how to fix it.
The Big Con argues that the public sector’s reliance on consultants and contractors is a large part of the problem. Its authors believe there is a very sharp conflict of interest when governments privatise the components of the state that deliver policy advice or other core services. These companies act in the interests of their partners and shareholders rather than the public, and their business model is based on “infantilising” their clients.
“That term comes from a Conservative MP in the UK,” Mazzucato explains. Back in 2020, Lord Agnew, the Cabinet Office and Treasury Minister, wrote a letter to the heads of the British civil service that was leaked to the press. Agnew told his civil service to stop hiring so many consultants, partly because they provided such poor value for money, but also because their use “infantilises the civil service by depriving our brightest people of opportunities to work on some of the most challenging, fulfilling and crunchy issues”.
Mazzucato: “If all of the interesting work in the public sector is subcontracted out to the private sector, then most of the best staff in the civil service will follow it out the door, where they’re also rewarded with higher prestige and higher incomes. Over time, this degrades state capacity until even the most basic tasks need external consultants to deliver them.”
Consider Wellington’s multimillion-dollar pedestrian crossing. Documents obtained by the Listener via the Official Information Act break down the $535,000 cost of consultancy fees: $234,000 for the business case and design, primarily paid to WSP, a consultancy firm that specialises in engineering; $288,000 to law firm Chapman Tripp to provide legal advice on the judicial review that was withdrawn; and $13,000 for communications and engagement.
The programme director at Let’s Get Wellington Moving – a joint initiative between Waka Kotahi NZ Transport Agency and local government whose name most Wellingtonians regard as deeply ironic – described the spending as “expert advice to ensure the best outcome for the public”.
Let’s Get Wellington Moving was established in 2016. It has cost $94 million over seven years, $38.5 million of which has gone to more than 200 external consultants – including $2.4 million to PwC and $1.5 million to Deloitte. The consultancy spend is expected to pass the $60 million mark this year. And the Cobham Drive crossing is almost all that it has achieved to date.
National’s spokesperson for public services, Simeon Brown, says Waka Kotahi is very well resourced to develop business cases, provide legal advice and deliver communications and engagement, with many policy advisers, lawyers and comms staff in-house.
Brown says the work should have been carried out by NZTA rather than external consultants. Especially for something as simple as a crossing.
Doubtful value
Everyone agrees that consultants’ advice can be valuable. Even Mazzucato concedes they have a valid role – occasionally, on the sidelines. The central premise of the industry is this: every private-sector firm and public-sector entity has a core business it specialises in but inevitably finds itself involved in complex, high-cost tasks for which it lacks expertise: IT projects, mergers, acquisitions, restructures, engineering, and so on. It makes no sense to invest in permanent staff to deliver these one-off projects, and if the task fails, the consequences can be catastrophic – a major IT failure can shut down an entire organisation.
Enter the consultants. In business-speak, they are defined as “experts, extras and facilitators” who deliver complex projects for a living. Many of these firms are global and every piece of work they undertake is documented as a case record accessible by all of their offices. So, when you hire a large firm, you’re not just drawing on local expertise but a deep well of knowledge built up over decades and enhanced by in-house research. In 2021, revenues for the global consulting sector were estimated at $700-900 billion, and for its advocates, this reflects the enormous value it creates.
Doesn’t the market tell us that the consultants are doing something important? No, Mazzucato insists, it does not. Business and academic literature finds that the real value of consulting is very difficult to ascertain and that its firms are concerned mainly with “creating an impression of value” through sophisticated marketing techniques, she says. They often carry out tasks that an organisation’s permanent staff could perform but charge more money. Their claims to expertise are often highly dubious: much of The Big Con documents failures and high-profile disasters inflicted on public and private companies by consultants.
The most egregious was their involvement in the global financial crisis. Wearing their auditor hats, the Big Four accounting consultancies “signed off trillion-dollar balance sheets, sanctioned increased dividends in bank shares that collapsed months later, blithely assumed markets would function seamlessly and established controversial rules that inflated bubbles and amplified losses”.
