by 

Austin Mitchell MP
Prem Sikka, Professor of Accounting, University of Essex

(Published in  Red Pepper, March 2006, pp. 26-29)

 
When Labour won in 1945 Hartley Shawcross announced “We are the Masters Now”.  Today only consultants can say that.  They benefit when management is uncertain, politicians nervous and civil servants discounted.  All those conditions now apply.  With no ideology politicians no longer have the route map in their heads, local government and the NHS have to constantly demonstrate best value, and privatised utilities are finding their way in a new business world.  So consultants, ever ready to fill any void, for a fee, have prospered.  In doing so they have penetrated and reshaped the private and public sectors of the economy and government itself. They preach efficiency, profit maximisation, goal attainment and anything that furthers the enrichment of stock markets and business executives.  The rest of us pay for it.

 Far from peddling new management fashions, they have changed the whole environment. During the 1980s, consultants led by accountancy and law firms, and banks came up with the idea that the interests of shareholders and company executives could be aligned by giving management share options for reaching profit targets. Manna from heaven.  Companies did not have to record the £5 billion or so annual cost of such options and executives learnt that by massaging the books to manufacture profits they could lay claim to ever higher salaries, bonuses and share options. So the accountancy firms drew up ideas for roasting company accounts, resulting in profit hype and grotesque executive salaries.

 Next consultants came up with the idea that companies could boost their profits, and executive rewards, by a pension holiday for employer’s pension contributions. This added some £18 billion to company profits. Stock markets celebrated record dividends. Business executives got richer.  We were on the way to the current pension crisis, though now consultants are not urging companies to return the foregone contributions or punish company executives for breaching the pension contracts.

 No consultancy firm has ever had the experience of running railways or any other major industry. Yet they were the driving force behind privatisation. The railways were broken into over 100 separate entities sold at knock-down prices.  Public subsidies rose but with guaranteed cash flows and assets at give-away prices, some railway companies got a return of 34% on turnover.  The £12 billion collected in subsidies since privatization is supplemented by £10 billion of public investment in track and signaling equipment.  Some £1 billion of dividends have been funded by subsidies, job losses, borrowings and above inflation hikes in train fares.  As a result, British railway have been described as “the developed world’s least safe, most expensive and most unreliable rail systems” because rail travelers face the highest costs in Europe and more people die in railway accidents than in France, Germany and Spain.  Lord Cullen’s report on the Ladbroke Grove rail disaster, which resulted in 31 deaths, noted that the railway companies had “a combination of incompetent management, inadequate procedures, poor driver training and complacent attitude towards danger signals”.  No consultants came forward to accept responsibility.

In theory consultants offer a new pair of eyes on problems and usually the painful ones, such as job shedding, downsizing, efficiency.  This makes their role political as a protective shield for management.  In the public sector they sell governments the seal of private sector approval.  They are the new masters of the universe, initiating naïve politicians into its mysteries for a fee and translating its imperatives into profit to themselves.  All this makes them a big and profitable new industry.  David Craig, renegade consultant, is one of the few to write about it.  In Rip Off he estimates its income from business and central government at £l50 million a week, its charge out rates per consultant at between £7,000 and £25,000 a week.  The Office of Government Commerce estimates central government spending on consultants at £2.5 billion in 2004-5, up from £1.76 billion the year before.  Most goes to the big boys but beneath them is a whole food chain down to the humble computer consultants at £80 an hour, each as indispensable as plumbers, though lacking Polish competition.  As yet.

 Consultancy isn’t an industry of jobbing geniuses but a big business with the Big Four accountancy houses at the top of the pyramid.  The basis of their power is their statutory monopoly of auditing which gives them access to all the biggest PLCs to use audits as a market stall from which to sell all sorts of other services, from golf course and logo design (usually hired out to other consultants) to tax avoidance advice and management selection.  For all this audit is the loss leader.  It’s reduced in price to get a foot in the door to sell other services which provide two thirds to three quarters of Big Four income and most of their profit.   Price Waterhouse Coopers (romantically shrunk to PWC) has announced record profits this year.  KPMG is giving a bonus of half a million (enough to buy two peerages at the going rate) for every partner.

 In a concerned society such concentrations of power would be regulated.  They are in the USA by the SEC, now with the additional powers of the Sarbanes-Oxley Act 2002, carried after Arthur Andersen brought Enron to its knees.  Here the same audit firms use the same practices (tax havens, off balance sheet accounting and shell companies are all much the same) but nothing has been done because government regards the Big Boys as its friends and is anxious to keep them happy.  So it makes every concession they ask.  Arthur Andersen were brought back in from the cold where the Tories sent them after their DeLorean fiddle.  The independent regulation promised in Labour’s manifesto was junked.  Limited Liability Partnerships were conceded to protect them from the consequences of their own failures, soon to be followed by an effective cap on liabilities in the new Companies Bill removing all consumer rights.

 So these multi-national monoliths have become partners in government.  It clutches at the confidence their name inspires.  They enjoy their reward in millions from a government which is the most lavish and least complaining of employers.  Indeed the public sector has become an Eldorado for management consultants and given them far more influence on government than consumers or backbenchers.  In opposition New Labour castigated the Conservatives for wasting £500 million on consultants.  In office Labour has been dominated by consultants.  They now rake in over £10 billion.

