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$1 billion and counting: how consultants maximise fees

Many years ago, a friend joined a major consulting firm in a senior role. First day on the job, he was given a manual called 'Assessing Opportunities: Do we really want this job?'. He gave me a copy. Enough time has passed to keep him and the consulting firm anonymous, but the document is no less revealing into how this large consulting firm assessed its clients.

To give the firm its due, the document requires its staff to ask whether any potential assignment will deliver good results and value for the client. The firm must be convinced it can provide a solution to meet the clients needs and (in capital letters) "... FOR A PROFIT!"

This article accepts that most consulting assignments are defined and measured, and the client should understand the costs and other commitments required to complete the assignment.

But in the wake of the recent revelations that the Australian Government is spending over a billion dollars a year on consultants, the emphasis here will be on how the fees are calculated and justified.

Of course, many professional services - legal, architecture, accounting, financial advice, plumber, electrician - are charged on a time basis, so the lessons are universal.

What does the Government pay $1+ billion a year for?

In recent years, despite public service staffing caps and a loss of senior staff in an attempt to control costs, payments to a select group of consulting firms have surged. In March 2020, the Australian Audit Office reported that in the five years after the Coalition came to power in 2013-14, annual fees doubled to $647 million. It has since doubled again.

The Australia Institute recently issued a report questioning the loss of skills in the public sector. Senior Researcher, Bill Browne, said:

“It is worth reflecting on the rise of consultancy spending by the Federal Government, now exceeding $1 billion dollars a year. Compelling the work done by consultancies to be public would be an improvement on the status quo, although there is still the underlying issue that consultancies are doing an unprecedented amount of public work. In fact, the $1.1 billion spent on the largest consultancies last year could have employed an additional 12,346 public servants. It is not just jobs being lost to the public sector; knowledge and experience is being outsourced too.”

“Australia’s consulting industry (public and private) is the fourth largest in the world. By population, Australia’s spending on consulting is greater than that of any other country, and about double that of comparable countries like Canada and Sweden.”

The use of consultants is tied to reductions in departmental staff. The current Government has indicated it expects the public service to align its thinking with government policy, which reduces the potential for contradictory opinions. Prime Minister Scott Morrison said public servants are expected to “get on board and implement the Government’s agenda”. The Auditor-General highlighted the loss of public service expertise.

In October 2021, The Australian Financial Review reported that Accenture was awarded government contracts worth more than $340 million during the previous financial year, and Deloitte topped the Big Four list at $275 million followed by KPMG, EY and PwC. These five companies earned $1.2 billion in FY21.

Let’s explore the consulting manual from one firm on how fees should be charged, so anyone who is a client of a major firm knows what is happening on the other side.

Extracts from how to be a good consultant … FOR A PROFIT!

Before any assignment is accepted, the firm must be sure “the client is willing and able to pay for our services”. That’s a great start with a government contract as there is no doubt about paying capacity. Then:

“Explore whether the client has reasonable expectations about how much this assignment will cost and enough money available to achieve a satisfactory conclusion.”

Here are some questions to ask the client:

  1. Have you established a budget for this project?
  2. How were you hoping to fund this project?
  3. Let’s say you really can get the results you want, but not for ($ amount). What would you do?

If the client budget appears insufficient, it could be due to one of three things for 'you', the client:

  1. You don’t really believe the value we placed on the results.
  2. You don’t really believe we can deliver the results.
  3. You believe someone else can deliver the results for less.

It reads like a confrontational push to make the client willing to spend more. The instructions make it clear that the firm should walk away if there is not enough money to achieve the desired results.

But loss of the assignment is not accepted that easily. Clients should prepare to be hassled. The firm must understand how and by whom each key decision is made:

  1. Can you help me understand the steps you will take in order to make the necessary decisions?
  2. Who gets involved?
  3. What do they have the authority to decide or influence?
  4. What criteria will they use?
  5. What objections do you expect, if any?

And then this punch line: “In order for this to be a high quality decision, who has to be convinced this is a good idea?”

Then pages on assessing the competition, such as whether the client is talking to other organisations, how comparisons will be made, how do they know who best serves their interests?

And this: “Forget about us for a minute. Let’s assume you hadn’t approached us. Based on what you’ve heard and seen so far, which of the other firms seems to be the most on target in meeting your needs.” Would anyone reveal the answer to this question?

