Striking the ‘right balance’ key to solving consultancy conundrum

The use of consultants in the public service has gone too far, but reform shouldn’t wind back the clock for answers. The challenge is to get the balance right.

There was a time when Australia’s public service essentially ran the national government’s functions on its own.

In the 1970s, the public service had a workforce of over 250,000. There were nowhere near as many managers as there are today and, while university degrees were rare, the technical skillset was far broader.

Fifty years later, the service is very different.

The workforce is 40 percent smaller despite Australia’s population almost doubling, the proportion of senior positions has increased dramatically and a new graduate workforce has replaced the former ranks of people with different technical skills.

Much of the transformation has been driven by technological change, but policies towards the public service have also changed dramatically.

To keep the country running today, governments rely on external contractors, consultants and labour hire. Billions of taxpayer dollars are involved and serious questions are emerging about the value for money involved with a series of scandals about the performance of contractors and consultants and about how they won contracts.

The time is ripe for rebalancing – giving back to the public service some of the control it has had taken away.

A different world from the 1970s

The Australian Public Service today compared to 50 years ago is much smaller, much more top-heavy, more inclusive particularly in terms of gender, but far less diverse in its skill sets and the functions it performs.

‘Externalisation’ is one of three major themes in public service developments from the 1980s in Anglophone countries, along with ‘politicisation’ and ‘managerialism’.

In Australia, early signs of some of these themes emerged with the Coombs Royal Commission of 1976 and its themes of increasing responsiveness to the elected government, increased efficiency and effectiveness and increased representativeness and more open interaction with the Australian public.

Looking outward

The first big step was with the commercialisation of Australia Post and Telecom initiated by the Whitlam Government and implemented under the Fraser Government.

Almost half (45 percent) of the APS had been employed in the Postmaster General’s (PMG’s) department, and were then made employees of the new statutory corporations.

The first stages of New Public Management (NPM) in the 1980s focused on better ‘management for results’ with the managerialist agenda including a form of program budgeting based on clear program objectives and performance targets and devolution of management authority subject to accountability for performance.

Gradually these reforms embraced competition as managers, looking to improve efficiency and performance, began to test markets for various corporate services. Centralised administrative services such as property, construction and cars were turned into businesses and subject to competition.

Defence commercialised its aircraft and shipbuilding and maintenance businesses, along with munitions and clothing manufacturing, and then began its commercial services program of reform to reduce the costs of support services such as equipment maintenance, supply depots and canteens. Most departments explored the contracting out of various corporate services such as payroll.

With the Council of Australian Governments’ (COAG) National Competition Policy in the early 1990s, a wider range of utilities and services were subject to competition and increasingly the option of privatisation was pursued.

The Commonwealth Employment Service was replaced by a program of employment services purchased by the Employment Department and delivered by for-profit and not-for-profit providers. Competitive tenders focused on achieving specified employment outcomes.

Until then, the Australian approach towards New Public Management is best described as ‘pragmatic’ rather than ideological, each incremental development focused on improving efficiency and effectiveness.

Legitimate questions can be raised about the assumptions involved and the improvements achieved, but the agenda was being promoted by senior bureaucrats as much as by political leaders.

Ideology began to play a more explicit part from the late 1990s, though much of the agenda was still focused on genuine efficiency gains.

Ideology was apparent, for example, in the mandating of IT contracting in the late 1990s rather than allowing managers to determine when and where contracting offered efficiency gains.

A ‘Yellow Pages’ approach was also suggested, where any activities that private businesses revealed in the Yellow Pages that they deliver should not be undertaken by government itself but outsourced instead.

The imposition of staff ceilings in 2014, in addition to budget caps on administrative expenses, also forced some agencies to contract out activities even when there was no value-for-money advantage.

By this time, governments on both sides had also become attracted to the apparent (political) advantages of external consultants including both the appearance of a greater degree of independence of government and the public service and the reality of close control to deliver acceptable advice.

The ‘politicisation’ agenda was also downgrading the importance of strategic policy advice from the public service and giving priority to external policy advice including through ministerial advisers and consultants subject to their close influence.

Scale of ‘externalisation’

Data on the scale of externalisation in the earlier periods are not readily available, but the reduction in fulltime APS employees reveals the dramatic impact of the commercialisation of PMG in the mid-1970s and suggests another significant impact over the 1990s.

While APS employment grew over the following decade, that growth was in line with overall population and employment growth in Australia. There has subsequently been a further decline in APS employment, particularly relative to total employment.

An Audit of Employment by the Finance Department and APS Commission in 2023 (Australian Government 2023) estimated that external labour paid for by APS departments and agencies in 2021-22 amounted to 53,911 (FTE), compared to the actual APS staffing of 144,271 (ASL).

Fifty-two percent of these were outsourced service providers (mostly involved with Defence), 33.7 percent were contractors, 12.5 percent were labour hire and 1.8 percent consultants. IT and digital solutions was the job family with the largest expenditure, representing 32 percent of the external FTE and 43 percent of the expenditure.

