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Use of External Consulting Services Fiscal Years 2007/08 through 2010/11 April PDF
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1 Use of External Consulting Services Fiscal Years 2007/08 through 2010/11 April 2012 Office of the Auditor General Page 1
2 Use of External Consulting Services Fiscal Years 2007/08 through 2010/11 March 2012 Table of Contents Page Preamble 3 Executive Summary 5 Scope 8 Objectives 8 Methodology 8 Key Performance Indicators - Value for Money 9 Summary of Recommendations 11 Overall Cost of Consultants Hired by Business Units Section Lack of Formal Policies Regarding Hiring of Consultants Section External Consultants Engaged as Specific Expertise Required Section Repetitive Use of the Same Vendors Section Expertise Inventory Section Impact on Staff Expertise through the Extensive Use of External Consultants Section Accountability for the Performance of Consultants Section Use of Consultants in the Capital Program Section Coding of Expenses Section Use of SAP Section Office of the Auditor General Page 2
3 Preamble The 2010/2011 work plan of the Office of the Auditor General (OAG) included a project to review the use of external consultants by the Halifax Regional Municipality (HRM). The OAG embarked on this project to assess the effectiveness of any processes in place used to ensure the most appropriate use of external consultants and if HRM is receiving the highest value for money. Given the extensive nature of this topic, the OAG intends to complete this review in a multi-phased approach. In this first phase, we concentrated on a high-level review of external consulting services used. In subsequent phases, we intend to: review processes related to services classified as outsourced or contracted out, review the specific processes used for the expertise and capacity hired externally most often, review the performance measures used when deciding to hire externally, and review the overall approach to performance management with respect to external service providers. During the early stages of this review, it quickly became apparent the term consultant could, and in fact does, have many different meanings at HRM. As a result, the first step was to define what the OAG considered an external consultant for the purposes of this review. Based on a review of the types of external services hired by HRM, the OAG has defined external consultants as those hired to provide professional or expert advice. Generally, consultants have specific areas of expertise upon which HRM draws. In this context, an external consultant is someone hired to provide advice in an area of expertise, but who would generally have no direct authority to implement change. This is separate and distinct from services outsourced or contracted out. Outsourced services are roles normally existing within the organization and under the direction of the management structure of the organization. However, for various reasons Management has decided to hire an external organization to perform these services. In the simplest of terms, consultants advise on how to do something, outsourcing providers actually do it. In some cases, it can be difficult to distinguish between the two, in part because many firms provide both consulting and outsourcing services 1. In this review, the OAG has (with significant input from the business units) isolated the advice-related consulting services which HRM obtained between 2007/08 and 2010/11. The services identified by the business units as outsourced services are anticipated to be reviewed in a later project. 1 International Association of Outsourcing Professionals, Welcome to Out sourcing, Office of the Auditor General Page 3
4 Once the advice-related consulting services were identified, the OAG reviewed various information including those business units using consultants, the types of consulting services being procurred, how often HRM hired consultants, as well as which consultants HRM regularly engaged. Based on the data received, it is apparent HRM purchases a wide range of consulting services such as engineering, architecture, site planning, human resources, urban design and legal. As identified in a Report by the Comptroller and Auditor General, through the National Audit Office of the United Kingdom: Consultants, when used correctly, can provide great benefit to clients. Using consultants can provide access to skills that it is not necessary, sensible or economic for the organisation to build or maintain itself. Organisations typically use consultants for one of three reasons: 1. People access to specialist skills. 2. Process knowledge on how to approach a task. 3. Perspective an independent view; new innovative thinking. 2 In addition, from the OAG s perspective, there is one additional potential reason: Capacity existing in-house resources are fully utilized and do not have the current capacity to take on a project which is a priority for the organization. 2 Report by the Comptroller and Auditor General, through the National Audit Office of the United Kingdom, 14-Oct-10, Central Government s Use of Consultants and Interims, page 4, item 3. Office of the Auditor General Page 4
5 Executive Summary The primary objective of this project was to determine if there are sufficient governance and accountability structures in place to ensure the hiring of external consultants by HRM is the most efficient and effective means of achieving the desired outcome and if HRM is receiving best value for money. The budgets approved by Regional Council generally include funding for external consultants, but based on the way the information is presented, the amounts and justification for hiring the external consultants are not transparent or obvious. It can be difficult to determine if the organization is receiving value for money when hiring external consultants as it is dependent on several factors, such as: clearly defined requirements, the development of a standard with which to monitor and assess performance of the external consultants, overall governance and accountability structures including: a. overall corporate objectives, b. adherence to proper procurement practices (Note: this review did not look at procurement practices followed as these are the subject of a separate OAG