And: “Nobody is perfect. What seems to be missing from what we’ve discussed.”

And: “Given that ABC is offering a good solution, what would we have to do to be clearly superior?”

And: “I don’t know if we can get you the fee you want, but out of curiosity, let’s suppose I could. Then what happens?”

It's a world where a lot of time and effort is spent on agreeing and collecting fees, which must frustrate those from both sides who just want to get on with the job.

Ensuring services are paid for and value billing

Much of the document is devoted to project scope and ensuring the job and costs are fully understood. Consultants are discouraged from discussing fees early on, and “seek first to understand, then to be understood.” Fees can later be discussed including scope and timing but:

“Never reduce price/fee without obtaining something in return that can be construed as a value exchange.”

Fees are determined according to four main elements:

  1. The time we spend on the work
  2. The timescale over which the task is expected to be completed
  3. The value to the client
  4. The amount we are prepared to invest in the relationship

Here is a good part for moving away from depending on hours – value billing.

“Fees based on time are traditional in the consulting business and this method is always an appropriate benchmark. However, it has the drawback of focussing not on what we accomplished but on how long it took us. It also draws the client’s attention to our hourly rates which may seem very high.

Some clients are willing and perhaps are expecting to pay on the basis of value, rather than strictly on the basis on the time spent. In the past, value billing has been rare, and many consultants are hesitant to do it, at least where the value is higher than the actual time charges. But it is not unethical, and in fact it is expected in many other professional services.”

It would be revealing to learn how much of the $1 billion plus paid by the Government is done on time versus value, and how the latter was measured. The millions spent on consulting advice relating to the slow vaccine rollout would make fascinating reading on whether the job was delivered as expected.

Non-traditional pricing must be approved by Head Office, and if fees are discounted for strategic reasons, “the client should be advised, in writing, why we are making this investment.” In other words, you owe me one and we expect more profitable projects or an expansion of our relationship in future.

The firm’s objective is to achieve 100% recovery of time and expenses, but there are exceptions:

New client. "Bidding low might allow expansion of the business but builds expectations that future services will also be cheap."

Sophistication of client. “Some clients are skilful in using consultants, asking us to do only the tasks where we excel.” Well, you wouldn’t want to do a task where you are mediocre, would you? “Others ask us to do routine work that they are too busy to perform. If we accept those jobs at all, we should make sure the client understands how much it is going to cost.”

Client work style. Consider charging more if the client:

  1. loves being involved in the consulting project
  2. wants plenty of phone calls, meetings and ‘face time’
  3. needs a final detailed report or fancy presentation
  4. has a complex decision-making process requiring many presentations and revisions
  5. has a hard time making decisions
  6. always haggles over fees.

This is a great insight. Clients should not look as if they are enjoying the work or if they have a hard time making decisions or they will be charged more. Look out for unnecessary 'fancy presentations'. And: “If the client seems to be eager for a bidding war, watch out.”

Another aspect to watch is leverage, the number of junior staffers managed by each partner. The senior staff are the business 'finders', but they work on many projects at once, leaving the grunt work to 'grinders'. Many years ago, the bank I worked for assigned a project to an experienced partner and firm, and then a young graduate turned up on the first day. I was supposed to guide him through the assignment. The old saying came to mind: "A consultant is a person who borrows your watch to tell you what time it is."

Make sure to issue the full invoice

Then page after page on engagement letters, issuing invoices and collecting fees. “If you don’t write it down, you can’t manage it.” So record all time and expenses spent on client work, including:

  • Project planning and brainstorming
  • Travel
  • Time thinking about the project at home, on the road or elsewhere
  • Time spend on project and client management activities.

All the record keeping and planning should be paid for by the client, including sitting on the toilet thinking about the project.

There are strict rules about not entering time and expenses properly, and in bold letters, there are no exceptions to this policy. You only get paid if you record it, and if the bill is for less than 100% of time and expenses, a write-off document must be completed and approved. To emphasise the value of the work, consultants must write in the invoice letter how the they saved the client time and money and how the assignment benefits the client’s business and our continuing relationship.

It's boom time

Consultants are not the only financial professionals enjoying record numbers during the pandemic. IPOs are soaring based on market optimism and a lack of other investments, with about $770 million in fees paid to investment banks in FY21. Legal and accounting firms have so much business that they are struggling to find staff.

