EDITORIAL: McKinsey’s McKinky fees
Mckinsey earned every eight days what KMPG earned in 14 years
To get a flavour of how management consultants operate, we need to look no further than clause 17 of the services-level agreement between Eskom Holdings and McKinsey and Company Africa signed on January 7 2017. It says, "the employer [Eskom] agrees that it will not use the contractor’s name [McKinsey], refer to the employer’s work, or make the Deliverables or Proposals [including the consultant’s fee, expenses and other commercial terms] or the existence or terms of this agreement available outside its organisation without the contractor’s written permission".
In other words, Eskom was prohibited from even mentioning to outsiders that McKinsey was in the building. Welcome to the world of consultants. Most companies brag about their clients. Consultants prefer to move in the shadows. The reason is simple: they don’t want to stand in the way of management claiming credit for improvements — management is their employer after all. And they don’t want anyone to know the gobsmacking fees they charge.
In the Eskom case, it all went pear-shaped. Through the Budlender report, the Gupta e-mail leaks, and now successive leaks from horrified Eskom staff, it’s increasingly possible to construct a more or less accurate picture of what happened. But still there is much we don’t know. For some reason, the board gave its acting managers the authority to sign a thumping set of contracts with McKinsey.
McKinsey was supposed to be paid only a proportion of savings actually made. Eskom management must have thought that this was to its advantage, which in itself demonstrates its naivety. Performance fee contracts are manna from heaven for management consultants because if you save 10% of revenue and 10.55% of that accrues to you from an organisation as large as Eskom, suddenly you are looking at income of R1.4bn.
After being burnt over the years, most consultant contracts now work on an hourly rate, per consultant deployed. In the US, that works out at about $1,000 an hour. It would probably be much less in SA, but even at that rate, McKinsey would have had to deploy around 400 people to earn that R1.4bn in a normal fashion.
But the actual contract shows that notwithstanding the fact that this was notionally a performance contract, a whole set of down payments was required — an indication of the scale of the project. These payments collectively amounted to close to R1bn. Then there were a whole lot of conditions if the contract was broken. This is partly why, after six months’ work, McKinsey walked away with R1.03bn.
A lot of the media attention has understandably been focused on the Gupta-linked advisory group Trillian, which siphoned off R565m. Trillian appears nowhere in the contract, but apparently, there was a back-door agreement of some kind, so when the contract was scrapped, it got paid out too. It’s hard to imagine how much champagne was drunk in the Trillian and McKinsey offices; R1.6bn for essentially doing nothing — what a pleasure.
McKinsey claims that the contract was "in line with similar projects we, and other firms, undertake in SA and elsewhere around the world"; that it stood "fully behind the impact and value we delivered". This is arrant nonsense. Most of McKinsey’s claim against Eskom lies in the down payments. Neither did the Treasury sign off on the contract, as required.
A small mountain has been written about KPMG, which earned R40m over 14 years for doing the books of the Gupta companies. In the event, McKinsey earned every eight days what KPMG earned in 14 years.
McKinsey’s current strategy is to close its eyes and pretend nothing untoward has happened — as is its nature. That is not going to wash. This battle has just begun.