report), c. documentation and measurement of the benefits received. HRM spends an average of $4.1 million per year on external consulting services Regional Council is HRM s governing body and as such, approves the funding for both the capital and annual operating budgets. The hiring of specific external consultants is approved at various levels in the organization depending on the dollar value of the contract, under the guidance of the Procurement Policy Administrative Order #35. As such, the budgets approved by Regional Council generally include funding for external consultants, but based on the way the information is presented, the amounts and justification for hiring the external consultants are not transparent or obvious. As the data within this report will show, the use of consultants is widespread across the organization and coded to a variety of accounts within the HRM general ledger, often based upon the function performed. As a result, it is difficult and time consuming to identify the costs incurred by HRM related to the use of external consultants. Based on the information provided to the OAG, it appears there is little or no review or reporting done within HRM regarding the use of external consultants. The purpose of the following summary is to highlight the key areas the OAG feels HRM Administration can improve upon related to the hiring of external consultants. The full report detailing the results of our review follows this summary. For clarity, we reiterate this project specifically excluded the services identified as outsourced or contracted out. Office of the Auditor General Page 5
6 During the course of this review, several key points became apparent to the OAG: 1. HRM spends an average of $4.1 million per year on external consulting services, the majority (81%) of which falls within the Capital program. 2. The amount spent by HRM on external consultants is increasing annually from $3.5 million in 2007/08 to almost $5.0 million in 2010/ There is no formal organizational guidance on when external consultants should or should not be hired. 4. There is no process approval required, except what is set out in Procurement Policy Administrative Order #35, which is based on contract value. 5. The OAG s research on best practices used in other municipalities noted it is common practice to have a specific policy on the hiring of consultants, as well as the requirement for a specific approval, supported by a business case identifying the reasons for the need to hire externally. Neither of these is in place at HRM. An overarching policy and a separate approval process, perhaps based upon dollar limits, would work to strengthen the corporate governance of an area incurring significant costs. It appears there is currently no reporting mechanism in HRM to provide accountability and transparency regarding the use of external consultants. 6. In addition, it appears there is currently no reporting mechanism in HRM to provide accountability and transparency regarding the use of external consultants. In fact, through the course of this review, the OAG was unable to identify definitively all of the consulting expenses incurred during the period under review. However, we did not feel dedicating additional time and OAG resources was appropriate or warranted as it was felt the efforts undertaken had provided sufficient information to allow for the writing of this report. This point is raised as the OAG questions how HRM can ensure it is following best practices and providing the accountability and transparency necessary, if the organization cannot easily identify all related costs. 7. As part of this review, the OAG reviewed a sample of expenditures identified as incurred due to specific expertise being required. However, the documentation provided did not identify the specific expertise required or why it was lacking within the organization. This leads the OAG to suggest the need for the development of business cases clearly identifying what expertise is needed and why it is felt to be unavailable within the organization. 8. In the absence of this process and with the results of the review of the expenditures mentioned above, it is reasonable to conclude in the current situation, decisions to hire external consultants could be made without a full understanding of what expertise is needed or what is available in-house. Office of the Auditor General Page 6
7 9. HRM Administration repeatedly hires the same expertise from external consultants (often from the same vendor). Engineering, architecture and corporate services expertise (human resources, legal and communications) appear to be those hired most often. The lack of documentation supporting the basis for the repeated hiring of external consultants raises a number of questions for the OAG. Does HRM not have the right expertise in-house, and if not, why not? Is HRM using our internal staff appropriately? Does HRM have sufficient staff to complete the work required? Throughout the course of this review, it became clear (to the OAG) that HRM s spending on external consultants is increasing and the area responsible for incurring the majority of the consulting charges is the Capital Program. Overall, in the view of the OAG, there is a strong need for increased governance, accountability and oversight structures within HRM with regard to the hiring of external consultants in order to ensure HRM is receiving best value for money Overall, in the view of the OAG, there is a strong need for increased governance, accountability and oversight structures within HRM with regard to the hiring of external consultants in order to ensure HRM is receiving best value for money. This could happen in a number of ways, including: 1. implementation of a corporate policy which includes measurable criteria regarding the use of consultants, 2. implementation of regular reporting on the use of external consultants, 3. implementation of an approval process using a business case approach to ensure hiring decisions have been well researched and are the best approach, 4. implementation of a process of performance management for consultants to ensure they are providing services at the level and quality expected and outlining mechanisms to deal with inadequate performance. This provides recourse for existing contracts and informs future decisions, 5. development of a definition and guidance for staff regarding what constitutes a consulting services charge, 6. implementation of a policy regarding the specific account coding to be used for consulting services acquired so complete and accurate reporting can be done. Office of the Auditor General Page 7
