Ottawa turns to consulting firm McKinsey to fix Phoenix pay system, doubling spending on outsourcing

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The flow of tax dollars to global consulting firm McKinsey and Company has increased significantly as the Liberals have turned to the company for help with the struggling Phoenix pay system and other issues, a Globe and Mail analysis of federal outsourcing contracts shows.

The former Conservative government did very little business with McKinsey during its final years in power, but after the Liberals formed government in 2015 spending on the firm’s services began to accelerate. The spending nearly doubled last year as the COVID-19 pandemic worsened.

Five federal departments paid a combined $17.2-million to McKinsey during the 2020-21 fiscal year, compared to $9.3-million the previous year and $3.4-million the year before that. Throughout this period of increased spending, the government maintained close ties with Dominic Barton, who was until 2018 the firm’s head.

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The payments are likely to be even higher this fiscal year. McKinsey was awarded a $4.9-million contract in Feb. 2020 to help improve the problem-plagued Phoenix system, which handles payroll for the federal government. That contract has since been amended three times, with the latest change, in December, bringing its estimated total value to $27.7-million. A majority of that will be booked in the current fiscal year.

The Liberals’ increasing use of McKinsey for advisory services is part of a larger trend. A Globe and Mail analysis found that federal spending on outsourcing contracts in the category of professional and special services has increased by more than 40 per cent since the Liberals formed government in 2015. The jump from $8.4-billion in 2015-16 to $11.8-billion in 2020-21 occurred even though the Liberal Party’s 2015 campaign platform promised to cut back on the use of external consultants.

McKinsey is headquartered in New York City and is among the world’s largest consulting firms. Mr. Barton was an early adviser to the Trudeau government. For the government’s first two years, he chaired former finance minister Bill Morneau’s advisory council on economic growth while still leading the firm.

In Sept. 2019, after having left McKinsey, Mr. Barton was appointed as Canada’s ambassador to China. His foreign posting ended in December, and he will take over as chair of Australian mining giant Rio Tinto in May.

During the early days of the Liberal government, McKinsey gave members of Mr. Morneau’s council pro-bono support in areas such as research.

Mr. Barton would frequently be spotted heading in and out of meetings of the federal cabinet, where he provided his policy advice to ministers in closed-door sessions.

The short-lived council made several major policy recommendations that the government ultimately adopted, including the creation of a Canada Infrastructure Bank that would aim to attract private investment in Canadian projects.

The council also recommended significant increases to Canada’s annual immigration targets as a way of boosting the country’s economic performance. Records show that Immigration, Refugees and Citizenship Canada (IRCC) awarded McKinsey a $16.3-million contract in 2019 to advise the department on “transformation strategies.” A 2021 amendment increased the value of that contract to $24.8-million.

Nancy Caron, a spokesperson for IRCC, said in a statement that the contract work with McKinsey involves “reviewing, developing, and implementing digital tools, processes, and services.” She said the contract was amended in 2021 to help the department deal with “pandemic-driven pressures.”

“The work outlined in the initial 2019 contract is not related to the work and advice of the federal expert Advisory Council on Economic Growth. The Advisory Council was only one of several voices in Canada urging IRCC to increase annual immigration levels and to make changes to our systems,” she said.

A 2020 report by the Professional Institute of the Public Service of Canada, a union that primarily represents scientists and professionals in the federal public service, found that outsourcing contracts in areas like IT often end up costing more than twice the initial estimates, after amendments. PIPSC President Jennifer Carr told The Globe in a recent interview that the “ballooning” costs of federal contracts hinder public transparency and accountability.

A review of 10 years’ worth of outsourcing data shows that federal spending with McKinsey had declined to zero in the two final fiscal years of Stephen Harper’s Conservative government. Then, in 2016-2017, the first full fiscal year of Justin Trudeau’s government, McKinsey received $1.8-million in federal work.

