Home Asides Evening Musings: Board OKs million-dollar McKinsey deal

Evening Musings: Board OKs million-dollar McKinsey deal

by Benjamin Kabak

Here’s a story worth watching over the next few days if only for some excellent outrage: The MTA Board has approved a five-year deal with the management consulting firm — and Jay Walder’s former employer — McKinsey & Co. As part of the contract, McKinsey, earning a nine percent fee, will assess $879.6 million in spending in ten categories identified by Accenture during its 2010 MTA treatment. The MTA believes McKinsey can help identify $20 million in annual savings, and if so, the company would receive less than $2 million. McKinsey thinks it can achieve “significantly greater savings” and could earn as much as $11.7 million if it identifies savings of $130 million or more.

So why will this be a story? Well, for one, people do not take kindly to the threat of consultants because it means job losses and consolidations are usually on the horizon. The public too looks at these contracts warily. As Brian Lehrer’s radio show proved in November, the average person thinks consulting treatments cost far more than they do and realize far less in savings than they do. The P.R. blowback then can be problematic. When coupled with the fact that McKinsey is Walder’s former employer, it’s easy to see a potential firestorm on the horizon.

Yet, in the Board PDF announcing the deal — check out pages 40-41 of this PDF — the MTA explains the justification for the treatment. McKinsey’s rate is actually a percentage point lower than what Accenture charged, and the MTA won’t have to pay much at all if the company fails to realize significant annual savings. The MTA, in its words, called the contract “fair and reasonable,” and it’s clear that it costs money to save even more. So I submit this to you for consideration: A deal such as this one should initially raise an eyebrow, but it seems as though this is not an improper contract for the MTA to approve.

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38 comments

Bolwerk February 23, 2011 - 7:45 pm

It would help if the local press weren’t so irresponsible in its reporting. FUD unleashed by politicians and interest groups cannot usually be questioned in reporting. At best, it’s often only given equal weight against the truth.

Thanks to this phenomenon, the public often assumes things like the MTA having two sets of books.

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Erik February 23, 2011 - 7:51 pm

As a former management consultant who worked in the business for ten years, based on your post I was initially going to comment that this is very bad news.

I worked for a small firm whose focus is on operations, efficiency, and IT. We were often brought in as implementors on large initiatives after the McKinseys and Accentures of the world charged a hefty fee for strategies and recommendations. You’d be shocked (maybe not) at the disconnect that often exists between the “planners” and the “doers”, especially since the key people involved in the planning are often replaced prior to the implementing, and often the firm leaves entirely and leaves it to other companies, such as ours, to actually achieve the savings they promised.

There are always large holes in the “strategic thinking” vs. actual on-the-ground implementation. However, such planning projects often provide the political cover to take action whereby overselling it and then achieving something is better than not doing it at all. Regardless, the advisors still get paid.

When I read the actual PDF, though, I saw that this project is specifically a Strategic Sourcing project, and that is an important distinction. This is a very specific subcategory of management consulting, and it is limited to looking at goods and services purchased, and ways to drive down the cost. A lot of savings can be found by doing a sound data analysis on purchasing logs across organizational silos, simply counting how many of each thing are bought in total, settling on one common “version” if there are slight differences, settling on a common supplier, and renegotiating. There are also IT systems and operational changes that can be put in place to achieve further savings, but all related, in a hard and real way, to the purchasing sphere.

This project will not touch any of the MTAs other operations, and it is likely to achieve results. This is the appropriate use of a management consulting firm, and a legitimate project. I actually applaud the MTA for taking the PR risk and not only undertaking this project in the face of potential PR risk, but also hiring McKinsey to save money vs Accenture, at the result of even greater PR risk due to Walder’s relationship.

As an expert in consulting and a transportation buff, I ask you to use your platform to let other transit advocates know that this project actually is a very good idea.

Thanks,

Erik

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Donald February 23, 2011 - 11:26 pm

So what your saying Erik is that McKinsey is not going to have anything to do with labor costs?

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Alon Levy February 23, 2011 - 8:11 pm

Here’s Manuel “subway tunnels for $50 million per km” Melis Maynar on the subject:

[link] No large firm of consulting engineers was hired as general project managers. It is the author’s opinion that experience in other cities and countries has shown that such an approach does not actually produce savings in time and cost. The project management of the civil engineering and architectural elements was carried out by just three Chief Engineers, and six further engineers, all of whom were direct employees of the Madrid Regional Government.

