Consultants borrow your watch to tell the time then charge you for it, say critics

By | septiembre 29, 2017
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When veteran retailer Solomon Lew let fly at the woeful performance of Myer he put the spotlight on the value of consultants, saying the department store chain was a “basket case” being run “primarily” by consultants after losing a lot of good retailers.

“The business, at this point in time, has got too much of what the consumer doesn’t want,” he said.


Moody’s downgrades the big four banks

The credit ratings of ANZ, CBA, NAB and Westpac have been downgraded due to risks in the housing market.

Myer has launched strategy after strategy yet failed to stock the right products to win back customers. “This board has lost in excess of $2 billion of shareholder funds … The share price has gone from $4.10 to 70¢. You tell me? Is their strategy working?”

The answer is a resounding no.

Management consultants have been advising companies for decades, attracting detractors and fans.

To the fans, consultants offer new insights and expertise in development of strategies. Some companies have gone to the next step and outsourced entire functions to consultants to keep headcount down, which keeps investors happy. Some use consultants as a protective mechanism as they can wrap reports and other communications in non-disclosure agreements and confidentiality agreements which makes it extremely difficult to access this information in the case of a parliamentary hearing.

In theory, it also reduces the risk of disclosures being made by company whistleblowers because they simply don’t have access to the evidence any more.

To the detractors, the role of consultants can be summed up as “borrowing your watch to tell you the time and then charging you for it”. To them, they are all care and no responsibility.

But they aren’t going anywhere. As demand for digital and data strategies continue, companies and government departments are increasingly relying on consultants to help with transformation advisory work, developing risk-related business performance improvements as well as internal audit-related work.

Globally, the consultancy industry is worth a lot – IBISWorld estimates it generates global revenue of $600 billion a year.

In the past three years the federal public service has spent almost $1 billion on the big four consulting firms, according to media reports.

Media, retail, telecommunications and the big banks are all big users of consultants. Even the regulators have started outsourcing some of their own duties and responsibilities to consultants or “independent experts”.

The role of consultants can be summed up as borrowing your watch to tell you the time and then charging you for it.

In the year to June 30, 2017, ANZ is understood to have paid Ernst & Young more than $20 million in consulting services. As one observer said: “That’s a lot of coin to buy capability or value add when ANZ is only renting human resources for a period of time and highly skilled people are looking for a job in financial services.”

Of the $20 million-plus consultancy fees most was attributable to cyber security to support ANZ’s transformation agenda.

In a statement ANZ said it uses consultants to complement existing skills. A spokesman said consultants often have detailed knowledge or the expertise needed for a particular short-term project. Specifically on cyber security, the spokesman said ANZ was expanding its capabilities and recruiting additional staff in this area.

Whatever the case, it is big money. ANZ isn’t alone.

The issue of job losses through restructuring at the same time consultant spending is ballooning at professional services firms is yet to be scrutinised.

Last month ANZ announced further structural changes in its technology division. In an interview with colleague Clancy Yeates the bank said a restructure of the Australian arm would involve breaking the division into “tribes” made up of “squads” of about 10 people that are “agile” in day-to-day operations. It said the restructure would likely result in a lower headcount.

In the year to March 31, 2017 ANZ reduced its full-time equivalent staff by 6 per cent. The bank announced the sale of the Asian retail and wealth business, the sale of its stake in Shanghai Rural Commercial Bank and the sale of UDC in New Zealand. The cumulative effect of these transactions is to reduce future revenue by more than $1 billion from 2018.

NAB reduced its full-time equivalent (FTE) staff numbers by 4 per cent in the year to March 31, 2017, CBA’s FTE was unchanged and Westpac increased its FTE levels by an estimated 1 per cent.

According to Brett Le Mesurier from Velocity Trade, “ANZ’s FTE problem is that it averages $12 million in loans per FTE, compared with $15 million for CBA and NAB and $19 million for Westpac.”

The advantage of consultancy expenditure is it is treated as a variable cost and therefore isn’t reported as an increase in FTE/staff in company accounts.

Greater cost flexibility is also provided. If revenue falls, companies can slash consultancy fees, which helps keep expense growth below revenue growth, which, in turn, supports the share price.

On the downside, job cuts can result in disorganisation and cultural instability, which can lead to wide-scale operational dysfunction and defective risk-management capability.

Indeed financial scandals have been a boon for consultants. Investigations into the life insurance sector, financial planning scandals, compensation schemes and a focus on company cultures have filled the pockets of these so-called “independent experts”.

They are a handy way to look like the institution is doing something. But they lack transparency, are often conducted outside the gaze of the regulator and the public, and the contents of the reports are rarely made public.

As more and more sensitive functions are outsourced to consultants, the time will come for regulators to start scrutinising the fallout to get a better glimpse into their opaque world.

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