The Liberal government paid McKinsey $33.6-million over the period of five fiscal years that ended March 31, 2021.

The increase in federal outsourcing to McKinsey overlapped with a period of considerable controversy for the firm under Mr. Barton’s leadership. The company agreed in Feb. 2021 to pay nearly US$600-million for its role in advising clients on how to sell more opioid painkillers, such as OxyContin, amid the global opioid crisis.

A Congressional committee in Washington announced in November that it was launching an investigation into McKinsey’s “consulting practices and conflicts of interest” as well as its “apparent failure to monitor and prevent harmful practices.”

Public Works spokesperson Michèle LaRose said the department’s contract with McKinsey was awarded as part of the government’s “ongoing efforts to stabilize the Phoenix pay system and eliminate the backlog” in payroll errors that need to be resolved. She praised the work that McKinsey has done to date.

“McKinsey & Company is streamlining processes and standardizing work at the Pay Centre to increase efficiency and reduce processing times for pay transactions, as well as to build greater capacity through new ways of working,” she said in an e-mail. “They are also implementing strategies to increase efficiency and reduce errors, which will lead to decreased wait time for employees’ pay issues to be processed.”

The Phoenix system – which was itself based on IT work that was outsourced to IBM – was designed under the previous Conservative government and launched in 2016 by the Liberal government. Phoenix has since caused frequent errors that have left workers unpaid, underpaid or overpaid, resulting in widespread disruptions and distress throughout the public service.

The Globe and Mail reported in December that the government has paid $560-million in damages so far to public servants as a result of Phoenix problems. The cost of compensation is approaching twice the $309-million spent by the federal government between 2009 and 2016 to develop the Phoenix system, which was supposed to generate long-term savings.

The McKinsey contract to improve Phoenix is separate from a $16.9-million, eight-year contract to start replacing the system, which was awarded last year to Ceridian HCM Holding Inc.

Alley Adams, a spokesperson for McKinsey, said in a statement that the company supports government leaders by providing management and organizational expertise and follows applicable procurement laws and regulations.

“McKinsey is proud to work with public sector leaders, civil servants and others with their important work in delivering improved public services and outcomes for individuals,” she said in an e-mail.

Recently tabled government spending records for 2020-21 – which was the year of peak deficit spending during the COVID-19 pandemic – show McKinsey received payments from five separate government departments.

The firm received $6.8-million from IRCC for “management consulting,” $4.9-million from Public Services and Procurement Canada for “informatics services,” $2.7-million from National Defence for “other services,” $2.6-million from Innovation, Science and Economic Development (ISED) for “management consulting,” and $115,625 from Employment and Social Development for “temporary help services.”

The National Defence department said in a statement that the $2.7-million was for consulting services related to the Royal Canadian Navy’s “Digital Navy” program.

The Digital Navy Initiative is intended to promote innovation in the navy and advance the digitization and automation of processes, the department said.

Officials with ISED said the $2.6-million paid to McKinsey was to support the Industry Strategy Council, a panel primarily made up of business leaders, which produced a policy report in 2020.

Employment and Social Development Canada said the $115,625 paid to McKinsey was for “benchmarking services.”

In addition to Mr. Barton, other former senior advisers to the Liberal government have McKinsey connections.

Mike McNair, who spent five years as Prime Minister Justin Trudeau’s head of policy, joined McKinsey as an associate partner in Feb. 2021.

McKinsey said in a statement that Mr. McNair “was not involved in awarding any McKinsey contracts at any time during his time with the government.”

Jim Leech, a former president and chief executive of the Ontario Teachers’ Pension Plan, was a pro bono senior adviser to the Prime Minister in 2017 and 2018 for matters related to the Canada Infrastructure Bank. He has been a senior adviser to McKinsey since Sept. 2014.

Mr. Leech said in an e-mail Tuesday that there is no connection between his advisory work for the government and McKinsey, nor any connection between his advisory work and McKinsey’s federal contracts.

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