SSC Report on leased executives in the state service

28 June 2001

Minister of State Services

LEASED EXECUTIVES IN GOVERNMENT DEPARTMENTS
Introduction
1 Following the outcome of the investigation into the termination of a leased executive contract by Specialist Education Services, you asked the Commission to provide an assessment of the leased executive contracts for all departments and their associated Crown entities. The information in this paper is based upon data received from departments and Crown entities.
Background
Definition of Leased Executive
2 For the purpose of this enquiry, a leased executive is defined as:
"an independent contractor who is engaged via a leased executive agency or management consultancy where the total cost to the department/Crown Entity is $750.00 per day or more".

In other words, a leased executive is a contractor who has entered a contract for services with an executive leasing agency or management consultancy. That agency in turn has a contract with a client (organisation) which is charged for the cost of the executive including a fee for administering the service.

3 Not included in this enquiry are:
· leased employees, including temporary operational employees (eg keyboard operators, programmers etc) where the cost to the department/entity is less than $750 per day;
· consultants engaged directly;
· contractors engaged directly; and
· employees engaged on a fixed term agreement.
Parameters of Enquiry

4 Three questions were asked of all departments with an added request to provide the same information for Crown entities associated with them. These questions were:
a How many lease executive contracts has the department entered into (both current and completed) in this financial year (2000-01) to 30.05.01?
b What is the total cost of lease executive contracts for this financial year (2000-01) to 30.05.01?
c Why were leased executive contracts preferred over other options (e.g. fixed term employment contracts)?
Responses from Departments and Crown Entities
5 Information requests were sent to all departments. Returns were received for 39 departments, 30 Crown entities and 4 non-public service departments.
6 In order to minimise both the time and cost of this investigation, departments were not asked to analyse all contracts for duration or cost components (income of the executive and margin paid to the consulting company (lessor)).
7 Responses from Crown entities were contingent on the nature of the working relationship with the relevant department. Thirty Crown entities reported returns by attachment to a department response. Because Crown entities report directly to Ministers, any further information will involve the Commissioner formally requesting such information through responsible Ministers.
Analysis of Responses
8 The investigation response has provided a sample (snapshot) about leased executive arrangements within departments and some Crown entities. A more comprehensive picture would require a much greater investment.
9 The table below shows the number of Crown entities and departments that responded and the total cost of leased executive contracts for the actual sample group. It is important to note that no average cost comparison per contract can be derived without further information about the duration of contracts.
OrganisationsPotential ReturnsActualLeased ExecsTotal Cost
$ (000)
Public Service Departments3939977,631
Crown Entities 19330311,959
Non-Public Service Departments 742164
Totals239731309,754

Patterns of Usage of Leased Executives
10 From the information provided, the Commission notes that leased executives are used when:
a there is a need for short-term coverage during the absence of staff with critical skills to the organisation and where the skill capability is not immediately available in-house;
Comment
Responses suggest that departments do consider in-house options, usually without success.

b there is a need for additional management resource around the introduction of IT initiatives where in-house capability is not sufficient; and
Comment
Leased executive arrangements are common practice where departments need short-term access to highly specialised expertise. We note that some departments in this survey have extended such arrangement for longer periods of time albeit usually at lower cost per day.

c as a last resort when the particular expertise required is not available through any other source, or on any other basis.
Comment
A number of experienced and skilled management and IT specialists apparently have established themselves as individual contractors and offer their services on a leasing basis only.

Advantages and Disadvantages of Executive Leasing
11 Departments see some advantage in the use of Executive Leases because they are perceived to:
a mitigate the overheads and employment obligations associated with short-term staff appointments (they provide flexibility); and
b enable pressure points to be addressed quickly with placements whose quality is guaranteed by the agency (they are quick to implement and have been assumed to be low risk).
12 Disadvantages in the use of Leased executives are:
a building the capability of senior management in the Public Service and State sector is more difficult when a highly skilled part of the labour market prefers this kind of arrangement rather than permanent employment; and
b the arrangements are by definition, temporary and there is little, if any emphasis on skill transfer to the hiring department. Indeed, it could be argued that the department contributes to the skill set of the executive rather than the other way around.
Summary

13 The use of leased executives may be justified in specific circumstances. This survey has not however, provided information to assess the nature and efficacy of contracts or the process used to justify them.
14 Chief Executives are responsible to ensure that sufficient and effective attention is invested to build the capability of their organisation.
15 The Commission remains of the view (expressed in our report on the SES - Momentum contract affair) that leased executive appointments are at best high risk and at worst inappropriate where they involve the executive assuming a management role "with a public face".
16 The Commission considers that the risks associated with executive leasing can be reduced to a large extent by making the issues more visible, and by providing guidance on the management of executive lease arrangements to departments and Crown entities.
Recommendations
17 It is recommended that you:
a note the contents of the report; and
b agree that guidelines be developed and provided for Public Service Chief Executives with a focus as follows.
Departments and through them, their associated Crown entities, should consider the development of risk management processes which:
i Explicitly assess the costs and benefits of any executive leasing proposal against alternative forms of contract for service with particular attention to full or part time employment options;

ii ensure contractual arrangements, roles and relationships are well-designed, understood by all parties;

iii provide for regular (quarterly) review of the nature and justification of the leased executive arrangement, including a review of costs;

iv reinforce the obligations of responsible managers in departments and Crown entities to act as a good employer; and

v ensure that where leased executive arrangements are used to redress skill shortages, the transfer of skills and capabilities is a key responsibility of the leased executive.

V A (Tony) Hartevelt
Deputy Commissioner