8 Scope This project focused on the processes used to determine if HRM s hiring of external consultants was in keeping with the organization s goals and objectives, and looked at expenses processed between April 1, 2007 and March 31, Data was reviewed from a number of different perspectives, including who the major users were, what services HRM acquired, did HRM do recurring business with the same organizations, etc.. For purposes of this project, the OAG s defined consulting services as professional services primarily focused on providing advice in a particular area of expertise, for a limited time or specific project or a one-time task. Included in the project were all HRM business units, the Halifax Public Libraries, and the Halifax Forum. The project excluded the Halifax Regional Water Commission at this time. As noted earlier, this project excluded the provision of services to outsource capacity (contracting out). Given the magnitude of the expenditures for these services, a separate review of this area is contemplated. Objectives The overall objective of the project was to determine if there are sufficient and appropriate processes, procedures and policies in place to ensure HRM uses external consultants only when it is the most efficient and effective use of HRM resources. The OAG also considered whether HRM is a learning organization, developing its staff with the use of and working with, the external consultants. Methodology The baseline data was retrieved from SAP for expenses processed between April 1, 2007 and March 31, The information from SAP was filtered using the definition of consultants noted in the Scope section above and separated by the business unit responsible for the purchase. Business unit staff were provided with a list of purchases related to their areas of responsibility and were asked to: 1. confirm the completeness of their list, 2. confirm the items listed were in fact charges for consulting activities as defined within the scope of this review, 3. provide information with respect to the types of expertise acquired, and 4. provide the reason external services were hired rather than using internal services. Office of the Auditor General Page 8
9 The OAG compiled the information returned from the business units and identified who were the largest users of consulting services, what services/ expertise were being acquired and what the rationale was for hiring externally. Once the primary users were identified (the Capital program, Infrastructure and Asset Management, and Community Development) 3, key staff were interviewed to discuss the process used to identify their needs related to external consulting services. The OAG also discussed how they obtained the services (tendered, RFP, sole source, etc.), what formal and informal processes and policies existed for hiring external consultants, and what was the knowledge transfer to staff at the end of the process. Key Performance Indicators - Value for Money As has been pointed out in previous reports prepared by the OAG, the creation and monitoring of appropriate measures of efficiencies and economies with respect to any expenditure is difficult. As is customary with OAG projects, two approaches to the review of the use of consulting services could have taken place: one being of a compliance nature, the second more focused on performance. Ideally, the OAG would prefer Management have fully developed performance processes and measures in place with respect to all significant expenditures or expenditure categories. Had these processes and measures been in place, the OAG would have been able to undertake an independent review of the validity of the data compiled by Management, otherwise known as an attest function. In the development of a performance matrix for use in the public sector, the question of what the key stakeholders (the public) might expect is of great importance. The literature suggests and the OAG concurs, the development of a true performance matrix is a complex matter, which has many critical components including benchmarking. However, for purposes of the public s expectation, it is fair to say two questions likely are relevant: Are consulting contracts awarded fairly? Do the contracts result in value for money? With the above comments regarding processes and measures in mind, the following provides a basis for comments on the part of the OAG as to performance related to the ongoing engagement of consultants. Possible ad hoc framework: With any review of key performance indicators, a fundamental question which needs to be answered is, does the expenditure in fact, have to be incurred? 3 The business units referenced in this report are based on the reporting structure in place when the project was started and do not reflect the revised structure which came into effect on October 3, Office of the Auditor General Page 9
10 In answering the question of whether an expenditure needs to be incurred, several questions are relevant: - Are alternatives to the expenditure available? - Is the expenditure strategic (relates to Council Focus Areas) or does it address a strategic risk? - Does the expenditure need to be incurred at this time? After the above are answered, the fundamental question of value needs to be answered. Does the expenditure add value? Once the question of value is answered, three basic questions around performance are appropriate: - Is HRM making the most of available resources and are we using these resources in the most economical way? - Are processes being designed to minimize costs? - Are specific aims and goals being met directly through the expenditures being incurred? Also, as has been the previous practice of the OAG, the question of risk management becomes relevant. In this context, the OAG kept two questions in mind as this project was undertaken: - What, if any, risks to the organization exist by incurring the expenditure? - What, if any, risks to the organization exist by not incurring the expenditure? With the above as a backdrop, many of the recommendations contained in this report have as their basis the questions listed above relating to both performance and risk. Office of the Auditor General Page 10
