Public service, private gain?

Upon election in 2010, the coalition cut public sector spending on consultancy by 40 per cent—from £2.5bn to £1.5bn. Yet this has been offset by a 35 per cent rise in consultancy revenues from local government and other state bodies. Despite the coalition’s attempts, then, the public sector is still big business for consultancy. But what is management consultancy? And what can its history tell us about why governments have and continue to use its services?

Contrary to popular belief, the origins of the state’s use of management consultants have nothing to do with the swing towards economic liberalism that Britain has undergone since the 1980s. Nor is it linked to the private-sector style reforms of the Thatcherite and New Labour governments. Instead, the emergence and development of the public sector as a ripe field for management consultants lies in the economic collectivism of the 1960s. Though a management consultancy industry first emerged in Britain in the 1920s, it was only in the 1960s that consultants were used on a consistent basis by the state, as a direct response to fears about Britain’s declining status in the world. Amidst the dirigiste planning boom of the early 1960s, British firms such as AIC, P-E Consultants, and Urwicks worked on issues such as improving planning capabilities and productivity in the nationalised industries, or undertaking personnel studies for the Fulton Committee on the civil service.

Then came the Americans. As state officials sought to emulate the ‘American miracle,’ McKinsey & Company were hired in the late 1960s and early 1970s to transform the organisational structure of a number of state bodies—including the NHS, Bank of England and BBC—from a loose holding company model to the multidivisional model which was ubiquitous across the Atlantic. Such was the extent of this American influence that there was talk of the term “to be McKinseyed” entering the Oxford English Dictionary.

The economic downturn of the 1970s enhanced the appeal of consultants. In 1975, for instance, in response to the high-profile failure of the Treasury’s systems for planning and controlling public expenditure, Arthur Andersen (the forerunner of Accenture) devised and installed a system for monitoring cash-flow in the department. The project represented the first significant government use of consultants to install information technology systems in the state.  This would become common practice in the 1980s, when, for instance, Andersen worked on the computerisation of all social security benefits for the department of health and social security, a process that cost an estimated £2.5 billion.

Nowadays the state is awash with consultancies for data processing (such as IBM and Capgemini) and major security service providers (such as Serco and G4S). Where once such firms had been employed on a short-term basis, today’s consultants are semi-permanent fixtures. Capgemini is currently working on a two-year long pilot project with the HMRC, helping it reduce operational costs by paying providers to deliver IT services. Despite the coalition’s claims, consultancy firms continue to provide this type of outsourcing work throughout the public sector. The fees they earn are far greater than before and the work is no longer about providing advice but about delivering implementation.

So what does this short history tell us about the state’s use of management consultants? The first major point is the continuity across political administrations. Some political scientists have suggested that the use of consultants by government has led to a ‘hollowed-out’ state in Britain. This does not seem plausible. The fact that consultants can adapt to the changing demands of political agendas suggests that they are both politically disinterested, and that they are useful tools of government policies. Whether the state expands or contracts, management consultancies will be employed to ease the transition.  Secondly, this continuity also shows that it has been primarily the permanent civil service that has driven the use of consultants, not politicians.  I once pointed out to John Major that his governments spent proportionally more on consultants than Tony Blair’s governments. Major noted with some desperation that if he could have stopped the use of consultants he would have, but crucially, it was civil servants who hired consultants, and politicians could only veto their appointment in extraordinary circumstances. Thus responsibility for state reform, and as a result expenditure on management consultancy, lies ultimately with the permanent bureaucracy, not the more transient elected political class.

Management consultants have been at the heart of developments in the British state since the 1960s. Despite political claims to the contrary, it is likely they will remain so for as long as the state seeks to modernise and reform. This need not be a threat to the state’s operating processes. In order to fully capitalise on consultants there needs to be a frank recognition that the state is dependent on their work. However, the government must understand that the incentives of consultants—largely profit maximising—do not always align with those of the state; the key is in marrying the two.  The coalition plans to outsource some public services to private sector providers, many of which will be consultancies (despite its contradictory efforts to reduce consultancy expenditure). If private sector providers can deliver some public services at better quality and lower cost, the government must work hard to ensure it can appropriately manage these private providers and align their incentives for profit maximising with ensuring high quality service provision, unlike the botched NHS Connecting for Health programme, for instance.  Only once the government understands this can it best make use of consultants.

Antonio E. Weiss is a management consultant and historian.  He is currently writing on the history of management consultancy and the UK state.  His latest book, Key Business Solutions, is available from Financial Times Prentice Hall in September. The image for this piece was sourced here