As Local Governments Shrink, Private Consultants Reap Rewards
"I would probably bring in McKinsey," Mitt Romney once told the Wall Street Journal editorial board, explaining how he might, should he win in November, hire management consultants to help shape a presidential cabinet.
Romney, a devotee of corporate culture who began his career at the Boston Consulting Group, promises to transfer that technocratic ethos and private-sector reverence to the Oval Office. Indeed, management consulting firms are already marketing themselves to state and municipal governments as professionals with the necessary business savvy to help manage a downsizing austerity state.
"When crisis strikes consultants are called. Consultants thrive on chaos," says Tom Rodenhauser, managing director at Kennedy Consulting Research & Advisory, which tracks the industry. "When a municipality is facing huge budget issues, and they can't solve the problem themselves, they'll call in consultants and make the tough choices that either politically or practically elected officials can't make."
Consultants, like Romney, have the appeal of "real-world" experience which, in early 21st-century America, means experience in the hard-nosed competitive marketplace outside of the public sector's one-time easy comfort. Since August 2008, the number of public employees has already been cut by 662,000 nationwide. Consultants draw on experience from a private sector that has relentlessly slashed employment, broken unions and outsourced work for decades.
Accenture, for example, tells clients that "the crisis forever redefined how people live and work; how businesses operate; and how governments must govern." Government must "adapt to this new normal—an environment of economic uncertainty, stagnant revenues, austere budgets and increasing demands from citizens, businesses and other governments for core services delivered in new ways."
Consultants often recommend privatizing services like education and slashing public employee workforces, though sometimes governments might just be looking for outside expertise to validate decisions that have already been made.
"They are paid to be the cost-cutters and understand that a lot of money can be saved that way," says Chris McKenna, a business historian at Oxford and author of The World's Newest Profession: Management Consulting in the Twentieth Century. "In the world of good cop/bad cop, consultants end up having to play the bad cop role."
In Philadelphia, the $2 billion William Penn Foundation paid the bill for a Boston Consulting Group plan to restructure the city's fiscally-distraught (and state-government run) public schools in the wake of massive state budget cuts. The resulting "Blueprint" proposed a radical overhaul that would dismantle the central office and potentially transfer school-level management to private charter school organizations. They proposed privatizing 2,700 blue collar jobs, which provided the school district with the necessary leverage to extract major concessions.
Boston Consulting, whose spokesperson declined to comment, has a track record of similar proposals and alumni that work at major corporate-education reform and charter school organizations. In Philadelphia, the firm became a target of public anger.
"The unpopularity of it comes back to bite everyone involved," says Rodenhauser. "And often what happens, and this is why consultants don't particularly care for public sector, is the clients will say, 'the consultants told us to do it we don't want to do it.'...When a municipality is in a dire situation, they're going to have to do dire things. I think sometimes consultants are mischaracterized as the bad guys."
Care for the public sector or not, consultants are making strong pitches for government contracts. According to its website, Boston uses a "Lean Productive Government approach" that "adapts private-sector lean approaches to work in...public sector" areas including "justice, health, welfare, defense, transportation, and education."
The "lean" model that Boston is referring to typically involves three key principles: holding that only core functions should be performed in-house, and contracting out the rest; cutting labor costs and benefits, and curtailing union power; and relying on short-term contracts to ensure flexibility.
Consultants can pose not only ideological, but direct economic, conflicts of interest.
Philadelphia's city government, for example, paid financial consultants at Lazard $200,000 for a study that recommended that the city privatize its public gas utility. Lazard then won a potentially far more lucrative contract to manage the sale. And Lazard proposed, among other things, selling Philadelphia Gas Works to an infrastructure fund; Lazard has a strategic relationship with such a fund, the Lazard Global Listed Infrastructure Portfolio. The other sale options posed other potential conflicts of interest: potential buyers Lazard interviewed for the study were also Lazard clients.
