How reliance on consultancy firms like PwC undermines the capacity of governments

In the wake of the PwC scandal, there is renewed interest in the work of outside agencies within Australian government.

Earlier this year, an audit showed almost A$21 billion was spent on external labour hire in the Australian Public Service in 2021-22.

Contained within this figure is a significant jump in the amount spent on consultants. While some outsourcing will be to fill genuine gaps, there is evidence that overreliance on consultancies can undermine the longer-term capability of the public service.

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Consulting is a global business

Australia is not the only country with an interest in consultants. It is a truly worldwide phenomenon that spans government and private business. In 2023, it is estimated the global management consultants market is worth over $US860 billion.

However, Australia’s consulting industry (made up of public and private sector spending) is the fourth largest in the world, and significantly larger than other comparable countries.

External organisations undertake a broad range of functions, including giving advice on strategy, accounting services and IT services. Sometimes entire government functions (for example, operating offshore detention facilities) are outsourced.

The use of outside labour has a long and interlinked history. Their worldwide rise started following a number of reforms from the late 1970s that aimed to introduce more market-based structures into public services. This transformed the corporate structures of governments.

Governments were encouraged to outsource a range of functions (such as delivering disability or employment services) on the basis that they could contract this to firms that could do this more effectively and efficiently. Governments could stick to making policy and ensuring this delivered the outcomes consumers wanted.

But the separation of policy design and management from service delivery was not as simple as it might have first appeared. In separating these functions, many governments have experienced a “hollowing out”, losing the knowledge, skills and institutional memory that is key to managing services.

And so this had a snowballing effect, with governments increasingly turning to consultants to carry out the jobs they once did.

Consultants in the Australian Public Service

Over the past decade, the total volume of consultancy work undertaken for the APS by the so-called “Big Four” consultancy firms has increased 400% from $282 million in 2012-13 to over $1.4 billion in 2021-22.

Most often the reason given for contracting consultancies is a “need for specialised or professional skills”. This may be because, the rationale goes, the skills don’t exist within the APS or because an external perspective is needed that can’t be gained from internal employees.

Read more: Consultants like PwC are loyal to profit, not the public. Governments should cut back on using them

But some believe a culture of preferencing advice from consultants over the public service has taken hold. At times, this can lead to governments receiving the advice they want rather than a more rounded view of an issue.

The use of consultants within government doesn’t always mean these skills are not available in the APS. One important issue to consider is the level of APS staffing. After the 2015-16 budget, the previous government constrained the size of the APS to around the 2006-2007 average staffing level of just over 167,500. It is argued this cap on staffing numbers left the APS unable to undertake all the work it needed to do, making it reliant on consultants to fill gaps.

The Australia Institute argues the $1.1 billion spent on consultancy services in 2018-19 could have employed an extra 12,346 public servants. It notes that, in reality, consultants are often paid at a much higher rate than public servants.

Implications for public service capability

A number of inquiries and reviews have expressed concern that reliance on consultants has long-term impacts for the public sector.

In 2019, the Independent Review of the APS found labour contractors and consultants were increasingly being used to do work that had been core public service capability, such as program management.

These findings were confirmed in a 2021 Senate Finance and Public Administration Reference Committee report on the capability of the Australian Public Service. It found that when government spends money on policy advice from private consulting firms, this undermines public service capability.

Read more: PwC scandal shows consultants, like church officials, are best kept out of state affairs

The Community and Public Sector Union has argued that consultants are often engaged to do more strategic and complex work that APS employees should be doing. All too often, public servants are asked to provide administrative support to consultants, and therefore miss out on opportunities to develop their skills and expertise.

These issues have also been noted in other countries. Most notably in the UK, Lord Agnew of Oulton noted the UK civil service was “too reliant on consultants. Aside from providing poor value for money, this infantilises the civil service by depriving our brightest people of opportunities to work on some of the most challenging, fulfilling and crunchy issues.”

When consultants undertake entire areas of work, the requisite skills and knowledge are not transferred to the APS. In effect, this sets up a negative feedback loop, where APS employees lose skills and institutional knowledge because of the reliance on consultants, meaning the next project or piece of work needs the input of consultants.

Time for change

Although concerns about public sector capability have been around for more than a decade, there is some sign action might finally be taken. A Senate Finance and Public Administration References Committee inquiry into the management and assurance of integrity by consulting services is due to report by the end of September. It will likely make a number of recommendations about the use of consultants.

The recent federal budget announced the government was committed to rebuilding the capability of the APS, increasing average staff numbers by around 10,800. This figure includes a number of individuals on external labour hire arrangements who will effectively be brought in-house.

But restricting the use of consultants will be just one step in rebuilding the APS and its capability. Significant investment and a change of culture are both needed if the use of consultants is to decrease substantially.