This does not reveal the growth in external labour.

It is likely that Defence, which has 76 percent of the total external labour, has always used external labour in its capital procurement and, since the mid-1990s, has also done so in its supply activities. Other departments are unlikely to have used much external labour until the 1990s.

There is some data on the increased use of consultants.

ANAO reported in early 2023 that the value of consultancy-related contracts increased from around AUD$350 million in 2012-13 to nearly AUD$900 million in 2021-22.

It appears the definitions may have changed as in its 2020 report it referred to growth from under AUD$400 million to over AUD$1.2 billion in the decade to 2018-19.

A separate empirical analysis found spending on consultants in 2017 was 5.5 times that in 1995-96.

There is evidence of improvements in efficiency over the early reform period and there remains political and bureaucratic support to maintain the broad management framework that allows externalisation where it adds value.

Serious questions have emerged, however, about the scale and management of externalisation and its impact on public service capability. Among these is whether the APS has retained sufficient capability to be an informed purchaser of external support, with the risk of not obtaining value for money even where external support may be warranted.

More recent concerns

A series of reports and reviews have found that both politicisation and externalisation have gone too far.

The APS of the early 1970s was too independent and too insular, and it needed to be more responsive to the elected government, more open in its dealings with the public and more exposed to competitive pressures and external expertise and views.

But the scale of increased political control and use of external labour over the last three decades has adversely affected the capability and performance of the APS, and led to some other fallings.

The adverse impact on APS capability has been revealed in the  Moran Report, subsequent capability reviews, the Thodey Report and a 2021 Senate Inquiry. Areas of concern identified are:

• Strategic policy advising;
• Human resources management;
• Financial, performance and risk management;
• Digital capacity;
• APS capability as an institution.

Important recommendations have been made to address both politicisation and externalisation concerns, the latter including:

• The removal of staffing caps;
• Reduced reliance on external consultants, contractors and labour hire;
• The development of ‘professions streams’ including in digital, data and HRM expertise;
• Improvements in ‘commissioning’ external support;
• Better reporting on external labour.

The use of long-term contractors sitting beside APS employees doing similar ongoing work (which it seems is not unusual) also raises a fundamental Constitutional issue.

If they are in effect Commonwealth employees, they should be employed under powers authorised by the Parliament such as the Public Service Act. That might also make them subject to legislated codes of conduct.

What to do

The Morrison Government endorsed the development of ‘professions streams’ and established a Finance Department centre of excellence on procurement, referring to this in responding to the Thodey recommendation for improved ‘commissioning’.

But it rejected the other Thodey recommendations to remove public service staffing caps and to reduce reliance on external consultants, contractors and labour hire.

The Albanese Government moved swiftly to remove the staffing caps and, in its first two budgets, to reduce expenditure on consultants, contractors and labour hire.

It also commissioned the Audit of Employment by Finance and the APS Commission as an important step towards better reporting on external labour.

The use of labour hire and contractors has been reduced over the last year, but it will take time for the APS to rebuild capability so that it can fully take up the slack.

Replacement of labour hire by APS employees, including non-ongoing employees, should not present a major challenge and should ensure better trained and better motivated staff in service delivery areas such as Services Australia and Veterans Affairs.

Replacing highly skilled contractors, however, will require the APS to develop appropriate classification and remuneration arrangements that attract, develop and retain the skills required.

Contracting for particular services may still offer value for money, but a cadre of internal experts is critical to identify when that is appropriate and to manage the process well.

Revelations through the current Senate Committee inquiry suggest there also remain serious issues about the way consultants are used and about the management of conflicts of interest. Among the disciplines needed when contracting consultants are:

• Clarity about what is to be delivered;
• A competitive process;
• Careful management of the consultancy to maximise the quality of the product and manage any conflicts of interest;
• Proper assessment of the product against the description in the requirement; and
• Preferably, where possible, publication of the material delivered to expose it to external scrutiny.

While there is no doubt that the use of external labour has gone too far, it would be wrong to suggest that we should wind back the clock to a world when the APS ran everything itself without the use of external organisations and labour.

The challenge is to get the balance right.

The APS needs to retain inside a wide range of specialist skills, complementing generalist administrative and policy analysis skills.

It needs those specialist skills to perform its very wide range of functions, and to have the expertise to be an informed purchaser when it does draw on external support. And there is more work to be done to ensure its procurement processes are properly managed.

Andrew Podger is an Honorary Professor of Public Policy at the Australian National University. As a long-time serving public servant, Professor Podger was Public Service Commissioner 2002-2004 Secretary of the Australian Department of Health and Aged Care 1996-2002, Secretary of the Australian Department of Housing and Regional Development 1994-1996, Secretary of the Australian Department of Administrative Services 1993-94. He was awarded an Officer in the Order of Australia (AO) in 2004.

Originally published under Creative Commons by 360info™.