First Sars, now Telkom hit by Bain
State company subsidiary loses millions after consulting firm’s cost strategies were binned
ATelkom subsidiary, which recently announced yet another round of retrenchments, is the latest state institution to have sunk hundreds of millions of rands into controversial multinational consulting firm Bain & Company.
Business Connexion (BCX) told its staff last month that it intended to shed 790 employees. This was despite the company paying about R200-million for cost-cutting and turnaround strategies that will not be used.
BCX is a Telkom subsidiary that offers digital telecommunications services. This week Telkom insisted BCX had realised value from Bain’s work.
Boston-based Bain has been under fire in recent months for disastrous consulting work, which has contributed to the unravelling of the South African Revenue Service (Sars).
Civil servants testifying before retired judge Robert Nugent’s commission of inquiry into Sars described how Bain’s work at the revenue service, which included breaking up critical units, rendered the organisation dysfunctional.
They said the consultancy firm conducted 33 interviews over six days to restructure a Sars that had been built up over two decades.
In his final report to President Cyril Ramaphosa, Nugent recommended that the national director of public prosecutions should consider criminal charges against Bain. He found the tender awarded to Bain had been manipulated to benefit the company financially and had allowed former commissioner Tom Moyane to take control of Sars.
Bain was paid R196-million for its work at Sars. According to Nugent’s report, Bain has paid back all the money it received from Sars, which came to R217-million with interest.
In a statement on Monday the consultancy said its involvement with Sars was a “serious failure”, although its representatives did not knowingly participate in the destruction of the revenue service.
“As a firm, we have been shocked and saddened by our involvement with Sars. We let our clients down, our people, our alumni, and our firm. Most of all, we have let down South Africa,” the statement read.
The firm’s South African spokesperson could not be reached for comment.
In its announcement to staff members, BCX said the retrenchments were brought on by a high cost-to-income ratio, stiff competition and changes in the regulatory environment.
BCX’S cost-to-income ratio is 82% and is projected to rise to 87% in the new year if jobs are not shed.
The situation was exacerbated by a decline in the demand for services offered by BCX.
What the company did not tell its employees, documents reveal, was that it had made a decision not to implement Bain’s strategies, for which the company paid R201-million.
The work was packaged in three affiliate agreements worth R43-million, R175.3-million and R64.8-million, totalling R283.1million. The difference between what was contracted for and ultimately paid for by BCX, R80-million, is currently the subject of dispute.
The Mail & Guardian has established that BCX’S own review of the contracts has raised red flags about the Telkom subsidiary’s negotiation, implementation and monitoring capacity, which led to millions being paid unnecessarily.
Telkom said the agreement was terminated on June 29 when a new chief executive was appointed. “BCX is comfortable that at the time of the termination it had received value for any payments made under the contract. No payments will be made in respect of future or unrealised benefits,” Telkom spokesperson Nomalungelo Faku said.
“Following a review of the organisational strategy, the leadership was comfortable that the organisation could leverage off the work produced by Bain to that point, as part of the revised strategic direction for the business.
“The delivery of work is overseen by BCX management who has the responsibility to review and/or implement any proposals.”
So useless were the strategies Bain drafted for BCX that new chief executive Jonas Bogoshi has set them aside and terminated Bain’s mandate.
An internal review of the contracts showed:
O Some initiatives had no detailed and specific deliverables;
O Bain’s expenses, which came to R32.4-million, were not agreed upon upfront and are now subject to dispute. One is an invoice for R2.73-million for a consultant who did work for six months without mutual agreement;
O BCX initially agreed with Bain that the final 50% of the risk-based (not fixed) portion of the contract would be paid when the full benefits of Bain’s cost-cutting strategies were realised. What was signed, however, was an agreement that Bain would receive 100% of the fees as soon as it started realising benefits. As a result Bain was overpaid by up to R84-million, because the initiatives did not yield the promised savings. Internal accounting of the project showed that BCX realised savings of R201-million, some R1-billion short of what was anticipated.
A whistle-blower at BCX said: “With all the stories emerging around Bain & Company and their involvement with Sars and Telkom, I would like to highlight that something similar has happened at BCX. While there has been an internal investigation around this, many believe that it is as a result of the changes in strategy, mismanagement and the high cost associated with the Bain work that BCX has lost several staff (including executive committee members) and clients. This is why the organisation is underperforming.
“This must be investigated because, if the situation is not rectified, there will be no BCX left in the next couple of years.”
Another insider likened Bain’s contribution to the demise of BCX to its effect on Sars: “What we saw being reported in the Nugent commission is a mirror of what has been happening at BCX. It is hard to watch an organisation one cares about go down in such a terrible manner. It’s the third round of retrenchments since last year and staff morale is really low.”
The Nugent commission laid bare Bain’s role in the destruction of Sars, and unearthed a pattern of patronage that went all the way up to then-president Jacob Zuma in his relationship with former Bain managing partner for South Africa Vittorio Massone.
Massone, in his testimony before the commission, said he had met Zuma for the first time at a meeting arranged by Telkom chief executive Sipho Maseko, to discuss how Bain could assist in overhauling first the government and then the ANC.
Bain documents released to the commission showed how Massone knew even before the 2014 general elections that Moyane, who Nugent said “arrived at Sars without integrity”, would become the commissioner.
It also emerged that Moyane met Massone and his team at Bain seven times before he took up office.
Linked: Telkom boss Sipho Maseko introduced Bain’s Vittorio Massone to Jacob Zuma. The telecom’s subsidiary, Business Connexion, is in financial trouble after Bain assisted it. Photo: Moeletsi Mabe/sunday Times/gallo