The challenges of establishing a centralized internal audit service in the Belgian federal administrations

Please note this is an opinion piece. There are some strongly held convictions which I voice here.

My involvement in trying to establish internal audit in the Belgian federal government

Recently, rumors have been building up again about a centralized internal audit service for the Belgian federal government. I think it would be a very bad mistake to make. Truth be told, I’ve been involved in the fight to establish audit services in the Belgian federal government since the early 2000’s.

My current role & responsibility is a direct result of my deep appreciation for working in activities related to government. At BTC, I’m both living a dream as head of internal audit and feeling I can make a contribution. BTC, after all, is the agency, wholly owned by government, charged with development aid.

Note that the early 2000’s were the time of the Copernicus reforms, where giving an increased autonomy to federal government services was high on the agenda. The envisioned reduction of direct political influence on the administrations was an important stated goal. However, increases in autonomy had to be counterbalanced and internal audit was an important aspect of that counter-balance.

The current state of internal audit in the Belgian federal government

Please note that to date, no formal internal audit activities have been started up in the Belgian federal government. To be clear, this does not mean there is no internal audit activity. On the contrary, several federal government services, understanding the need to have an independent or semi-independent entity responsible for oversight on internal controls, governance and (in the relevant cases) risk management, went ahead and started up their own internal audit departments. Some of these have more than 10 years behind them. Yet, sadly, they were dissavowed by the appointed audit committee of the federal government. Put in place by the last caretaker government Belgium had, this audit committee is not necessarily that experienced in matters of internal audit.

Other control and inspection structures

This of course does not mean there are no independent entities providing supervision of federal government activities. On the contrary, we have the court of auditors and we have the finance inspection. The first reports to the parliament, the second to the minister of the budget. Both structures are most effective, in my opinion, when they have embedded their collaborators deep in the federal government services they are charged with checking.

Internal audit recognition issues at other government levels

There is an active example of a centralized internal audit service in Belgium: the internal audit to the Flemish Administration, or IAVA. Despite being managed by a good manager, and with competent auditors on board, this audit team has had an uphill struggle in becoming accepted as “one of us” among Flemish public servants. In more than once instance, their authority was challenged, and they have invested a significant amount of time and resources establishing themselves as trusted business advisors to the public servants they are charged with auditing. For example, IAVA was instrumental in developing the guide to internal control development. They manage a leading practices database. All great initiatives, but not traditionally what you would expect from an internal auditor.

What’s my beef?

It’s this: developing a centralized internal audit structure within the Belgian federal government will, for at least the next ten years, amount to little more than window dressing. The new internal auditors will need to earn the trust of public servants operating outside of the “circle of trust” of the organization.
I know the president of the federal audit committee will be up in arms and cry foul, stating independence issues. The point is that that is not, in itself, an issue of independence. Independence is not an objective by itself, but a means to an objective audit opinion or an objective audit report. There are a lot of ways to ensure this objectivity, including building safeguards to independence in the way audit is embedded in the federal government service structures.

If anyone needs an example on how this can succesfully be done in an organization linked to federal government, come take a look at how BTC has done this in the past years. I believe we are very independent, yet we work deeply embedded in the organizational structures we audit.

The current structure, as proposed by the federal audit committee would in effect be a “finance inspection plus”, in essence adding to the role of the finance inspection. In that case, let’s call a duck a duck, and integrate this function with the finance inspection. This would mean a redefinition of the role of finance inspector, but that is feasible. The way in which the inspection currently works as it relates to their oversight role is also embedded in the organizations they audit.
However, if the intent to develop truly functional audit departments is a true intent, and not window dressing, I would suggest to stay away from the model currently being proposed. It will not work. I know it, the people who propose it, know it (deep in their harts).
Last, but not least, the argument of reducing the cost of internal audit from a budget perspective is a relevant one, but a centralized structure will end up costing you more, not less … if you calculate cost as a function of audit efficiency. Because your internal audit will not be effective, nor will it be efficient, for years to come. It may add value, but it will not be auditing.

The 80-year bubble - the end of management consulting as you know it

The origins of management consulting

After a slow start in the 19th century, management consulting came into its own during the Great Recession, in the early 1930’s. If you want to read more about the dynamics behind the growth of the profession, there are worse papers to read than Christopher D. McKenna’s paper on The Origins of Modern Management Consulting. The paper provides a non-traditional view on the reasons for the growth of the profession which ring true to most veterans of the profession reading it. In addition, it shows that what is currently often marketed as new or groundbreaking is anything but. Deep collaborations between management consultants, bankers, accountants and engineers form the basis for the profession, not a new opportunity.

Whatever the drivers, management consulting has provided organizations with access to independent, external expertise in areas which were not core to these organizations. Just as it doesn’t pay to have a plumber in your house at all times, a management consultant was often called when the need arose. Given the assymetry of access to information, the one stop shop for management consulting was a good deal for many companies at that time.