11 Summary of Recommendations The OAG recommends HRM Administration develop a corporate policy regarding the hiring and use of external consultants to ensure all decisions to hire are fully vetted against a policy and set of criteria to ensure the most efficient and effective use of HRM resources. This policy should provide guidance regarding when a consultant can and should be hired, what documentation is needed to support the decision and what are the approval and reporting requirements In conjunction with the policy (2.0.1), the OAG recommends HRM Administration develop an approval process, requiring business units to prepare a business case for hiring external resources for any contracts above a specified dollar value. The business case should identify the expertise required, how it compares to the resources currently on staff, how it will assist in developing in-house staff for future requirements and a cost-benefit analysis compared to other options. It is important this process be a full and robust process, not just a cursory paperwork exercise. The approval process should be completed prior to any procurement activity commencing, and the documentation should be retained so the rationale for decisions can be reviewed in the future, if necessary The business case prepared (2.0.2) to justify hiring the external consultants should specifically address what skills existing staff do not possess and why the external consultant is needed In addition to developing a policy regarding the hiring of external consultants, the OAG also recommends HRM Administration develop a policy regarding budgeting for the use of external consultants. This could include requiring business units provide the Finance - Budget Office with information such as proposed business plans which support the amount of budget requested or allocated for use of external consultants. This would also enable the organization to identify whether the expense was budgeted/ planned when considering a request for approval to purchase and allow for planned versus actual comparisons in order to provide increased transparency. Office of the Auditor General Page 11
12 3.0.1 RFPs issued when specific expertise is required should clearly specify the expertise HRM is looking for in addition to the work to be done and deliverables required. The evaluation criteria for the proposals submitted should be weighted towards expertise The OAG recommends each business unit provide an annual report to the CAO outlining consulting services incurred. This report should include for each RFP or consultant engaged: specific identification of what expertise was not available internally, which consultant was hired to provide the expertise, the original budget, final cost and an explanation of any significant variance, a discussion of how HRM plans to manage in the future i.e. was it a one-time project with expertise not being needed again, developing expertise internally, recruiting, etc HRM Administration should provide a report to Regional Council (perhaps through the Executive Committee) on an annual basis (as a minimum) regarding all professional expertise acquired from external consultants, and should include information which identifies the highest areas of usage. This reporting could be organized by Council Focus Area to give increased transparency regarding the costs associated with implementing the strategic initiatives. The OAG contemplates this reporting would occur annually, in conjunction with the reporting and approval of the annual budget. In researching best practices used by other municipalities, the City of Regina provided a good example of transparent and informative reporting on the use of consultants Given the frequency of use and significant dollars attributed to the expertise categories noted, the OAG recommends HRM Administration review the specifics around external human resources, information technology, legal and communications consulting services provided and investigate if there is a more cost effective way to access the services The OAG recommends HRM Administration identify the core competencies needed by the organization and for the individual roles within the organization. Once this is completed, it should then be used to assist with the creation of an overall competency map, identifying the areas where HRM is missing any necessary core competencies. Office of the Auditor General Page 12
13 5.0.2 The OAG recommends HRM Administration create a database of staff expertise based on core competencies, which should be used to determine what expertise is available in-house prior to hiring an external consultant The OAG recommends HRM carefully consider the circumstances where it has traditionally hired external consultants to determine if there are opportunities to engage existing staff as a developmental opportunity Given the current significant use of consultants by HRM, the OAG recommends establishing and adopting a process and criteria for assessing the performance of external consultants to be used to inform future decisions The OAG recommends HRM Administration determine the level of detail it feels necessary to manage the use of external consultants, identify the general ledger accounts which would be used to accomplish this and set a policy on the appropriate coding for the use of consulting services While the following recommendation is not part of the scope for the project, it results from the work undertaken which was within the scope. The OAG recommends HRM Administration review the current chart of accounts and identify any accounts not used regularly, and determine those which do not assist the organization with its financial management. There are currently 496 general ledger accounts available for use for income and expenditure related entries. During the 2009/10 fiscal year, there were entries posted to 339 of these accounts within the HRM operating accounts. In addition, there are a further 991 general ledger accounts available for use for balance sheet related items. Even taking into consideration HRM is a large, complex organization, this number of accounts appears high. Office of the Auditor General Page 13
