‘The over-reliance on consultancies erodes the capacity of the state to innovate and manage its enterprises effectively’
| Photo Credit: The Hindu
In May 2024, a report that the American consultancy group, Boston Consulting Group (BCG), was to be involved in the revival strategy of state-owned Bharat Sanchar Nigam Limited (BSNL) and that BSNL was to pay BCG ₹132 crore for the consultancy drew much attention. BCG has reportedly recommended reducing the workforce among other major steps. While this became a much-talked about news item, this is not a one-off event. In recent years, the public sector’s reliance on the services of external consultancy firms has increased exponentially — and not just in India but also worldwide. While the overall spending of the government is not available for India, there is some data available for other countries. For instance, France spent over €1 billion on intellectual services provided by consultancies in 2021, while the Australian government spent A$21 billion on external labour hire in 2021-22.
Need for scrutiny
The case of BSNL has once again drawn attention to the contentious issue of the growing influence of consultancy firms within the public sector. It raises important questions about the efficacy and the implications of outsourcing strategic decision-making in the public sector. Given the increased involvement of external consultancies, there is a need that this is scrutinised.
The central critique by most people is rooted in their lack of “skin in the game”. Consultancy firms are given projects and contracts to provide strategic advice but bear no responsibility for the outcomes of their recommendations. Like in this case, for example, if BSNL’s fortunes fail to improve despite the implementation of BCG’s strategies, the consultancy faces no consequences. This lack of accountability creates a troubling misalignment of incentives. The consultants are rewarded handsomely regardless of the results, while BSNL — and by extension, the Indian taxpayer — will bear the full brunt of any failure.
Moreover, such an arrangement undermines the very purpose of hiring external expertise: to deliver tangible improvements and long-term viability. Also, if you are paying someone to solve your problems without any major accountability, there will always be some problems left to be solved.
In addition, the over-reliance on consultancies erodes the capacity of the state to innovate and manage its enterprises effectively. Over time, this dependence on external expertise creates a vicious cycle. Instead of building internal capabilities, they become perpetually reliant on external advice — and this does not come cheap.
Impact on state capacity, conflict of interest
This kind of dependency has much broader implications for the state capacity. The skills and the knowledge learned by the consultancies on these projects are not transferred to the public officials. In effect, this sets up a negative feedback loop, where public sector employees lose skills and institutional knowledge, meaning, the next project or piece of work will still need external inputs.
The proliferation of consultancy contracts reflects a deeper crisis of confidence in the public sector’s ability to govern itself as well, by implicitly undermining their own legitimacy. This outsourcing of expertise not only weakens public institutions but also creates an unaccountable parallel bureaucracy of consultants who wield significant influence over public policy and resource allocation without subject to the same democratic oversight or accountability as public officials or political leaders.
Consultancy firms often serve multiple clients across industries, including competitors and regulators, which can create conflicts of interest. Their advice may be influenced by these overlapping relationships, raising questions about the impartiality and the integrity of their recommendations. The conflict of interest has recently been much debated in most countries leading to major consultancy firms considering breaking their various functions.
An additional problem is that the objectives of public sector enterprises are often very different from those of the private sector. Consultancy firms often approach problems from a profit-maximisation perspective, emphasising cost-cutting, efficiency, and market competitiveness. While these strategies might yield short-term gains, they may not align with the broader public service mandate of organisations. For instance, BSNL, as a public sector enterprise, has historically played a vital role in India’s telecommunications landscape, particularly in bridging the digital divide and bringing telecommunication services to rural and underserved areas. The aggressive cost-cutting measures might compromise the quality of service in rural areas, where BSNL’s presence is crucial in providing affordable telecommunications access. Overall, a purely market-driven strategy could divert the public enterprise’s focus from its social responsibilities, which will essentially undermine its role as a public goods provider.
What will work better
A better alternative, as Mariana Mazzucato and Rosie Collington, the authors of the book, The Big Con: How the Consulting Industry Weakens our Businesses, Infantilizes our Governments and Warps our Economies, suggest would be to invest in strengthening the internal capabilities of the public sector institutions. This could involve recruiting and training top talent, fostering a culture of innovation, and empowering employees to take ownership of the company’s strategic direction. They write, “Because knowledge is not cultivated within state workforces and institutions, a dependency on the ‘expertise’ of consultancies spirals.” By building internal expertise, these organisations could develop strategies that are not only effective but also aligned with their long-term goals and public service mandate. This will help them reclaim their strategic autonomy as well — which gets compromised with too much reliance on outside the system.
The case of BSNL and BCG serves as a microcosm of the broader debate about the role of consultancy firms in public sector governance, state capacity and accountability. There is a need for governments across the world to rethink this model of governance.
Aasheerwad Dwivedi is Assistant Professor (Economics), Faculty of Management Studies, University of Delhi. The views expressed are personal
Published – March 19, 2025 12:08 am IST