In several cities, the contracting of consultants has prompted criticism and calls for increased oversight.
Former New York City Schools Chancellor Joel Klein frequently turned to consultants. His approach encountered controversy in 2007, when Alvarez & Marsal devised a cost-cutting school bus overhaul that left students waiting in the winter cold.
More recently, the New York City Housing Authority has refused to release the contents of a $10 million study undertaken by Boston Consulting Group. Senator Charles Grassley (R-Iowa) cited a "lack of transparency" in a letter complaining to the Department of Housing and Urban Development.
NYCHA Chairman John Rhea's defense? The Atlanta housing authority had paid BCG for a similar contract.
"I am concerned that other housing authorities across the country may also be paying millions to BCG and other consulting firms without fully understanding the drawbacks of such contracts," Grassley wrote. The Daily News reports, "BCG was the only company considered for the job after the firm’s executives reached out to [NYCHA Chairman John] Rhea — who worked for them in the early 1990s."
NYCHA, the New York Post later revealed, went on to pay a separate consultant $100,000 to help clean up its public image.
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After leaving BCG, Mitt Romney went on to work at Bain and Company consultants, from where he launched the controversial private-equity firm Bain Capital. For decades, consulting has been a top choice for MBA graduates like Romney.
The industry has been charged with giving vacuous advice ("stealing your watch and then telling you the time") and with perpetuating corruption (after Enron's 2001 collapse, it was revealed that Arthur Anderson had been paid to simultaneously consult and audit the troubled firm).
But the $200 billion global consulting industry, particularly when it comes to state and local government, has not received much rigorous attention from the media or the academy. There is no data on trends in consulting work in state and local government; most of the documented history focuses on the industry's contracts in Washington.
Management consultants have been deeply involved in the federal government nearly since the World War II era. McKinsey organized NASA in 1958, stating that America's "free enterprise society dictates that industry should be given as extensive a role as possible" in the agency's operations. By 1964, 90 percent of the agency's $5 billion budget was allocated to private contractors.
The recession prompted the industry to newly market themselves as cost-cutters and privatizers, perhaps nowhere more so than in public education.
“We’re going to have to do more with less,” said Margaret Spellings, the former Education Secretary under George W. Bush and a lead advocate of No Child Left Behind's emphasis on high-stakes standardized tests who now works for Boston Consulting and the Chamber of Commerce, in a video on the consultancy's website. “And I think we’re going to do that by using more data, more information, and a better understanding of those processes to wring out greater efficiencies.
Private foundations led by Bill and Melinda Gates, Eli and Edythe Broad, and the Walton Family have spent $4 billion annually to restructure public education, including charter schools and high-stakes standardized tests, according to Dissent's Joanne Barkan. And some of that money goes to consultants.
In 2010, the Gates Foundation gave 15 cash-desperate states $250,000 to hire consultants to write applications for Obama's Race to the Top competitive education grant. The grants, which encourage districts to tie teacher evaluations to standardized tests and loosen restrictions on charter schools, draws heavily from the corporate-education reform model funded by the big three foundations.
Consultants also benefit once the federal dollars are paid out. In Colorado, consultants reaped 35 percent of $26.6 million in federal education dollars sent to the state over two years, according to The Denver Post.
Nationwide, school-turnaround consulting companies sprouted as it became clear the U.S. Department of Education was about to spend billions of dollars to fix the nation's bottom 5 percent of schools in academic performance. Retired big-city superintendents and even life coaches across the country were seeking contracts with failing schools.
In Colorado, as in many other states, the state education department held a consultant fair, where it was apparent "there were vendors coming out of the woodwork" without experience in school turnaround but who knew "there was a lot of money to be made," said Patrick Chapman, director of federal programs for the state education department."
Local officials, who feel forced to make cuts they do not think they have the expertise to implement, hire consultants. Sometimes, foundations sign the checks. But it is the general public, which elects neither consultants nor foundations, that must ultimately pay the cost.