14 9.0.3 While the following recommendation is not part of the scope for the project, it results from the work undertaken which was within the scope. The OAG recommends HRM Administration develop a policy regarding the use of all general ledger accounts, including updating the account definitions and ensuring the list is widely distributed within the organization While the following recommendation is not part of the scope for the project, it results from the work undertaken which was within the scope. The OAG recommends HRM Administration implement a process of regularly reviewing all general ledger accounts in order to ensure consistent use. Management Response I have reviewed the report Use of External Consulting Services Fiscal Years 2007/08 through 2010/11, submitted to me on March 26, 2012 by your office and am in agreement with the recommendations. HRM Administration has, as is now our stated practice, taken the individual recommendations under consideration and will develop a more comprehensive management response and work plan to address each individual issue identified in the report. In keeping with past practices, the Audit and Finance Committee of Council will be briefed on the detailed response and fully engaged as work progresses. HRM Administration will continue to work with the committee to ensure that the range of recommendations made by your office are addressed in a coordinated and appropriate manner, while maintaining a high level of transparency and accountability in reporting. CAO Richard Butts Office of the Auditor General Page 14
15 Detailed Findings and Recommendations Office of the Auditor General Page 15
16 1.0 Overall Cost of Consultants Hired by Business Units Given the way HRM records these expenses, it was difficult to identify definitively all consulting charges. Based on the review of the data received, the OAG was able to conclude HRM spent at least $16.7 million on external consulting services during the four-year period under review. The starting point for this project was a review of data retrieved from HRM s financial system (SAP) in order to identify expenses processed between 2007/08 and 2010/11 for consulting services as defined in the Scope section of this report. Given the way HRM records these expenses, it was difficult to identify definitively all consulting charges. (The issue of HRM s approach to coding its consulting expenses will be discussed in detail in Section 9.0 of this report). Once the list of potential consulting expenses was compiled, it was provided to the business units with the request they review the list, confirm which items were consulting services and confirm the list contained all consulting service charges as defined. Additionally, for the items identified as consulting services, the business units were asked to provide information such as the reason for hiring the external consultant and the type of expertise or service hired. The OAG then compiled and reviewed the data provided by the business units. Based on the review of the data received, the OAG was able to conclude HRM spent at least $16.7 million on external consulting services during the four-year period under review, primarily due to the perceived need by business units for specific expertise. This amount includes costs related to both operating and capital activities. Operating expenses are defined as costs arising during the ordinary course of running an organization and include items such as salaries, legal fees, bank charges, office supplies, utilities, insurance, etc. Operating expenses are incurred for items related to the operations of the organization during a specific period and are not generally expected to create a lasting benefit extending beyond the end of the accounting year. Alternatively, capital expenses arise when an organization incurs costs either to acquire a new capital asset (through purchase or construction) or to add value to an existing capital asset with a useful life extending beyond a year. Capital expenses are related to physical assets. The costs related to capital assets are included in operating expenses in the form of an annual amortization charge as well as, for example debt service charges (principal and interest). At HRM, the Capital program is managed by the Infrastructure and Asset Management business unit. Both capital and operating expenses are critical components of a diversified organization such as HRM. As a result, both need to be included in this review to gain a complete picture of the organization s use of external consulting services. Office of the Auditor General Page 16
17 As shown in Chart 1 below, the cost of the external consultants hired has increased every year during the period under review (+7% in 2008/09, +20% in 2009/10, +10% in 2010/11 for an overall increase for the 4-year period of 41%) The information received from the business units showed HRM used external consulting services primarily in the Capital program. As shown in Chart 2, during the fouryear period under review, the Capital program incurred $13.5 million of the total $16.7 million. It is interesting to note costs incurred related to the use of external consultants in the Capital program increased significantly each year under review (+7% in 2008/09, +28% in 2009/10, and +21% in 2010/11 ) for a total increase of 65% for the period under review. The information received from the business units showed HRM used external consulting services primarily in the Capital program (the area responsible for the purchase or upgrading of HRM s capital assets such as its buildings, equipment, roads, sidewalks, etc.) and within three operational business units (Infrastructure and Asset Management (IAM), Community Development (CD) and the Office of the Chief Administrative Officer (CAO)). As shown in Chart 2, during the four-year period under review, the Capital program incurred $13.5 million of the total $16.7 million. It is interesting to note costs incurred related to the use of external consultants in the Capital program increased significantly each year under review (+7% in 2008/09, +28% in 2009/10, and +21% in 2010/11) for a total increase of 65% for the period under review. Comparatively, the gross budget for the Capital program increased by a net of 21% over the same period (+53% in 2008/09, -26% in 2009/10, and +11% in 2010/11). The OAG notes the receipt of stimulus funding can impact the timing and hiring of consultants. Comparatively, the gross budget for the Capital program increased by a net of 21% over the same period (+53% in 2008/09, -26% in 2009/10, and +11% in 2010/11 ). Office of the Auditor General Page 17
