Update: Following publication McKinsey provided amaBhungane with a more detailed response, which we have included.
In 2014, McKinsey and Regiments Capital received an at-risk consulting contract at South Africa Airways (SAA).
As amaBhungane’s latest investigation shows, the deal was as dirty as they come: leaked information, lobbying from a captured executive, the potential for astronomical fees. In the end McKinsey and Regiments walked away with a bloody nose and just R12.5-million.
“Making real decisions in business is a lot harder than getting paid to advise people what to do,” James O. McKinsey is alleged to have told a friend the day before he died.
Eighty one years later, the consulting firm that bears his name has perfected the art of turning speculative advice into gold and draining bank accounts with ideas before any real savings materialise.
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In July, McKinsey’s global head, Kevin Sneader, apologised for extracting R1-billion in fees from Eskom off the back of an unusually rapacious at-risk consulting contract.
Although the word “sorry” appeared 11 times in the speech he delivered at Gibbs Business School in Johannesburg, one word was missing: SAA.
In 2013, SAA issued a tender looking for consultants who could help it free up working capital. The tender indicated that SAA would prefer some form of profit share rather than simply paying a fixed fee.
New evidence shows that Gupta-linked advisory firm Regiments Capital was assisted by SAA’s then-treasurer Phetolo Ramosebudi, who leaked a stream of confidential SAA information – including information from rival bidders like KPMG and Boston Consulting Group – to the firm. We have seen nothing to suggest that McKinsey, Regiments partner, was aware of this.
In January 2014, SAA awarded the contract to a joint bid by McKinsey and Regiments.
McKinsey and Regiments were already earning huge fees together at Transnet, but the SAA contract would become a trial run for a new way of doing business: the “100% at risk” model, meaning in theory that they would not earn fees if they did not produce upside for the client.
100% at risk… but for who?
By McKinsey’s own admission the aim of the working capital project was “to address severe funding shortfalls” that had crippled the national airline. As a result, the consultants were promised a percentage of any cost-saving idea they generated.
The consultants’ original submissions show they initially asked for their fees to be capped at R120-million, but SAA negotiated them down to R80-million.
If the cost-saving projects were implemented, the consultants’ fee would be 7% of any agreed savings.
For example, McKinsey and Regiments recommended that SAA implement a system to stop early payments to service providers. The change was estimated to save SAA R23-million (over what period is not clear), so the consultants were paid 7% of that saving: R1.61-million (excluding VAT).
But the catch was that even if the project was never implemented, McKinsey and Regiments were still entitled to claim 80% of their fees, based on hypothetical savings that would never be made. ((That is, 80% of 7% = 5.6% of hypothetical savings.)
For example, a McKinsey spreadsheet compiled in August 2014 speculated that SAA could save R784-million if it refinanced some aircraft. The project was never implemented, but in terms of the contract SAA signed, the consultants were still entitled to ask for fees of R43.9-million for this endeavor.
This project and other lucrative ones fell directly under Ramosebudi, although the amounts involved were so large that SAA’s board was required to sign them off, and as a result the projects were never implemented.
McKinsey’s fight for fees
In March 2015, Ramosebudi left SAA and joined Transnet. But by that point, SAA also had a new chief executive, Nico Bezuidenhout. When McKinsey presented him with an initial invoice for R28.9-million he baulked.
“SAA disputed the benefits received, SAA and McKinsey met and agreed to review the benefits and agree the quantum,” spokesperson Tlali Tlali confirmed in a written response.
In February, SAA agreed to pay a lower amount of R12.5-million, which would be split 50:50 between McKinsey and Regiments – although emails and invoices confirm that 40 percent of Regiments’ fee was destined for a letterbox company controlled by Gupta-man Salim Essa.
But the consultants’ fight for fees did not end there.
In 11 June 2015, McKinsey principal Christina Planert sent out a number of documents to senior McKinsey and Regiments’ executives ahead of a planned phonecall with SAA scheduled for that evening.
“As you remember we had decided to ‘bank what we can’ so that client also acknowledges impact of the project,” Planert reminded the team.
The email went on to highlight three categories of fees that McKinsey and Regiments might still be able to extract from SAA. The biggest by far were the projects that SAA had never implemented.
“As we know the value here is huge (2.4-2.6 Rbn, status August last year). We need to a) understand whether they pursued any of the concepts, b) if they might do so going forward,
and c) if not, whether we want to pick the battle and ask for our 80% fee and if yes, how…” Planert concluded.
Whether McKinsey and Regiments decided to push their luck on these fees we don’t know. What we do know is that SAA refused to pay any further fees on the contract.
Regiments declined to comment on our questions while McKinsey told us: