A closer look at why the RAA declared McKinsey a flop

In 2009, when the government unveiled its decision to hire McKinsey for USD 9.1 mn or Nu 443 mn with the aim of accelerating socio-economic development in Bhutan, there were many critics of the move.

Four years later, a Royal Audit Authority (RAA) Report on procurement of consultancy services has shown that the then government did not get what it aimed for and paid for from McKinsey.

In an indication of the impact of McKinsey or the lack of it, the RAA Report points out that one important objectives under Accelerating Bhutan’s Socio-Economic Development (ABSD), which is to propel Bhutan to the top 50 nations in ease of doing business index, was not achieved. Instead, Bhutan dropped from its 119th ranking in 2008 to 148th in 2013.

The RAA Report has stinging criticism of several aspect of the McKinsey or ABSD project in Bhutan showing how many original goals were not met, while in other cases targets were drastically changed.

One major claim of the success of McKinsey was the government claim of Nu 108 mn in savings on the procurement of construction materials like Bitumen and steel. The RAA Report, however, says this is unjustified attribution of national savings to consultants. RAA says that the actual outcomes are yet to be ascertained.

G2C

A key ABSD initiative was the Government-to-Citizen (G2C) services to provide online public services. However, RAA found that the lack of adequate awareness programs has hampered the success of the G2C services as the public still rely on the normal procedures to get their work done. Some of the procedures are also very tedious and people resort to the earlier system of using the post.

Most of the rural people are not aware of all the services available in the G2C service centers, and some operators are unable to use the system properly as it is in English.

The Community Information Centers (CICs) set up in the villages was not effective as most CIC’s were not used. The G2C services were initially targeted for all 205 gewogs and in 15 ministries/ agencies by 2013 through establishment

of CICs. However, the revised plan indicated establishment of only 185 CICs. Of this only 131 were online and 54 were offline.

It was found that of the 100 CICs established in gewogs, only 23 online CICs cater the services to the public.

Five CICs did not process any application, and ten CICs processed on average of 1 to 100 applications in a year.

It was found that the CICs were established without pre-requisites such as optical internet services and manpower, and thus resulting in under utilization of facilities.

The interview with the local communities or public indicated that many of them were not aware of the facilities. Therefore, the intended objectives of the CICs remained largely not met, thus indicating ineffectiveness of the programme according to the RAA.

As against the objective of generating substantial portion of the 90,000 jobs required in the 10th Plan as provided in the contract agreement signed between the Government and the consultant, the ABSD initiatives targeted creating only 30,000 jobs.

Employment

The report says that without clarity in target setting and alignment of targets with the overall government’s target of reducing unemployment rate to 2.5% in 2013, the contribution of the ABSD initiatives towards lowering unemployment rate cannot be ascertained

Agriculture

RAA found that several of the original targets were considerably scaled down or postponed.

Under agriculture, the original target of renovating 278 km of irrigation canal was deferred to the 11th Plan. The irrigation master plan and organic brand and certification were also deferred to the 11th Plan.

The original aim of setting up 5 federal cooperatives was reduced to one and another target of setting up 500 farmers groups was reduced to 300. The aim to establish 50 one stop shops was also reduced to only 25. The aim of construction 125 km of irrigation channels was reduced to 97.45 km.

The Ministry of Agriculture and Forests (MoAF), to enhance rice productivity, had identified five clusters in various dzongkhags and targeted 8,500 hectares as the area to be covered under rice commercialization. In contrast, the MoAF had only been able to achieve 4,529.1 hectares constituting about 53.28% of the intended target as of November 2012.

The report said that development of Irrigation Master Plan was dropped because the work which was outsourced to Jain Irrigation, India was found not competent enough. They did not have required expertise in irrigation field, but rather they specialized in manufacturing pipes. The RAA says that since the McKinsey & Co. had introduced Jain Irrigation to MoAF, it was an indication that the consultants had not carried out appropriate studies on the company before proposing the same, says the report.

The RAA Report says that the consultants had proposed activities without proper scrutiny and assessment on their feasibility and the availability of resources resulting in some of the proposals being dropped from the performance compacts. The report says that the Forest Resources Assessment activity has been dropped from the ABSD program given the scope of the task and also due to the inability to mobilize resources for the activity.