18 External consultants were used in approximately 69% of capital projects When reviewing the use of external consultants by the Capital program, the OAG was curious as to how prevalent the use of consultants was. Were most of consulting services incurred for a few significant projects or was the use of consultants a regular part of delivering the capital program? Based on the data available, the OAG has calculated external consultants were used in approximately 69% of the projects, leading to the conclusion HRM uses consultants as a regular tool in delivering the Capital program. Given the significant and regular use of consultants in the Capital program, the OAG wonders why HRM is accepting of not having the expertise on staff and if the heavy reliance on consultants in the past is still considered efficient and effective going forward. As noted earlier, as part of ongoing business operations, there were three business units which incurred the majority of external consulting expenses: Infrastructure and Asset Management (IAM) $0.89 million, the Office of the Chief Administrative Officer (CAO) $0.68 million and Community Development (CD) $0.68 million (see Chart 3 below). The remaining business units incurred less than $0.5 million each. Office of the Auditor General Page 18
19 Office of the Auditor General Page 19
20 2.0 Lack of Formal Policies Regarding Hiring of Consultants During this review, business unit staff advised the OAG there is no specific policy regarding the use or hiring of external consultants. This lack of a specific policy combined with inconsistent coding of charges and the absence of reporting on the use of consultants, highlights a lack of control and oversight at both the business unit and corporate levels. As suggested in the ad hoc performance framework, when considering the hiring of external consultants, business units should ensure the expenditure is both necessary and represents the most efficient and effective use of HRM s resources. During this review, business unit staff advised the OAG there is no specific policy regarding the use or hiring of external consultants. The only formal guidance is contained in Procurement Policy Administrative Order #35, which guides the overall purchasing activity for the organization. This lack of a specific policy combined with inconsistent coding of charges and the absence of reporting on the use of consultants, highlights a lack of control and oversight at both the business unit and corporate levels. Given the magnitude of spending on consultants, it would seem a degree of formal oversight would be appropriate, at both the business unit and overall organizational levels. Recommendations: The OAG recommends HRM Administration develop a corporate policy regarding the hiring and use of external consultants to ensure all decisions to hire are fully vetted against a policy and set of criteria to ensure the most efficient and effective use of HRM resources. This policy should provide guidance regarding when a consultant can and should be hired, what documentation is needed to support the decision and what are the approval and reporting requirements In conjunction with the policy (2.0.1), the OAG recommends HRM Administration develop an approval process, requiring business units to prepare a business case for hiring external resources for any contracts above a specified dollar value. The business case should identify the expertise required, how it compares to the resources currently on staff, how it will assist in developing in-house staff for future requirements and a cost-benefit analysis compared to other options. It is important this process be a full and robust process, not just a cursory paperwork exercise. The approval process should be completed prior to any procurement activity commencing, and the documentation should be retained so the rationale for decisions can be reviewed in the future, if necessary The business case prepared (2.0.2) to justify hiring the external consultants should specifically address what skills existing staff do not possess and why the external consultant is needed. Office of the Auditor General Page 20
21 2.0.4 In addition to developing a policy regarding the hiring of external consultants, the OAG also recommends HRM Administration develop a policy regarding budgeting for the use of external consultants. This could include requiring business units provide the Finance - Budget Office with information such as proposed business plans which support the amount of budget requested or allocated for use of external consultants. This would also enable the organization to identify whether the expense was budgeted/ planned when considering a request for approval to purchase and allow for planned versus actual comparisons in order to provide increased transparency. Office of the Auditor General Page 21
22 3.0 External Consultants Engaged as Specific Expertise Required As indicated in Table 1 below, for 87% of purchases, the need for specific expertise was identified as the reason for the purchase. As part of the data collection process for this project, the OAG asked business unit/program staff to identify for each charge, why external consulting services were engaged. As indicated in Table 1 below, for 87% of purchases, the need for specific expertise was identified as the reason for the purchase. This accounts for $14.5 million of the $16.7 million spent on external consulting services during the four-year period reviewed. Table 1: Rationale for Hiring Consulting Services, Capital Program and Operational Business Units Combined Fiscal Year Fiscal Year Fiscal Year Fiscal Year 4-Year Rationale for Expenditure 2007/ / / /11 Total % Specific expertise required $ 2,870,467 $ 3,471,154 $ 3,353,737 $ 4,845,424 $ 14,540, % Capacity 621, , ,012 98,101 1,664, % Capacity and specific expertise 5,307 38, , , % Other 7,492 1,855 68,050 3,761 81, % Total $ 3,505,239 $ 3,746,939 $ 4,511,657 $ 4,947,286 $ 16,711, % In order to