Recent evolutions in the traditional hunting grounds

Recent years have seen a steady increase in the level of professionalism of support functions in a lot of organizations. Quality management, for example, long a function outsourced to experts, has been internalized by most organizations and is seen as core to its functioning and reputation. By building these competencies internally, often driven by former consultants who joined the organization, enterprises have steadily been cannibalizing the most profitable areas for management consulting: those areas in which management consultants can use low level resources to provide the brunt of the work. That model, often called the 1to3 model, is the basis of leverage. And well leveraged jobs are the key to management consulting profitability.

A second evolution is the advent of the internet as a true business tool. Where before there was a real information assymetry and as a client you had limited to no information on other compentencies outside of your traditional providers, unless you actively went and spent a lot of time looking for it, nowadays information on similar or comparable service offerings is at most a couple of clicks away. The only real barrier to switching is the experience with and knowledge of the organization the incumbent consultant has gathered over the years working for you. However, if you can transfer the responsibility and especially the cost of onboarding and learning to a new management consultant, you can start shopping around as a client.

The tipping point

The pressure on the traditional management consultants has been mounting for a number of years, as witnessed by fee pressure, which was apparent even before the 2008 crisis. On the other hand, the market has never been more accessible. And lots of smaller management consulting teams, often composed of a handful of consultants, put their stake in the ground and declare their intent to serve. Often at very interesting fee levels, as they are not burdened by the significant overhead and higher level personal revenue expectations traditional management consultants have.

I have a strong feeling a key tipping point has been reached that will redefine this service area forever. I’m making abstraction of the IT implementor and integrator arena, which requires significant numbers of technically proficient consultants but which has been under pressure since the late 1990’s, as witnessed by the steady decrease in fee levels and the emergence of new players in that market. No, I’m on the contrary talking about the core management consulting as provided by the Big 4, by Bain, McKinsey and the Boston Consulting Group.

What the future holds

The future holds, in my opinion, a significant redefinition of the market. Consulting firms, which have been growing since the early 1930’s, will start to become smaller again. Their intake of new recruits will slow down and they will start to invest in building a deeper understanding of the issues. Partners and directors, which are currently mainly sales people, will need to invest in deep knowledge development and will need to commit to invest multiple years in really learning and understanding a market. I predict this will be a bridge too far for an entire generation of older partners, who will not be willing to make the investment, will cash out and retreat from the business.

The possibility to leverage will decline to a fraction of what it currently is. People who enter into the profession will need to take in account that while it will still be possible to make very good money in this market, the traditional structures of past consulting practices are over. For good. The projects which allow for the past level of leverage just won’t be there, and clients will refuse to pay for the education of people not on their own payroll. After all, at the market you don’t pay for both the grain and the bread. You only pay once, and that once contains the cost of the expertise of one who knows how to make bread.

People entering the market will do so with a true passion for the issues or for the profession of assisting organizations in their development and growth. With the need for continuous and continued investment in content development to a high required level of expertise, you will need to be very passionate to succeed.

A new opportunity for modern consulting practices

However, and that is a very positive evolution, gaining access to the market will become easier and easier. As mentioned above, I note many smaller firms being established with a very limited number of partners, with a very specific and targeted focus area and with a clear vision of what they can and especially cannot do. These niche consulting boutiques find each other through the internet, through networks such as LinkedIn and the like, and are able to come together around a specific project for a limited period of time. After the project, each organization goes its separate way. Project management of both the project itself and the relationship between the multiple providers is slowly becoming a separate consulting market, or even a meta-market. After all, the participating consulting organizations attract a third party to manage the project and the interdependencies between them without getting bogged down in the specifics themselves.

Experience by practicing what you preach

Their partners are partners in the consulting organization but retain the independence to do stints of a couple of years in organizations, further developing their knowledge and trade. They may return or they may not. If they don’t, they exemplify the McKinsey concept of keeping the vast McKinsey allumni network alive. If they do return, they bring both a network and newly gained knowledge and understanding which can only enhance the quality of service delivery.

In conclusion

The internet, combined with the internalization of core non-traditional skills in enterprises is leading to the bursting of the 80-year bubble of management consulting. In my opinion it will in time lead to a significant enhancement of the added value consulting can bring to the table and show that McKinsey had it right all along. Combining the network with deep skills and access to information developed in depth can only enhance market positioning.

A word of warning

However, a last word of warning: as with many markets, a significant change results in a period of Wild West behavior in the market. Exercise due diligence and avoid the snake oil salesmen you find in every market.

Full disclosure: the organization I am employed by will until November 11th 2011 be providing services to one of the Big 4 advisory companies. Since 1995, I have worked for Big 4 advisory companies and with a number of consulting companies active in the same space. I have also been active in strategic consulting. This text represents my personal opinion and is not representative of any opinion held in the past, present and future my past or current employers or clients.

This text is a curation of an article I wrote a couple of weeks ago for my blog “Risk & Reengineering”