More recently, and closer to home, the Australian Senate in 2021 held an inquiry into a A$1.3 million contract awarded to Boston Consulting Group to report on the viability of the postal service. BCG’s managing directors were unable to explain what new analysis they had provided, and the inquiry chairwoman stated: “It’s hard to know what [the money] delivered, actually.”
Reforms bonanza
When Jacinda Ardern led Labour to a landslide victory in 2020, her party decided to use its parliamentary majority to deliver large-scale public-sector reform. It would centralise the nation’s 16 polytechnics into a single provider, merge the 20 district health boards into one agency, transfer all the water infrastructure controlled by local government into four entities (now 10) and combine TVNZ and RNZ into a single public broadcaster.
The reforms would be delivered by consultancy firms and an army of contractors. The cost was justified on the basis that only they had the expertise to manage such complex projects. The $200 million (to date) polytech merger includes $12 million on consultancy fees. In April, the NZ Herald reported that Three Waters – recently rebranded by the government as Affordable Water Reform – had spent $56.8 million on consultants: $9.6 million of this was billed by EY, whose highest individual rate of pay was $3500 a day; $4.13 million went to MartinJenkins, a New Zealand firm whose top advisers billed at $400 an hour.
The media merger was tossed onto Hipkins’ post-Ardern policy bonfire in February. Two months later, RNZ reported that $19.6 million had been spent on the scuttled merger – $12 million of it on consultants who were paid an average $6000 a week. Deloitte earned more than $5 million. Broadcasting Minister Willie Jackson insisted it was money well spent.
But the real money is in health. It’s impossible to calculate just how much the public health system has spent on consulting in recent years: the spend is distributed across hospitals, the Ministry of Health, the newly created health entities, Pharmac and the Department of the Prime Minister and Cabinet. A recent study by the University of Otago suggests that district health boards spent at least $430 million on contractors and consultants between 2016 and 2019, but the authors complained that the sector’s reporting was so opaque it was impossible to calculate the true amount. The DHBs were abolished last year and merged into Te Whatu Ora, which spent $21 million on consultants in its first six months, while Te Aka Whai Ora, the newly established Māori Health Authority, has been reported as spending $1.15 million a month on consultants.
Dependency issue
There is substantial scepticism within the sector about the value of all this advice. Ian Powell, a health commentator and former executive director of the Association of Salaried Medical Specialists, wrote in a Scoop column that business consultants “are more harmful to patients and health systems than flesh-eating bugs”. He added: “In the 30 years I’ve been involved in the health system, I’ve not seen a government more dependent on and influenced by business consultants.”
National MP Shane Reti worked as a GP in Northland for 17 years before winning a Harkness scholarship to Harvard. After returning to New Zealand, he became the MP for Whangārei and the party’s health spokesperson. He is also sceptical of the value of the business consultants: “All you get from them is diagrams and jargon while they hire away your key staff and then contract them back to you.”
Reti believes there’s a valid use for consultants in the sector – in specialist areas or when you need an external, objective analysis. But he can’t understand why there are 1100 consultants and contractors in the Ministry of Health itself, or 200 communications staff in Te Whatu Ora. To Reti, the focus should be on rebuilding the capacity of the system to deliver healthcare instead of corporate restructures and marketing campaigns. “We need real doctors, not spin doctors.”
Simeon Brown says the justification for the high consultancy fees on all of the large-scale reforms was that the government needed the best available advice. But Te Pūkenga, the merged polytechnic, is facing massive staff cuts after a predicted $63 million deficit; the health system is in a state of crisis: Three Waters has been rebranded after a series of public relations disasters; and the broadcasting merger has been cancelled. “It’s hard to see what value – if any – that advice delivered,” he says.
And it isn’t just a central government problem. Mike Lee has been a prominent figure in Auckland local government since he was first elected to the regional council as an Alliance candidate in 1992. Lee has seen the capacity of local government deteriorate as “some of the brightest and best council officers were talent-spotted and invited to join the flourishing consultancy firms”. He says big Australian contractors such as Downers and Ventia have come to dominate council operations, and consultants are part of this new ecosystem. “They tend to do the council’s thinking for them, delivering engineering and legal advice or most anything you can think of that councils once did in-house.”
