First Sars, now Telkom hit by Bain

State com­pany sub­sidiary loses mil­lions af­ter con­sult­ing firm’s cost strate­gies were binned

Mail & Guardian - - News - Sa­belo Sk­iti

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

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