 Perhaps their happiest hunting grounds has been the Private Finance Initiative (PFI) and Public Private Partnerships (PPP). Consultants report on the practicability of such deals, choose the bidders, then advise the winners on how to get an even better return by selling on the contracts and the income stream. Projects to the value of some £47 billion have been signed. The first £14 billion of these require the taxpayer to mortgage the future and hand over £96 billion to corporations over the next 26 years, inevitably restricting the ability of future governments to change policies or redirect public investment. Participating companies, often hiding in tax havens, have made huge profits. Accountancy firms alone have picked up fees of more than £500 million.  The public has got shoddy services and big financial burdens to come.

 The government admits that less than 25% of the PFI projects delivered more than 80% of the promised benefits. The project to provide IT for Magistrate’s Courts (project Libra) has been described as “one of the worst PFI deals”, by the Public Accounts Committee.  Costs escalated from £184 million to £400 million a disaster paralleled in the Passport Office, Social Security, the Health Service and the Child Support Agency (CSA) IT systems.  Consultants have never run hospitals, schools or trains. Under the PPP scheme for London Underground, monthly train failures jumped by 23%, track problems have risen by 20% to 76 a month and points failures are up by 38%. The Commission for Health Improvement (CHI) awarded the flagship NHS trust running Cumberland Infirmary in Carlisle and West Cumberland hospital in Whitehaven, the lowest marks for risk management, labour relations and information technology.  Consultants are not rushing to return their fees.

 A favourite advice of the consultants is to recommend the creation of Task Forces. These in turn are dominated by their friends from big business. Labour has created some 320 Task Forces with over 2,500 members. The government is not very forthcoming about the details but only 2% of the membership is from trade unions.  The vast majority are from big businesses who exercise disproportionate influence on public policymaking as a result.  They use it to recommend that government departments hand out even more consultancy contracts.

 In local government young politicians would be better advised to become consultants because as local government is emasculated and its performance endlessly assessed and measured, consultants find an easy market.  Take housing.  The government’s determination to privatise council housing compels councils to employ consultants to advise on stock plans.  A sizeable new industry of consultancies, usually run by former council officers, is available to councils and the Office of the Deputy Prime Minister’s Housing Task Force brings councils and consultants together like a marriage bureau.  Consultants report, usually at a cost of a million or so, and always in favour of privatisation of the council’s housing.  In my own district of North East Lincolnshire, consultants reported that the council could reach the decent housing standard out of its own resources but still recommended privatisation to reach an even higher standard. This then required the appointment of another consultant as “tenants` friend”.  For a smaller fee this recommended to tenants that they should lie back and enjoy it. The cost of consultancies is a major part of the £435 per property it costs to give away every council house but if that money was simply spent on housing there would be nothing to consult about.  The local government consultancy industry now covers every function, from strategic advice, privatisation of services, staff appointments, to actually running services such as Education, child welfare and others.

 Privatised utilities are another big market because their management is less confident than the old nationalised authorities used to be.  The Strategic Rail Authority was unhappy with the performance of Connex South East, not so much because its passenger service was the worst in London, but because its financial management, done from Paris, was unsatisfactory.  It therefore appointed a consultant to report on Connex.  They countered by appointing their own.  That expensive combination gave them a clean bill of health.  So Strategic Rail appointed a new consultant, PWC.  More aware of the responsibility of consultants to give management the decisions it wanted, they promptly  denigrated  Connex South East.  The firm was steadily improving and the National Audit Office considered that the consultant had over-egged the pudding but Connex was duly sacrificed, consultants benefited by a million pounds worth of business, and the new contract holder, South Eastern Trains, remained the worst service in London.

 So the money-go-round goes on.  If everybody is forced to use consultants the quality of their work hardly matters.  So it isn’t very good but costs billions, leaving room for a lot of overcharging, such as billing consultants at a weekly rate even though not every day is worked.  In the US big profits have accrued from billing travel and hotel charges at the full rate, though the consultancy uses its purchasing power to secure heavy bulk reductions which are not passed on to the client.  That practice has just forced American consultants to pay back billions of dollars.  There is no such requirements here where overcharging is more covert but equally difficult to control.  Few are ready to admit to shareholders or competitors that huge sums have been wasted.  Auditors are silent when their own firm has done the consultancy.  There is no review body to assess practice and pricing.

 Total costs for a sample of departments are:

Departmental spending on management consultants
Department	2001/2	2002/3	2003/4	2004/5	2005/6	Total
DCMS		107,300	10,171	21,067	4,500	£143,038	2005/6 is to date
DTI			1,107,186	2,005,669	1,095,494	£4,208,349	2005/6 is to date
Northern Ireland		4,410,990	4,853,689			£9,264,679
Education		4,000,000	4,700,000	8,300,000		£17,000,000	All consultants, not just management
DCA	6,500,000	5,700,000	9,000,000			£21,200,000
Health		7,266,000	10,031,000	12,800,000		£30,097,000	All consultants, not just management
DEFRA		15,317,093	20,260,714	14,122,596		£49,700,403
DWP		47,790,000	223,350,000	98,640,000		£369,780,000
DFID	211,600,000	221,800,000	214,600,000			£648,000,000
Transport		292,500,000	239,500,000	193,300,000		£725,300,000	External consultants and advisers,
							not just management consultants

 
Just taking over departmental the Department for International Development (DFID) shows the following expenditure for 2002-3.