Scott Turow is a best-selling American author and lawyer whose books have sold over 30 million copies in 40 languages. He draws on his professional background in an essay for the American Bar Association called 'The Billable Hour Must Die'. He says:

"Whoever says to a client that my billing system on its face rewards me at your expense for slow problem-solving, duplication of effort, featherbedding the workforce and compulsiveness - not to mention fuzzy math? ... But recognizing how far behind the eight ball we remain in the eyes of the public, should we really continue to engage in billing practices that even our clients, who know us best, have been telling us inspire distrust?"

And he adds that when someone is billing and working 2,200 hours a year, there's not much chance to pursue the experiences that nourish the soul.

 

Graham Hand is Managing Editor of Firstlinks. This article is general information. Disclosure: Graham worked as a consultant for many years and assignments were only accepted on the basis of strong personal trust between the parties. It was stated at the outset that if there were any questions about the merit of an invoice, no correspondence would be entered into and the client could ignore the bill or pay whatever they preferred. No invoice was ever disputed. 

 

15 Comments
Rusty
October 25, 2021

As if this is a surprise! The outcome is as much a dividend of the dithering senior personnel as it is of the community tolerating corrupt governments. I once worked for a large government revenue agency (that will remain nameless) that spent over a billion dollars on a new accounting and reorganisation project to record and manage business activity. Ultimately the aspect of accounting for the main input document which formed the genesis of the project was ruled “out of scope”. I’m not sure what was achieved for all the fees or the advice of some callow faced young consultant who would spent four days on something and then was suddenly the guru on the whole activity. Suffice to say the emphasis was on generating heat not light and making various senior personal within a deeply rooted circle of trust look like they were doing something as they travelled endlessly around the country. I did admire the shutzpah of the senior guy in our organisation who named his new boat “TA” though, based on all the travel allowances he collected during the seemingly endless change project.

Ron
October 24, 2021

This exposure is a long time coming, it is a future path for many ex- public servants who have observed the fantastic payouts for the consultants used in their departments. So as to get a piece of the action, they resign their position and come back as an expert consultant to the department involved. Of course once you are in as per the handbook it is gravy all the way. My brother took this course in Canberra years ago.
Ron

Ramani
October 24, 2021

If our policy-makers were to mandate anyone providing public goods and services (consultants and auditors included) to disclose in their marketing puff their global transgressions of laws for the past ten years, say (akin to the ban on bankrupts doing business), the resulting sunlight might help disinfect consumer detriment.

Imagine a prominent merchant bank advertising in its M&A bid ('our global CEO pictured along-side was jailed for insider trading and during his feted tenure he billed his clients x zillion') or an accounting giant for its multinational assurance assignment ('we have been busted by the US regulator for busting sanctions and we paid a cool billion', etc).

Sadly, this is as likely as cerebral self-surgey: the conduct regulator policing the disclosures will have to caveat its own conduct with countless examples of malfeasance it gets away with defensive spin at Senate Committee Inquiries.

Sovereign immunity will kick in and status quo will continue.

Just disgusted!
October 22, 2021

Then there are those large consulting firms who are engaged by the corporate regulator to look at financial advice in what is known as "the 10 year look-back". That's where an auditor/consultant is handed 20 adviser client files and instructed to look back to ascertain if there were any breaches of compliance on those files AFTER applying the compliance standards that apply TODAY. The rule is if you find a compliance breach in those 20 files, just one breach, you are then engaged to examine a further 20 to 40 files. And surprise surprise, guess what, there's always going to be one "breach" somewhere in those files.

This rort has been going on for probably seven or eight years. Anyone who knows anything about financial advice knows that minor, insignificant and inconsequential compliance "breaches" are always likely to be found without digging up the ground to much – it's a highly technical environment in which to operate. But the regulator continues to use these consultants, pays them a fortune, and saves on investigation staff.

The really sickening part is that if one takes the time to read the AEC declaration of political donations, 12 months after the last election, one can find the names of those very same consultants. I wish I could find an " investment" where an amount of under a million bucks could earn my firm 5 or 6 million dollars

Ramani
October 21, 2021

Wow Graham. If the consultant had been engaged to advise why consultants must not be used this internal memo in confidence would be the report. Apart from the fact Joe Insultant could have penned it for a part of the cost, most tips are what every business tries to please or fleece the payer.
A pity that the commonest reason has been omitted: the big guy wants an outcome and we should argue for it and money is no object!
Like many accounting firms caught up in scams globally, consultants - people of conviction - have been consigned to the convict club.
Perhaps they need a consultant?

