Introduction & Background
The Management Consultancy industry was estimated to be worth upwards of £44 billion annually by the close of August 2014, and is expected to grow by a further 2.6% over the next year. It comprises more than 121,801 businesses that employ 333,020 people, with services that range from IT consulting, marketing, organizational and strategic planning, business process planning and human resources . The industry, which seeks to create value by solving problems, optimizing growth and improving business performance, traces its roots to the beginning of the 20th century. It emerged in the wake of the Wall Street crash, which raised the need to ensure expert management of business, which could not afford to engage the services of such experts on a full-time basis. The industry’s growth up until WWII was slow, but took off after the end of the War, fuelled by waves of new technology, managerial techniques and increased demand for highly specialized management skills. Today, the UK industry is worth £9 billion and employs in excess of 80,000 people. The public sector in the UK is in part responsible for the industry’s rapid growth. For instance, in 2009, the public sector alone spent £1.5 billion on management consultancies, driven by the desperate need for the public sector to increase value for tax money, service efficiency and policy implementation effectiveness among other goals. However, the industry’s involvement in the public sector has drawn controversy, questioning whether the value created can justify the public sector’s expenditure on the same. This paper will seek to determine the sustainable societal value created by management consultancies in the public sector by:
- Examining the necessity of external management consultancy as against using/building the internal capacity
- Determining the costs overlay on management consultancy
- Evaluating the measurable value achieved by management consultancies in the public sector
Definitions and Terms of Reference
- While the public sector is wide, its definition in the context of this report refers to local government, international development, health care, defence, social housing and education
- Uses the NHS, the Cabinet Office and the MoD’s spending on management consultancy to gauge the efficiency gains and sustainability of the public sector’s spending on management consultancies
Management Consultancies Value Addition
Conceptually, consultancy services should add value by virtue of the fact that they have skills/knowledge required by an entity which is why process performance must be assessed by the manner in which the consultancy abilities. This assertion is backed by a 2010 study by the MCA, which established that up to 72% of all management consulting undertaken by the central government was necessitated because of the lack of relevant specialist skills in the specific departments. These areas with shortages in expertise included crises and other difficult situations. Effectively, ACCA (2010) argues that if management consultancies are used properly and in the proper circumstances, they can provide great value for the taxpayer. It is expected that governments may not have a reason to develop highly specialized human capital in certain, areas, but when the necessity arises for such expertise, outsourcing them to suitably qualified consultancies is necessarily beneficial. In addition, crises and other difficult situations may stretch the inhouse expertise, necessitating the need for management consultancies. Roodhoft & Van den Abbeele (2006) recommends greater collection of information and development of proper procurement protocols (as well as experience) in order to be able to utilize consultancy services appropriately.
ACCA (2010) identifies a number of cases where management consultancy has added specific value to the public sector. The Ministry of Defence made significant procurement savings after engaging the services of an outside consultancy firm in the implementation of a new approach to building internal capabilities. The project involved the procurement of complex capabilities that would provide increased protection for forces deployed in Afghanistan, known as the Talisman Programme. The Programme included both the purchase and integration of weapons, communication systems, sensor systems and armoured vehicles. Hopkins (2012) reports that MoD spent in excess of £290m in the year 2011, which facilitated cutting of 60,000 jobs, in the subsequent years. Given the UK’s current GDP per capita i.e. £24784.62 (assuming every lost job earns an equivalent of the GDP per capita), cutting 60,000 amounts to upwards of £1.487 trillion in annual salary payments that would be saved by spending £260 million on external consultancies.
The possibility of savings is perhaps best emphasized by the fact that providing the required expertise in-house may prove even more costly to the taxpayer. In order to use inhouse expertise, the MoD would have had to develop such capacity first since it did not exist, which would amount a loss of critical time and even more resources in training. In addition, since the specific expertise required in this case is not regularly required by the MoD, investing resources to create such capacity would amount to wastages. Similarly, the Cabinet Office engaged the services of management consultants in building and publishing capability reviews. The project, along with the Efficiency & Reform Group the government achieve £3.75 billion in cost savings in just ten months, corroborated by both the parliamentary Accounts Committee and the National Audit Office (ACCA, 2010; Cabinet Office, 2013).