It makes the organisations less responsive, Lee says. The Auckland Anniversary floods left piles of rubbish strewn across the city, which needed to be removed before the arrival of Cyclone Gabrielle. He suggested the council obtain extra bins from Hamilton or Whangārei. “Council officers told me they could not just order these themselves but had to go through one of the international waste companies the council was contracted to.”
Asked about the rising cost of contractor and consultant spending, Minister for the Public Service Andrew Little cites the demands of the Covid-19 response and the structural reform programme, as well as one-off IT projects and upgrades. “There is usually additional cost in embarking on reform or implementing new policies. The cost is justified on the basis that if we don’t do so it will lead to greater financial and often social and personal cost later.”
The long con
Mazzucato doesn’t blame the consultants for all this – they’re just companies trying to make money. Even the politicians and civil servants who contract them are symptoms of a deeper problem. She believes the way we think about government and the state is fundamentally wrong.
Back in the mid-20th century, government was the primary actor in our economy. In developed nations such as the US, the UK and New Zealand, governments built hospitals, schools, roads, power and telecommunications infrastructure – and all of this activity generated enormous economic growth and innovation. The US government landed humans on the moon and developed the internet.
But by the 80s and 90s, this sense of dynamism was dying. Government became managerial and risk-averse, dedicated to the delivery of existing programmes and services and the expansion of bureaucracy rather than creating new technologies and solving new problems. This period also saw the rise of the neoliberals, who argued that only markets and private companies could ever create value. And when they won the contest of ideas, government agencies became fragmented and siloed, with different departments working in isolation or even in competition. The inadequacy of government became a self-fulfilling prophecy.
For Mazzucato, the rise of the consultocracy is the natural endpoint of this process. If you believe government cannot create value, then the privatisation of the public sector is the logical next step. But the failure of this project – the inability of the global consultancy firms to deliver the efficiencies or transformations they’ve promised – demonstrates the flaw in the logic. The private sector is not the answer, she says.
The real solution is a return to the entrepreneurial, dynamic state. Government should build things, invent things, solve big problems, change things. “The challenges we face today demand ambitious responses,” she concludes. And governments can solve them collectively – they’ve done it before. But not if even the tiniest problems are outsourced to a consultancy.
PwC, EY, KPMG and Deloitte were all contacted regarding this story and either declined to comment or did not reply.
Is your lighthouse project agile?
Most public servants encounter their consultancy overlords via PowerPoint presentations. In a not uncommon scenario, staff are called into a meeting room or lecture theatre, a manager introduces a senior associate – likely from the “Big Four” of EY, KPMG, PwC or Deloittes – who delivers a speech accompanied by colourful slides about “greenfields” and “the technological singularity”, revealing at the end that the organisation is restructuring and everyone has to reapply for their job.
The presentations are generally dense with jargon: the consultants are “moving forward then circling back”; they are “peeling the onion”, “mapping the white space” using “blue-sky thinking”, co-ordinating “sprints” on core business. They warn against “boiling the ocean”.
For Mariana Mazzucato’s collaborator Rosie Collington, this jargon is an essential component in consultology – the suite of marketing techniques the industry employs to sell itself. The most elaborate of these is quasi-academia: the establishment of in-house universities, research institutes and journals. Deloitte University has sites in Dallas, Brussels, Hyderabad, Mexico City, Singapore and Toronto. McKinsey publishes McKinsey Quarterly, a magazine “conspicuously like that of a peer-reviewed academic journal” but without peer review.
“These create the impression that the companies are hubs of knowledge development,” says Collington. But she and Mazzucato argue that consultancies are primarily “rent-seeking” entities. Instead of creating knowledge or delivering value to their customers, they present the illusion of specialist knowledge while hollowing out the organisation. Mazzucato: “It’s like a therapist who makes their client sicker so they can keep charging them.”
This article was first published in the May 13 issue of the Listener.