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Anon256 February 24, 2011 - 3:25 am

Evidently Madrid has competent in-house staff, but it’s equally evident that the MTA doesn’t. Maybe they should be trying to hire the people in Madrid as consultants?

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Alon Levy February 24, 2011 - 2:42 pm

They could – but I suspect that if they were consultants, their interests would be to fleece New York to get themselves more work. Probably the MTA should try to hire those people as regular employees. There’s no way they get more money in Madrid than in New York.

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Christopher Stephens February 23, 2011 - 10:13 pm

The deal still stinks.

Of all the consulting firms in the world, Wadler chooses his former employers? It reeks of conflict-of-interest.

And, while I’m glad Erik has such a high opinion of his former profession, how many projects can you name that were improved by bringing in high-priced consultants? For starters, the MTA should be able to do this kind of analysis in-house. And your reassurances that McKinsey will only get paid if they realize savings? Who is going to determine that – McKinsey, right?

Seems to me the only people who are guaranteed to benefit from this contract would be McKinsey. Why do we keep handing money over to these self-appointed experts?

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Benjamin Kabak February 23, 2011 - 10:34 pm

how many projects can you name that were improved by bringing in high-priced consultants?

I certainly understand your concern, but you have to go all the way back to last year and the Accenture deal to answer that question. The MTA identified $42 million in annual savings with the help of Accenture. Your other question — could they have done it themselves? — is a better one to ask, but any time you can pay $3 million to identify that level of savings, it’s a good deal, no?

Also, if you read the PDF, you’ll see why the MTA chose McKinsey. Two companies submitted bids for this project, and Accenture’s carried a 10 percent fee while McKinsey’s came in at 9 percent. The MTA, as it has to, went with the lowest bidder.

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Christopher Stephens February 24, 2011 - 12:11 am

Saying that they went for the lowest bidder when that bidder should have been excluded because of the obvious conflict does not make it OK.
Also, and maybe I’m missing something here, you’re justifying paying a consultant based on Accenture’s work. But isn’t the contract to re-do Accenture’s work in the first place?

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Benjamin Kabak February 24, 2011 - 12:14 am

That’s a different story though. They could have been excluded. That wouldn’t have been a wrong decision. Walder recused himself from the vote and discussion, but his presence and knowledge of his background is enough to impact the vote.

Just curious: Did you read the PDF? They’re picking up on the work Accenture identify and focusing on the procurement process. It’s not re-doing their work.

I’m definitely not saying this is 100 percent clean. But these are the facts.

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Gary February 24, 2011 - 10:44 am

There is only a conflict if Jay Walder retains an equity or similar financial stake in McKinsey.

There is nothing inherently wrong with selecting a company that you have worked for/with in the past.

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Donald February 24, 2011 - 12:31 am

“but any time you can pay $3 million to identify that level of savings, it’s a good deal, no?”

No, because you can do the work in house and save the same amount of money, plus the $3 million.

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Benjamin Kabak February 24, 2011 - 12:33 am

That’s a pretty lofty assumption. What makes you think the MTA can do what a management consulting firm can do? There’s a reason why these firms are so successful.

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Alon Levy February 24, 2011 - 12:38 am

The cost of hiring competent in-house staff is always lower than the cost of hiring a consultant, especially one paid a percentage. Whether the MTA is capable of hiring competent people is another question.

BrooklynBus February 24, 2011 - 10:51 am

I agree. Of course, the MTA is capable of of hiring competent people. They don’t because they don’t want to. I’m not suggesting that the MTA hires only incompetent people, although it does have its share. But the people hired are usually just mediocre, not the best and the brightest. (This is partially due to very bright people not wanting to work at the MTA.)

What I am suggesting is that a “competent” person, in the manner we are currently using the term, is someone who thinks differently and is willing to try new approaches. That is exactly the type of person, the MTA tries to avoid hiring. They look for people who fit the current mold and express the best desire to carry the MTA forward thinking in the same manner it currently does. Result — No new ideas, business carries on as usual.

So when they want to try something new, they turn toward outside consultants. Think about it. If the people currently in charge of procurement were the best in their field, there is no reason why they should not be able to identify these cost savings on their own. If the problem is fragmentation among the agencies, then a committee formed of the top procurement managers from across MTA agencies should be be formed and be able to develop the same type of savings that can be identified by a consultant.

