Management Consulting and the Public Sector Clayton Schloss January 10, 2007

1. Management Consulting and the Public Sector Clayton Schloss January 10, 2007

2. Outline • Consulting industry origins • Rise of the contractor state • Consulting industry today and tomorrow

3. Why Interested • Career goals • Short-term: consulting • Long-term: government • Experience in both • Sen. Dianne Feinstein (D-CA) • Thomson Financial • Opportunity for governments to implement for-profit strategies to improve performance • Opportunity for for-profit entities to improve financial performance by addressing social needs

4. Management Consulting Origins: Great Depression Era • Great Depression era antitrust legislation aimed at preventing conflicts of interest in financial markets • Securities Act of 1933 • Required all financing to be preceded by “due diligence” • Restricted accounting firms just to auditing • Glass-Steagall Banking Act of 1933 • Separated commercial and investment banks • Outlawed consultative and reorganizational activities of banks

5. Management Consulting Origins: Great Depression Era • Management consultants became only legal conduit of “anti-competitive” financial information  explosive industry growth • Booz Allen & Hamilton founded in 1914 by Edwin Booz • In 1926 only employed one other consultant • 11 consultants by 1936, opened New York office • McKinsey founded in 1926 by James McKinsey • 25 consultants by 1936, opened New York office

6. IT Consulting Origins: 1950s • IBM operated under constant Justice Dept. scrutiny since 1930s • IBM accepted consent decree in 1956, binding for 35 years • Must sell, not lease, its punch card and tabulation machines • Must make proprietary technology available to competitors • Cannot offer advice on the purchase and integration of computer systems • In effect, government pressured IBM to cede the IT consulting services business to accounting firms • Arthur Andersen (now Accenture) quickly became market leader in IT consulting

7. The Rise of the Contractor State • World War II and its aftermath was a major catalyst to the management consulting industry • WWII provided several examples of success via collaboration between government and private sector • Atomic energy • Penicillin • Wartime fiscal deficit management - Keynesian economics • Led to development of the “proministrative state” • symbiotic relationship between private and public sectors • Aided by management consultants

8. The Rise of the Contractor State • Heads of consulting firms did individual projects during WWII • Robert Heller (Robert Heller) – reorganization of U.S. Congress • Tom Kearney (A.T. Kearney) – reorganization of War Production Board • Marvin Bower (McKinsey) – studies for Air Corps • Led to consulting firms getting government business • Booz Allen & Hamilton – most prominent beneficiary, did work for Army, Navy, War Production Board

9. The Rise of the Contractor State • Success of management consulting firms during war  continued business in postwar restructuring of U.S. government • Political pressure to reduce size of government after WWII  Hoover Commission (1947) to reorganize the executive branch • 23 task forces headed by business executives, advised by management consultants • Recommended decentralization of government, use of external experts • Outcomes • Creation of Department of Defense • Creation of General Services Administration • Creation of job of White House Chief of Staff • Restructuring of federal personnel management • Reorganization of Post Office

10. The Rise of the Contractor State • Subsequent reorganizations by management consultants • Federal Field Service, covering 90% of civilian employees • personnel administration for Coast Guard • Veterans Administration • Civil Aeronautics Administration • Dept. of Housing, Education, and Welfare • McKinsey: • 1952: President Eisenhower hired to advise on political appointees, plan organization of White House staff • 1958: Organized NASA after its founding – promoted use of outside contractors over internal expertise • By 1964, 90% of $5B budget spent on contractors

11. The Rise of the Contractor State • In 1960s and 1970s: management consultants used for creation and promotion of legislative standards • Dept. of Health, Education, and Welfare – examined impact of revisions to Social Security Act • Dept. of Transportation – examined impact of National Environmental Policy Act • Consultant ideology of using external contractors and advisors instead of expanding government bureaucracy resonated with citizens and government officials • Still prevalent today • Clinton: reduced size of post-Cold War federal government • Bush: • increased reliance on contractors in Iraq War • Dept. of Homeland Security relies heavily on consultants

12. The Rise of the Contractor State • Positive or negative? • Positives • Reduced ongoing direct cost of government • Reduced size of government bureaucracy • Benefit from specialization, use of private sector strategies • Negatives • Reduced sense of ownership in government • Less accountability, oversight • War profiteering, corruption in Iraq • Hurricane Katrina response • Dubai Ports World deal

13. Political/Management Consultancies • Recent rise of political/management consultancies founded by former senior government officials • The Cohen Group – William Cohen • White House, Congress, Dept. of Defense • Foreign legislative and regulatory advice • Partnerships with PR, law, private equity firms, considering partnership with Big Five consultancy • Stonebridge Kissinger McLarty – Henry Kissinger, Sandy Berger • May partner with Booz Allen & Hamilton • The Gingrich Group – Newt Gingrich • Internal company communication and marketing strategy • Seek clients that can provide public good – environment, education • PricewaterhouseCoopers partnership

14. Growth Statistics • Number of full-time management consultants in the U.S. • 1965: 17,000 • 1990: 100,000 • 2000: 140,000; sold over $70B of advice • Number of salaried managers per management consultant in the U.S. • 1950: 154 • 1965: 100 • 1995: 13

15. Growth Statistics • IT consulting fastest growing segment of industry – 60-70% of total consulting market • EDS, IBM, Accenture, H-P • IBM reentered IT consulting field in 1991 when consent decree expired • Annual services revenue of $47B in 2005 (52% of total) • $810M in U.S. federal government revenue in 2006 • 17th largest U.S. federal government contractor • Public sector accounts for over 30% of global consulting market • Expected public sector rev. growth over next 3 years = 6-9% • Expected private sector rev. growth over next 3 years = 1-4% • Booz Allen & Hamilton still top government consultant • Moved corporate HQ to McLean, VA in 1992 • $1.6B in U.S. federal government revenue in 2006 • 9th largest U.S. federal government contractor

16. Growth Drivers • Globalization • IT and communication advances • Budget deficits • Increased demand for government services • Increasing complexity of government issues • High visibility • Threat of budget cuts (agencies, departments) • Threat of elections (officials)

17. Recent Legislation • Repeal of Glass-Steagall in 1999 • Investment and commercial banks rejoined • Sarbanes-Oxley Act of 2002 • Consulting and audit functions separated • Impacts of these on consulting industry remain undetermined

18. Questions?