The Wall Street Journal has a solid report tonight on how state governments have been fleeced by major consulting firms like McKinsey and Deloitte.1 The question one winds up asking when reading about these fiascoes is whose bright idea was it to hire big name, and even if they discounted a bit, still very pricey consultants for engagements that weren’t in their wheelhouses. “Nobody ever got fired for hiring IBM” does not apply to hiring IBM to manage a construction site.
Mind you, the world is awash with outsourcing and consulting grifting,. It’s been so extensive in the UK that we’ve been negligent in chronicling it, since it’s hit the “dog bites man” level of predicability. Nevertheless, even the numbed UK press worked up some outrage over the costly fail of outsourced contract tracing. The BMA recently published an overview of the extent of government outsourcing of its Covid responses and why they performed poorly.
What is distressing about these US examples isn’t merely that they demonstrate the folly of hollowing governments and then expecting them to be able to add capacity or respond to emergencies by bringing in private sector mercenaries. It is that they also illustrate the general decline in what we’ve called organizational capacity. The consultants either have to have been utterly cynical and knew that they couldn’t deliver on the project specs and didn’t much care, or were so lacking in understanding what the required tasks were about that they arrogantly believed that simply being good at show and tell (aka PowerPoint) and recognized as smart was all it took. Nathan Tankus discussed the importance of organizational capacity in a post on the Greece bailout negotiations, explaining in some detail why the Greek government was not even remotely in a position to take over the Bank of Greece (which was really a node of the European Central Bank) or start its own central bank.
What I find impossible to fathom here is how the state governments in question here failed to understand that what they needed were cadres of middle managers and experienced lower level workers with relevant expertise, not pricey symbol manipulators. What was California smoking to hire Deloitte to run call centers, particularly when there actually are firms that specialize in running outsourced call centers? Admittedly, the call center outsourcing took place in parallel to a smaller contract on a related IT system.
But California was doubling down on failure. But documents obtained by Public Records Act requests suggest that Deloitte had performed poorly on its considerable work on the employment IT system over the years. From the Journal:
California turned to Deloitte to help handle a flood of claims engulfing its antiquated benefits system—a system Deloitte has billed the state millions for over the years, part of more than $250 million of work for the employment department. This spring, the firm was awarded a new $5 million contract to help upgrade systems to pay pandemic benefits. Deloitte also won an $11.1 million, two-month contract to supply call-center staff to quickly increase the employment department’s capacity. In August, the state increased the contract to $42.6 million.
It didn’t fix either problem. The department’s two call centers—including one partly staffed by Deloitte—are overwhelmed, an official state report in September found. And a huge backlog of unresolved claims, tallying more than a million, was growing by at least 10,000 every day, the report said….
Deloitte clearly has “not successfully resolved [the department’s] IT challenges or modernized its system,” a letter from dozens of local lawmakers this year said. David Chiu, a Democratic member of the state’s Assembly, said it is “incredibly concerning that [the employment department] has continued to go back to a contractor that has a well-documented history of bungling unemployment insurance work, not just for California but for other states.”…
Illinois and California are paying Deloitte $55 an hour—more than $100,000 a year on a full-time basis—for agents doing basic call-center work. That is more than double what the states pay agents they hire directly to do similar work, according to copies of the contracts and recent job advertisements. Permanent staff enjoy benefits. But the Deloitte rate is higher than at least one other contract for pandemic call-center work: Nevada is paying call-center operator Alorica Inc. $33.50 an hour for its agents, the contract shows.
But this level of client-fleecing is amateur hour compared to McKinsey. Get a load of this:
New York Gov. Andrew Cuomo’s office awarded McKinsey a $9.9 million contract in March to advise the state on issues related to Covid-19, the illness caused by the new coronavirus. That included 18 weeks of “leadership counseling” at $42,500 a week—the contract didn’t specify who would be counseled, or what that would entail.