If for some reason, someone is hired with initiative and were to make the same recommendations as a consultant would, he only would be prevented from carrying them out by his superiors, because the emphasis at the MTA is “Don’t rock the boat.”

Donald February 24, 2011 - 12:49 am

When was the last time a management consultant saved a govt. agency a substantial amount of money?

If you read Mckinsey’s page on Wikipedia, they have quite a list of failures. AT&T. Swissair. Railtrack. The list goes on.

Al D February 24, 2011 - 12:39 pm

Accenture saved the MTA a few hundred million dollars recently.

Erik February 24, 2011 - 7:57 am

The first half of my comment should make it clear that I do NOT have a lofty opinion of consulting. It has it’s place, but too often it’s about leveraging connections, serving as a smokescreen for actions that a company wants to undertake anyway, and/or performing some level of corporate espionage. All too often the beneficiaries are the consulting firm and the executives of the client at the expense of others… how that plays out depends on the nature of the project. Sometimes executives just prefer to have an external rationale for downsizing.

However, as I said, this is a very specific type of project (“Strategic Sourcing”). The MTA does not have anyone in-house that can do this work, I guarantee that. If it were an “operational improvement” project then I would agree with you. The MTA knows its operations best and perhaps there is someone inside that could lead such a charge.

But the analysis and process for strategic sourcing is the type of thing that you need to do 5 or 10 times before you get really good at it, and that’s even assuming that you have the required data analysis skills to start. The practice involves seeing patterns in the data and being able to successfully negotiate with suppliers. That’s where practice, and knowing what has worked in the past, means a lot.

And yes, these deals are generally constructed so that the consulting firm only gets paid for the savings it generates, and if it generates none it gets little to nothing (it’s called “on a contingency basis”). That’s a real thing.

However, I do admit your point that it’s always possible to game the contingency process by defining your success measures in a favorable way, either by what is being measured, how it’s being measures, or when it’s being measures. It really relies on the client having someone who takes a long, hard look at those terms and negotiates very firmly. I hope the MTA did so.

Of course, if they didn’t negotiate well, that’s another argument to bring in “experts” to do it for them for their indirect purchasing.

I applaud your skepticism, which is all-too-often valid. However, investment projects (and that’s what this is, paying money to make/save money) need to be looked at on a case by case basis.

I’m pro-transit. I believe in paying for public services (i.e., happy to pay my taxes when they are reasonable used in a way that makes sense for the public good). I’m against the corporate oligarchy and plutocracy that we seems to have become. However I still look a things through open eyes. In this case, it’s a smart move for the MTA. It needs all the money it can get.

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Christopher Stephens February 24, 2011 - 2:01 pm

Even if you take all of this at face value, especially that McKinsey is working on a contingency basis, the consultants are still getting away with murder. Even if they fail to find a penny in savings, they’re still going to walk away with millions to pay for the consultants, the reports, the support staff, the travel expenses, etc. This is all money that we’re going to have to pay for at the farebox.

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Benjamin Kabak February 24, 2011 - 2:02 pm

That’s not true. The deal is structured so that if McKinsey does not identify anything in savings, they don’t get any money from the MTA. Period.

Anyway, if you’re complaining about having to pay at the farebox, wouldn’t you prefer to see a lean MTA? Remember: Accenture saved the MTA hundreds of millions and collected a fee for it. It’s a trade-off. I don’t understand why people think “consultant” is a bad word in this case.

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Christopher Stephens February 24, 2011 - 3:15 pm

Why is “consultant” a bad word here? Have you ever been forced to work with one? “Lawyer” isn’t necessarily a bad word either, but it’s a red flag. Given the parties involved (McKinsey: notorious for high billing and ineffective advice vs. the MTA: notorious for poor management and bad negotiating skills), I still think my skepticism is warranted. And throwing in Wadler’s conflict of interest? Sounds like a perfect storm for throwing good money after bad.

Al D February 24, 2011 - 10:21 am

If Walder recused himself from the selection process, as he should have, there should be no conflict of interest.

McKinsey is one of the ‘name brand’ (if you will) consultants. Not permitting them to compete for the business lessens the oppotunity to get the best deal.