understand how the specific expertise required was identified and acquired, the OAG reviewed a sample of thirteen (13) Request for Proposal (RFP) files for consulting services. Each RFP file contained an original Request for Proposal, which outlined the specifics HRM required from each respondent as well as the evaluation criteria assigned to each requirement under evaluation. The evaluation criteria were broken out into seven to eight sections depending on the RFP. The sections were as follows: project team/capability, understanding, methodology, work plan, fee schedule, past/related experience, innovation and overall quality and compliance. If the justification for hiring a consultant was the need for a specific expertise, it would seem reasonable for the RFP evaluation process to reflect this clearly, either by the specific expertise required being outlined in the RFP itself, or through a heavier weight assigned to the project team/ capabilities criteria. Office of the Auditor General Page 22
23 RFPs in our sample did not clearly outline a specific expertise expected/required and the highest weights in the RFP evaluation were generally for Methodology and Understanding. In the majority of RFPs reviewed, it seemed HRM was seeking to hire expertise the OAG would assume HRM likely had on staff. The RFPs in our sample did not clearly outline a specific expertise expected/ required and the highest weights in the RFP evaluation were generally for Methodology and Understanding. In reviewing these RFPs, the OAG developed two main areas of concern: 1) The RFPs reviewed did not clearly identify the skills or expertise HRM was seeking. The deliverables were identified, but the skills or expertise required were not separately identified. As a result, the OAG questions if HRM truly understands the expertise needed and if Management understands what expertise exists within staff or if HRM hires external consultants primarily as a way to manage workload or public expectations. 2) In the majority of RFPs reviewed, it seemed HRM was seeking to hire expertise the OAG would assume HRM likely had on staff (i.e. engineering, traffic design, communications, public relations, project management, development of design and construction documents, the ability to create a strategic plan or provide an operational review) given the job titles and roles held by many staff members. This raises questions for the OAG regarding how HRM assesses the need to hire external consultants when it seems reasonable to assume it has or ought to have staff resources with same or similar skill sets and expertise. Given the results of our sample, the OAG has a number of questions: How does HRM know the external consultants to be engaged have the expertise needed? Given the needed expertise is not clearly articulated in many of the RFPs reviewed by the OAG, how does HRM know it is obtaining the needed expertise? How does HRM hold business unit managers accountable for managing their resources appropriately? Does HRM have the right expertise in-house? In addition, in several RFP responses in the sample reviewed, a detailed breakdown was provided of the team members proposed by the bidder, the number of hours expected to be billed by member and the billing rate. Given the level of base information available, it would seem reasonable to expect HRM would prepare a cost/benefit analysis before any further external consultants are hired who have similar expertise to existing staff. This leads the OAG to wonder why it was felt HRM staff did not have the capability to be forward thinking and how HRM assesses this expertise in external consultants. In some cases, business units indicated they needed external individuals who had been involved in leading edge, world-class projects of a similar type. This leads the OAG to wonder why it was felt HRM staff did not have the capability to be forward thinking and how HRM assesses this expertise in external consultants. This finding is consistent with other work completed by the OAG. The report Review of Request for Proposal (RFP) Process Procurement, released January 2012 also speaks to the need for better definition and weighting of the technical evaluation criteria. Office of the Auditor General Page 23
24 In fact, it appears staff may not be given credit for the expertise they possess. Generally, the effort placed on defining the need for consultants and the outcomes expected from the engagements appears to be limited and informal. The OAG understands the business units who make the most use of consultants do attempt to assess available in-house expertise prior to hiring externally. However, based on discussions with HRM staff, the effort put into assessing alternate methods of achieving desired results is done at a high level and on an informal basis. As a result, consultants may be used when in-house staff have the necessary expertise to undertake the work. In fact, it appears staff may not be given credit for the expertise they possess. Business units need to always consider and articulate what specific expertise is needed and whether the expertise is available from within HRM before turning to external consultants. If consultants are the only option, then business units need to define from the outset the benefit and measurable outcomes they expect to achieve. Based on the RFPs reviewed, there appears to be no clear delineation organizationally or by business unit as to when HRM is hiring for a specific expertise or simply hiring capacity. Recommendation: RFPs issued when specific expertise is required should clearly specify the expertise HRM is looking for in addition to the work to be done and deliverables required. The evaluation criteria for the proposals submitted should be weighted towards expertise. Office of the Auditor General Page 24