RUB and IT Park

The project was also partly responsible for the IT Parks’ white elephant status as it could not achieve its original targets of setting up three business process outsourcing companies and three data centers. The target was revised to only strengthening the operation of existing companies like Shaun Companies and Scan Café both of whom are currently struggling.

In the case of Royal University of Bhutan (RUB), the report found that unrealistic planning on the number of programmes to be implemented led to twelve programmes not being implemented as scheduled.

The report states the research and groundwork carried out by the consultants were not adequate in recommending result-based activities suggesting the ineffectiveness of the consultants.

Contract deliverables not clear

There were also some overall and fundamental issues with McKinsey, in terms of how the contract was drawn up, the monitoring of the program, and the measuring of performance.

The report says that the contract agreement drawn between McKinsey and the government did not clearly establish the deliverables (a project management term for the quantifiable goods or services that will be provided upon the completion of a project), and output from the consultant. The three keys targets sought from McKinsey were improving public services by providing critical public services cheaper, faster and at higher quality levels, generating a substantial portion of the 90,000 jobs required in the 10th Plan, and enabling and managing change to ensure real and sustained impact to do with mainly management tools.

It says that deliverables of the contract agreement was not adequately quantified. The outputs sought from the consultants were not clearly defined. There was no time-frame established for completion of each deliverables. The contract also failed to identify performance indicators for each deliverable, in relation to national performance indicators, except for a deliverable that agreed on propelling Bhutan to the top 50 nations in the “ease of doing business index of the World Bank”.

It says, therefore, the vagueness in establishing the deliverables and lack of performance indicators against each deliverable had impaired gauging the extent of achievement of commitments of the consultant.

Inadequate oversight

The report says that there was inadequate oversight over contract administration.

The contract agreement required the consultant to submit report every three months and the draft final report to be submitted within first week of the 23rd month. However, the required reports were not submitted by the consultant, impairing effective monitoring of the contract.

It says that without the reports and proper documentation of the activities carried out by the consultant, it had impeded effective supervision and also impaired verification and ascertainment of the extent of achievement of the commitments.

The RAA says that the agreement did not specify relevant clauses on the liability of the consultant in the event of breach of contract terms and conditions.

The status of progress of consultancy works and implementation of compacts were not made available.

Performance measures not defined

The performance measures or outcomes of the compacts were not clearly defined. The report said that it appeared that no proper assessment of the agencies was conducted by the consultant to identify appropriate outcomes for the agencies resulting in list of outcomes in the compact that do not add any value to the system.

As a case in point, some of the outcomes like, “minimum percentage of students supported by the government”, “% employability within three months of graduation”, “schools above 70% on GNH index”, “% of schools covered by the new holistic education method”, “% of students being funded by loans”, etc., indicated the outcomes were listed in the compact without adequate assessment and proper study on the relevance, feasibility and effectiveness of the outcomes.

The compacts also did not identify strategy to achieve the targets or outcomes in many cases.

The previous government, despite growing criticism, had touted the ABSD initiatives as one of its major successes and also a program on which money was well-spent.

This will, however, not be the first time that McKinsey has faced criticism. From day one of the project in Bhutan, media outlets could not talk to or access McKinsey consultants who maintained a wall of secrecy. This is in line with their international policy whereby, they have managed to largely avoid critical media coverage.

As part of the limited literature on McKinsey a new book titled “The Firm: The Story of McKinsey and Its Secret Influence on American Business,” written by Duff McDonald examines and critiques the company. He examines the firm’s failures, many of which have largely gone unreported. McKinsey provided advice, that led to the first too-big-to-fail bank failure in the 1980s, that of Continental Illinois Bank. McKinsey’s work for the National Health Service “failed to move the stultified British bureaucracy an inch,” McDonald wrote.

It led General Motors to pursue a strategy in the 1980s that made it harder to compete with Japanese imports. It was on the scene after John Sculley took over Apple from Steve Jobs to remake the company and it took Mr Jobs’s return to turn the company back around.

And it worked with GE Capital just before the financial crisis, helping the unit become even more exposed to problems that ultimately nearly collapsed the financial system.

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