9 July 2001 Media Statement

Leased executives in the state service

State Services Minister Trevor Mallard said a survey of the number of leased executives in government departments showed it was not a widespread problem.

However, he said guidelines would be developed for departments, in line with government attempts to a more standardised approach to management practices in the state services.

"The survey shows an average of less than two 'leased executives' in government departments and crown entities," Trevor Mallard said.

"That is not a level that causes me great concern. It is, however, important that departments are aware of our expectation as to when it is appropriate to employ leased executives."

The report was compiled following questions that became apparent when the State Services Commission looked into the arrangement the Specialist Education Services (SES) had with Celia Lashlie.

“That case raised bigger questions about leased executives in departments and entities. The Government wanted to know more about why leased executives are used, under what arrangements, and whether we should review those arrangements.

“In summary, the SSC report says that there can be good reasons for using leased executives, provided they are managed carefully.

“The Government’s aim now is to ensure that where the practice is employed, departments ensure that there are good reasons, and that departments and chief executives minimise the drawbacks.

"The SSC report finds that, generally, departments lease staff where it would be cheaper than taking on specialised, permanent staff for short-term, intense work. Further, leasing allows departments to take on staff quickly in order to address a pressing need in a particular area.

“The Government’s aim is to grow the capacity of the State sector. So, leasing should be discouraged if leasing is a substitute for growing people who have skills that the state sector needs in the long-term.

“Further, we expects agencies to be run and led - for the most part - by permanent employees. So, agencies should avoid leased staff being used in roles where they will be the public face of the agency - either internally or externally - over an extended period.”

Trevor Mallard said the data that came out of the SSC report was not surprising.

"Putting it into perspective, there are about 30,000 people working in the core public sector. For less than one hundred of them to be leased executives is not a major problem," Trevor Mallard said.

ENDS

A copy of the report is attached.

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.

Organisations Potential Returns Actual Leased Execs Total Cost

$ (000)

Public Service Departments 39 39 97 7,631

Crown Entities 193 30 31 1,959

Non-Public Service Departments 7 4 2 164

Totals 239 73 130 9,754

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

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