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Christopher Stephens February 24, 2011 - 1:57 pm

Conflict of interest rules concern more than just impropriety; they also advice against the appearance of impropriety. The fact that this issue is getting raised shows that allowing McKinsey to bid on the project was a mistake.

Also, while they may be a name brand consultant, they’re hardly alone in this field. The next best bid was only one percentage point lower, which suggests that the MTA would have gotten almost as good a deal if McKinsey had been barred.

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Christopher Stephens February 24, 2011 - 1:57 pm

Sorry – advise, not advice.

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Donald February 23, 2011 - 11:23 pm

I thought we already have someone who can find inefficiencies in the MTA? Better yet, I thought we have two people: Thomas DiNapoli and the MTA Inspector General. There is so much waste at the MTA you don’t need a fancy consultuing company to find it. For starters, lat year DiNapoli found that the MTA was buying jet fuel for city buses instead of alternative types of fuel that are cheaper. Second, the MTA should handle more of their legal work in-house instead of hiring law firms and paying them millions.

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Alon Levy February 23, 2011 - 11:33 pm

DiNapoli finds microscopic amounts of waste.

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Donald February 24, 2011 - 12:53 am

Most of McKinsey’s consultants have never ran a business or any type of organization. They recruit grads right out of school after they graduate.

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Matt February 24, 2011 - 9:04 am

Most of McKinsey’s grads, however, go on to run a business, as they are happy to point out at their recruitment sessions.

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Al D February 24, 2011 - 10:27 am

This is far more than a savings program. What Walder is doing with this project has many goals:

1. Yes, identifing savings.
2. Introducing and adopting Sourcing best practice to MTA
3. Slamming all the Strategic Sourcing professionals at MTA (and there are many) for their own inability to effectively collaborate across agencies and work objectively with their internal customers. This is the same bureaucratic morass that cannot timely buy a new snow thrower.
4. Sending a message to all managers that either buy into his management approach or he will ‘consult’ around you, making you useless.

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Alon Levy February 24, 2011 - 2:44 pm

On the other hand… I think I agree with your analysis.

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Christopher Stephens February 24, 2011 - 3:24 pm

Is throwing millions of dollars at your old company really the best (and most cost-effective) way to achieve these goals? It makes Wadler look sleazy, not powerful.

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Benjamin Kabak February 24, 2011 - 3:27 pm

Again, it’s only “throwing” millions if the work realizes savings, and I would disagree with the assertion that you’re throwing millions away if the savings are substantial. Per the deal, McKinsey doesn’t get paid without saving the MTA money. You would be saying the same about an Accenture deal. To me, the real issue is McKinsey vs. another company, not the expenditures. Walder says he recused himself from the discussion and vote on the deal. I don’t know if that’s good enough.

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Donald February 24, 2011 - 3:31 pm

How did Accenture save the MTA money? What savings did they identify? I’m sure the MTA could have identified those same savings if they hired competent people and did the work in-house.

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VLM February 24, 2011 - 3:35 pm

This is one of the most circular discussions I’ve ever seen here. What about management consulting don’t you understand? The MTA paid Accenture $3 million last year, and Accenture studied their organizational structure from top to bottom and recommended how to consolidate operations and eliminate redundancies in order to save significant operations dollars. That’s not at all something firms can do themselves. It just doesn’t work that way at any major company from the MTA to GE to Apple and Microsoft. This isn’t hard to understand: Management consulting does not happen in-house with competent people. Get off it already.

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Alon Levy February 24, 2011 - 9:51 pm

The primary job of consultants is to take middle management’s ideas and then present them to top executives without telling them where they come from. See explanation on the Urbanophile, who before becoming a major urbanist blogger was a management consultant.

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Al D February 25, 2011 - 9:22 am

Additionally, they are to steal company ideas, make them their own, thus further enriching the consultant hive whilst simultaneously pitching additional business to the client to increase revenue.

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Alon Levy February 25, 2011 - 7:43 pm

I don’t think it’s really stealing. It’s just a quick, expensive way to get around the tyranny of the org chart. Reforming corporate culture and developing in-house expertise both take time; using consultants is quicker, and costs much more.

Donald February 24, 2011 - 4:34 pm

Looks like this contract is even more suspcious than everyone originally thought. From the NY Post:

“Sources said McKinsey was NOT the lowest bidder among three other firms, but top MTA brass insist they would provide the most bang for their buck.”

*Emphasis added

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