The work was later reduced to seven weeks at $27,000 a week, as part of a cost-cutting effort that saw the overall fee approximately halved, according to a response to a public-records request. Representatives for Mr. Cuomo didn’t respond to requests for comment.
As Wall Street Journal reader eb mem pointed out:
You cannot teach leadership for any price per week. What consultants can do for $42,500/week is coach the official narrative for the abysmal decisions being made.
Funny we don’t know what the rest of the contract went to, but if McKinsey’s work in Massachusetts was any guide, it was sheer rent extraction:
McKinsey also did work for Massachusetts, some of which appeared to involve little more than forwarding others’ material along. Researchers at Harvard University prepared reports for the state’s health department tracking population movements. Consultants at McKinsey used the reports verbatim in material for the governor, according to a person familiar with the work.
While the researchers were grateful the governor received the data, they were puzzled why the paid consultants were needed to share data among state officials, this person said. The office of Gov. Charlie Baker didn’t return a request for comment.
There is no justification for either contracts or the end product related to public health services to be kept secret. The difficultly the Journal apparently had in getting more detail, as we have found again and again with CalPERS, smacks of stonewalling and footdragging to prevent embarrassment or worse. From what little we can see, the McKinsey engagements sound troublingly like an infamous South Sea bubble venture: “For carrying-on an undertaking of great advantage but no-one to know what it is!”
The Journal states that the engagements it has found so far for McKinsey and Deloitte total $182 million. Given how widely state public records laws vary, the number is likely to be higher given that the Journal would not get far in states with weak laws. And with states being in the midst of budget crises, $182 million would buy a lot in the way of PPE or first responder pay.
Sadly, after McKinsey being the subject of numerous critical articles on its role in propping up corrupt governments, it’s likely to regard a story like this as ankle-biting. As we pointed out in 2018:
The New York Times published a major story yesterday on how the consulting powerhouse McKinsey got itself eyeball-deep in a corruption scandal in South Africa that has become the focus of a major government investigation. It has led major multinationals operating in South Africa like Coca Cola to cease doing business with McKinsey there.
Among other things, as the Times explains, the firm got about $100 million in performance payments for performance that may not have even occurred from a state-controlled energy company Eksom. It got the assignment in connection with a local partner that was controlled by an Indian family, the Guptas. The Guptas in turn used their connections with then South African president Jacob Zuma to loot various state-owned entities. Oh, and on top of everything else, McKinsey’s contract was illegal….
McKinsey heretofore has managed to avoid being tainted by scandal even when it had its fingerprints all over the crime scene. McKinsey was the moving force being what may still stand as the biggest value-destroying acquisition of all time, Time Warner’s purchase of AOL. The board turned down McKinsey’s “dare to be great” speech in favor of the deal four times. Unfortunately, it relented on McKinsey’s fifth go. McKinsey was also deeply involved in Enron, to the degree that it was touting Enron as a model. Many alumni have remarked to me that they don’t understand how McKinsey escaped being dragged into investigations. More recently, McKinsey has tried to shrug off important stories by Pulitzer Prize winner Gretchen Morgenson, now at the Wall Street Journal, and Tom Corrigan, on how McKinsey has become heavily involved in advising parties to major corporate bankruptcies, yet has routinely flouted legal requirements to disclose conflicts of interest, including investments by its in-house retirement funds.
McKinsey got more bad press for restructurings at the intelligence agencies that managed to worsen their performance, identifying key Twitter critics of the Saudi government, leading to their arrest and helping Purdue Pharma combat addiction concerns and focus on high-prescribing doctors so as to boost sales of OxyContin.
McKinsey, which once was vigilant about protecting its vaunted reputation, has gone the Goldman Sachs route of prioritizing sucking money out of its clients. So sadly, this Wall Street Journal report is unlikely to ruffle any feathers at the Firm. But it might give state officials reason to worry that getting taken by McKinsey could tarnish their political futures.
1 We are charitably assuming that the governments really were interested in receiving the services they contracted for.