25 Human Resources $703,380 Engineering $471,762 Legal $363,126 Master Planning $337, Types of Expertise Hired Operating Business Units After determining the reason for hiring external consultants and understanding the focus on expertise, the OAG then looked at what type of expertise was procurred. As shown in Chart 4 below, within the operating business units, the primary areas of expertise acquired were human resources ($703,380), engineering ($471,762), legal ($363,126), and master planning ($337,027). Given the staff funding resources allocated to the various business units within HRM, the OAG again wonders why HRM repeatedly spends significant amounts to hire external expertise when staff could reasonably be expected to have the expertise. For example, engineering expertise given the number of engineers on staff, employee recruitment fees when HRM has a robust Human Resources department or the communications and public relations expertise given HRM has a section dedicated to Communications and External and Corporate Affairs. Office of the Auditor General Page 25
26 Given the staff funding resources allocated to the various business units within HRM, the OAG wonders why HRM repeatedly spends significant amounts to hire external expertise when staff could reasonably be expected to have the expertise. Capital Program Within the Capital program, as expected, engineering expertise ($8.1 million) is the most used, followed by architecture ($2.1 million), site planning ($726,746) and urban design ($547,758) (see Chart 5 below). Recommendations: The OAG recommends each business unit provide an annual report to the CAO outlining consulting services incurred. This report should include for each RFP or consultant engaged: specific identification of what expertise was not available internally, which consultant was hired to provide the expertise, the original budget, final cost and an explanation of any significant variance, a discussion of how HRM plans to manage in the future i.e. was it a one-time project with expertise not being needed again, developing expertise internally, recruiting, etc.. Office of the Auditor General Page 26
27 3.1.2 HRM Administration should provide a report to Regional Council (perhaps through the Executive Committee) on an annual basis (as a minimum) regarding all professional expertise acquired from external consultants, and should include information which identifies the highest areas of usage. This reporting could be organized by Council Focus Area to give increased transparency regarding the costs associated with implementing the strategic initiatives. The OAG contemplates this reporting would occur annually, in conjunction with the reporting and approval of the annual budget. In researching best practices used by other municipalities, the City of Regina provided a good example of transparent and informative reporting on the use of consultants. Office of the Auditor General Page 27
28 3.2 Services Hired by Most Business Units When reviewing the data from a different perspective, it becomes apparent there were similarities in specific expertise sought externally across a majority of business units. Over the four-year review period, 10 of the 13 business units hired external human resources expertise, 9 of the 13 business units hired external legal expertise, 7 of the 13 business units hired external communications/public relations expertise and 6 of the 13 business units hired external engineering and information technology expertise as shown in Table 2. Table 2: Consulting Expertise Obtained by Multiple Business Units for Fiscal Years 2007/08 to 2010/11 Inclusive Number of Business Units Type of Expertise Purchased Obtaining Expertise 4-Year Total Annualized Average Human Resources 10 $ 708,465 $ 177,116 Legal 9 549, ,409 Communications/Public Relations 7 253,316 63,329 Engineering 6 8,606,952 2,151,738 Information Technology 6 295,569 73,892 Architecture 5 2,203, ,976 Facilitation 5 52,307 13,077 Master Planning 4 495, ,769 Project Management 4 153,620 38,405 Site Planning 3 741, ,253 Financial Analysis 2 96,114 24,029 Strategic Planning 2 181,468 45,367 Urban Design 2 570, ,640 Assistance Writing RFP 1 119,652 29,913 Commissioning 1 91,444 22,861 HAZMAT Study 1 47,096 11,774 Police Resourcing Study 1 129,697 32,424 Preservation/Conservation 1 242,375 60,594 Real Estate 1 59,025 14,756 Specified Procedures Audit - E-voting 1 66,399 16,600 Survey Design and Delivery 1 71,800 17,950 Wide Range of Transit Expertise 1 333,744 83,436 Other 641, ,474 Total $ 16,711,121 $ 4,177,780 Office of the Auditor General Page 28
29 It is interesting to note the expertise obtained by multiple business units are primarily areas related to Corporate Service departments Human Resources, Legal, Information Technology, and Communications. This trend raises questions regarding the level and/ or type of services the business units are receiving as corporate administrative support. Data provided by the business units identified an additional $861,376 spent on external legal services, $1.69 million on external information technology services, and $75,360 on communications, marketing and public relations services over the 4-year period, which were categorized as contracting out. It is interesting to note the expertise obtained by multiple business units are primarily areas related to Corporate Service departments Human Resources, Legal, Information Technology, and Communications. This trend raises questions regarding the level and/or type of services the business units are receiving as corporate administrative support. It is interesting to note the Human Resources business unit was one of the heaviest users of external human resources consultants, accounting for 41% of all consulting expenses identified as human resource related. The CAO business unit was one of the heaviest users of communications/public relations expertise (49%). It is also interesting to note, Legal Services incurred none of the legal consulting expenses. As well, data provided by the business units identified an additional $861,376 spent on external legal services, $1.69 million on external information technology services, and $75,360 on communications, marketing and public relations services over the 4-year period, which were categorized as contracting out as opposed to consulting. This is in addition to the totals presented in Table 2. Recommendation: Given the frequency of use and significant dollars attributed to the expertise categories noted, the OAG recommends HRM Administration review the specifics around external human resources, information technology, legal and communications consulting services provided and investigate if there is a more cost effective way to access the services. Office of the Auditor General Page 29
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