I have my own consulting outfit….

Steven Smith
October 21, 2021

Former consultant to government here.

Consultancies aren't really paid to "do the work".

Our true value to a public service mandarin was as follows:
*Consultants piss off afterwards without any fuss.
*Consultants keep their mouth shut.
*Consultants apply the senior person's ideology, not their own.
*Consultants do the job, and nothing but the job.
*Consultants are blameable and expendable if something goes wrong.

In short, engaging consultants for job X gives a mandarin vastly more power, control, and safety than allocating the same task to the public service would.

Phil K
October 21, 2021

Mid-way through my former banking career I once found myself complaining to a bloke from the Strategy area about the volume of work I was doing for external consultants. He had a good chuckle, offered some sympathy and then told me a story about how the CEO had once hired a consultancy firm to tell him how many consultants he needed.

T
October 21, 2021

Anyone who has read the study for ASIC published last month on competition in the managed fund industry knows that we are getting doubtful value for what was probably a lot of money - I'm sure other consulting projects are different. It contained quite a number of errors, betrayed limited understanding of retail financial services and it's hard to understand how it advances ASIC's role as regulator.

Geoff
October 21, 2021

Do you know for a fact Graham that the $1.1B is being spent on consulting services, or is perhaps some of it (possibly a large part of it) being spent on contracted employees supplied by consulting services? Where I work this is common - we often use the big consulting firms as a short term hire service to supply people with particular skill sets to do whatever we need them to do (which is not, in any way, "consulting") so that we don't have to go to the expense and trouble of hiring them ourselves where the need is not permanent. I can source a particular person from one of the big providers in 2 weeks, and employ them (albeit it's expensive on a per hour basis) for, say, 6 months, then bang, no longer required, bugger off back home pal... Were I to hire someone permanently it would probably take 3 months and then I have an extra "headcount" I don't need, with all the various consequences that can entail in large organisations - and while I could source a contractor outside of the big firms, again it will take months and few people will touch a 6 month contract unless it happens to fit in with their life needs and they are supremely confident of their ability to source the next contract after that one. Asking for a friend...

HC
October 21, 2021

Excellent piece on the pervasive (and corrosive) use of Consultants by the government. Well done. Shining a light onto a place steeped, by mutual agreement, in opacity.

Lindsay H Moore
October 21, 2021

Any job is only worth so much to a client regardless of the time allegedly devoted to it. The accounting and legal professions in particular have over the years moved from concepts of what a task is worth in terms of value delivered to the client to the concept of charging alleged billable hours regardless of the quality and efficiency of the work and indeed the integrity of the record of hours. All to often the client is really being asked to pay for the education of junior and middle level staff in particular when inherent in their charge out rates is that they already know what they are doing.

Martin
October 21, 2021

This is just another example of the Liberal Government wasting the tax they collect. How anyone still thinks the Liberals are good money managers after the Jobkeeper debacle was exposed proves how hopeless they are with people's taxes. While Howard was the highest taxing PM at one stage I doubt he or Costello would waste tax payer's money like Slo Mo and Josh.

Steve
October 21, 2021

Most consultants I encountered over the years (private sector, not public) were simply a back-door way of management making changes they always wanted to make and pretend the recommendation is "independent". I don't expect many consultants who don't come to the conclusion the client wants from the beginning get invited back. This so central I'll say it again - I don't expect many consultants who don't come to the conclusion the client wants from the beginning get invited back. So much for independence. Also agree with the comment above about newbie consultants trying to advise an industry they know zilch about - just supports the idea they knew what the conclusion would be from the start. Worse, why do we have people in executive/management roles who need to use consultants so often - seems they must have been promoted above their competence....(shock!).

JF
October 21, 2021

It is a result of governments devaluing our public service of their independence as well as politicising the public service . The stories one hears about the so=called consultants giving the work to their newest employees without any experience are bountiful and common . It is disgraceful . How competent are the consultants this is another issue . We could spend half of this money on the public service and get better results

c
October 21, 2021

“Clients should not look as if they are enjoying the work or if they have a hard time making decisions or they will be charged more. ” LOL great insight! ICAC should be tipped off.

 

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