Consultants Cost the Public Less, Not More

It’s commonly assumed that consultants, with their high hourly billing rates, cost the public more than comparable public employees. It’s a flawed assumption. Let’s compare:

First, public employees receive pensions and lifetime health benefits that no business operating in the real world could ever pay. These create costly unfunded liabilities now in the trillions nationwide, and taxpayers are on the hook. When converted to their present value, these otherworldly benefits significantly inflate the true cost of public workers, far beyond their salaries.

Second, all overhead costs, including benefits, paid time off, office space, insurance, utilities, computers, software, vehicles, and administrative support, etc., apply to both groups. Consulting firms total ALL overhead to calculate consultants' hourly rates, while for public employees, overhead is buried in agency budgets, obscuring the actual employee cost. A like-for-like comparison of ALL overhead factored into public employee cost paints a very different picture.

Third, performance management differs sharply. Public agencies operate as monopolies with no rivals to compel performance. Public employees, protected by unions and bureaucratic processes, are difficult to fire for underperformance. So, taxpayers bear the cost of their underperformance and inefficiency, which varies from agency to agency. Consultants, on the other hand, are forced (and incentivized) by the competitive marketplace to perform, innovate, and consistently deliver value at a high level. Mediocre employees can be removed immediately when they underperform.

Ahhh, but what about the consultant's profit? Good question. The owners of a consulting firm bear 100% of the financial risks associated with the firm. By contrast, 100% of the financial risks associated with a public agency are borne by... the public. For all the risks, and there are many for both, the consulting firm might eek out a 10-20% profit to compensate. But a million things have to go right to make that happen. Once earned, that profit is immediately taxed, typically 35-50% depending on the state, thereby returning as much as half of the profit to the public. The public is the de facto half-owner of all consulting firms, receiving as much as half of their profit while incurring zero risk. Compare that to public agencies, where the public gets no profit but bears 100% of the enterprise risk.

Punchline: The reflexive assumption that consultants cost more than comparable public employees overlooks the long-term financial burden of unfunded pension and health benefits, ignores the full cost of agency overhead, and fails to account for the inherent inefficiency and underperformance of a monopoly. Total them up, and sprinkle in the public’s 35-50% zero-risk stake in consulting firm profits, and the financial case to maximize Public Private Infrastructure Stewardship is clearly made. Consultants cost the public less, not more.

Have a great weekend!

Caveat: It is possible for a public agency to perform at a high level, but an exceptional self-motivated leadership culture would be required to overcome its inherent challenges.

Dave

Feedback and blowback are always welcome: dave@goodnewsfriday.com

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