It is critical to remember that cost savings are not without a limitation. For a start, cutting jobs has implications on service delivery and the burden left on the shoulders of the remaining employees. In addition, empirical evidence going as far back as (Neil Baily, Bartelsman, & Haltiwanger (1994) has consistently shown that layoffs resulted in an overall reduction in the productivity of the organizations. It hurts employee morality, retention rates, job security, motivation and other workplace hygiene factors, to the detriment of performance. Effectively, long-term reliance on outsourcing key management consultancy services will have the effect of rendering the public service unattractive for the best talents. The effects on the existent and future labour forces would also be negative. These factors would further impact on the productivity and efficiency of the entity. Similarly, redundancy burdens the society with more unemployed human capital, losses of income and wealth. To the society, the value gained from outsourcing highly specialized managerial functions may be countered by the losses in efficiency due to the unemployment of human capital. If for instance the MoD lets the 60,000 personnel go in favor of outsourcing, in the short run, the society will be saddled with 60,000 unemployed people and families, some of whom may end on unemployment support. Similarly, the benefits of management consultancy must include the wider social benefits as against simply the accounting costs. Criticisms such as Hari (2010) ignore the wider benefit and costs of management consultancies, by merely focussing on the accounting costs and benefits of consultancies.
The sustainability of the public sector’s reliance on management consultancies into the long remains questionable, not least because the possibility of a permanent reliance on outside providers of critical services would prove difficult. The capability of the public sector to create and appraise deliverables for management consultancies is heavily limited by both the absence of information as well as the very nature of the services offered by management consultancies (ACCA, 2010; Dillon, 2005). The consequence of this is a complete breakdown in brief specification and performance appraisal, which will in turn sink the public sector into further inefficiencies. According to Dillon (2005), the presupposition that management consultancies will work to the highest standards is both false and unverifiable. Management consultants offer intellectually intangible knowledge services as well as objectivity, which cannot be confidently anticipated by the purchasers for the purposes of setting and appraising performance. The quality is impossible to assure and thus to create a permanent reliance on the external management consultancies would create a moral hazard on the part of the consultancies, which will in turn hurt quality and efficiency. In a study by Dillon (2005), which involved local authorities in New Zealand, a robust set of five process-related dimensions performance as well as the associated scales was developed, but they are all highly subjective to ensure that local authorities apply them uniformly.
The potential of a moral hazard is not only potent, but already exists (Hari, 2010; Christensen, 2005; ACCA, 2010). According to a study by Christensen (2005), consulting firms working with public sector bodies did rely on illusive cases to make the case for the adoption of their services. The zealous belief that aligning the public sector accounting with the private sector would have contributed to a gain by the former. This study focussed on the pioneer adoption of accrual accounting for the public sector and the activities by management consulting firms in inducing the public sector to adopt the change. While it is true that a measure of competition among different management consultancies and strict industry practice codes may help guard against exploitative practices by the industry, the risk remains significant (Christensen, 2005; ACCA, 2010).
There are also other barriers that prevent management consultancies from providing a net benefit in the public sector. ACCA (2010) argues that the complementarity of the public sector expertise and the management consultancy expertise determine the effectiveness of consultancy engagements. Poor quality consultant-client relationship or capacity mismatch is detrimental to the quality, the possibility that is worsened by the situation of dominant consultants and vulnerable clients that may occur when the public sector enters into new phases of development. For instance, if the MoD constantly outsources highly specialised services to management consultancies, in the event of a major managerial or technological breakthrough/change, the Ministry would become entirely dependent on the consultants. This opens up opportunities for exploitative monopolies. Effectively, management consultancies cannot only add value to the public sector for as long as the public sector players hold the purse strings and control the service providers. Other barriers included the potential of cultural conflicts between the client and the consulting firm. The military does have a strict and unique culture, which many external management consultancies will struggle understanding. A proliferation of consultancies in public sectors m in which they lack a true appreciation of the complex cultures and practices will prove to the detriment of the effectiveness of any consultancy engagement.
Management consultancies offer an objective and expert approach to the development of specialist skills within an organization and/or strategies to achieve both effectiveness and efficiency. While it is relatively easy to define and assess the value, create in the private sector, the public sector presents challenges, not only in the definition and in measurement of value, but perhaps most importantly, because the business environment is different. This paper has demonstrated that management consultancy firms have, and may continue providing value for the public sector, especially by filling the gaps in expertise that may exist in the public sector. This value cannot only be assured through a careful management of the client-consultant relationship, definition and appraisal of clear deliverables and the exhaustion of in-house alternatives. However, the value created need to be assessed in the context of the overall social benefit and costs (including unemployment), especially in cases where outsourcing translates into layoffs. Further, it is evident that a permanent reliance on external management consultancies will not only cripple the ability of the public sector to attract and keep the best talents, but may also lead to the emergence of exploitative quasi monopolies that would be detrimental to the public interest (Christensen, 2005; Dillon, 2005).
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