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Fonterra steers clear of consultants after paying millions to McKinseys

Thursday 20th September 2018

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Fonterra Cooperative Group will not use external consultants for its newly-announced everything-on-the-table asset review, the dairy processor says. This follows allegations it paid up to $100 million a year between 2015 and 2017 to global consultancy giant McKinsey as part of its “Velocity” cost-cutting and restructuring programme.

It also forked out millions of dollars in CEO and other staff bonuses as part of its Velocity Leadership Incentive scheme.

Last week Fonterra announced its first ever full-year loss - $196 million after tax for the year ended July 31. Operating earnings were down 22 percent on the previous year.

Fonterra has neither confirmed nor denied the $100 million-a-year claims. At the results presentation in Auckland, acting CEO Miles Hurrell would only say that the company “is not allowed to talk about the situation with McKinsey in terms of contractual arrangements, apart from to say that they have by-and-large left the business”.

Although the company is steering away from outside help for its latest internal probe, there are eerie similarities in the rhetoric from 2015, when the dairy giant launched its Velocity “performance improvement programme”. At the time, the company, then led by CEO Theo Spierings and chairman John Wilson, said “everything is in scope."

"We’re taking nothing off the table. We will up our game and the way we work, improving efficiency, lowering cost and duplication where we can and improving effectiveness and agility.”

Three years later, commenting on the 2018 loss last week, the new CEO said the company needed to “take stock of the business” and “get the basics right”.

“We are putting together a clear plan for how we are going to lift Fonterra’s performance. It relies on us doing a number of things differently.”

Will Wilson, who part-owns a dairy farm and is on the board of Tourism Bay of Plenty, spoke out against the appointment of McKinsey back in 2015. He questioned whether the review couldn’t be done in-house, particularly given the high salaries earned by senior executives.

At the time there were 17 people at Fonterra earning more than $1 million a year.

Wilson told BusinessDesk this week his view on the McKinsey appointment hadn’t changed.

“Isn’t it amazing that they needed to engage McKinsey at a cost of around $80-$95 million when they have a highly paid exec team supposedly being the best in the industry in New Zealand - and world class.”

But he says paying consultants is just one of the issues.

“It’s all very well trying to take cost out and build efficiency but if it continues to be done in an environment with a flawed strategy in the first place then it’s not going to progress the business."   

He said comparisons with other dairy companies in New Zealand, like Tatua or Open Country, do Fonterra no favours.

“Fonterra doesn’t know what it is – part value-add and mostly commodity and really doing nothing well. A confused strategy without focus, which is consequently not creating value for its owners.”

Business commentator Rod Oram, who raised the issue of the $100 million payments with Fonterra at last week's meeting, says the Velocity programme did help the co-op cut its operating costs - by 13 percent in fiscal years 2016 and 2017.

But they rose by 7 percent in the year just ended, “suggesting some of the discipline McKinsey expensively dispensed is losing some of its effectiveness”.

Hurrell defended the scheme, saying McKinsey and Velocity “have built up a strong culture of discipline around delivery of programmes”.

And the annual report also favourably mentions the initiative, which has now finished.

“In full-year 2016 and 2017, Velocity delivered significant benefits across the Farmgate Milk Price, earnings and working capital,” the report says. “In FY17 it also supported a material uplift in Fonterra’s organisational health and employee engagement.”

It also gave a material uplift to the earnings of the CEO, senior managers and selected staff.

Controversial chief executive Theo Spierings took home $4.4 million from his Velocity Leadership Incentive bonus in the 2017 year alone, a huge boost to his $2.5 million basic salary and close to half his total $8.3 million remuneration for the year.

Actual figures aren’t available for other staff, but the report says the Fonterra management team received Velocity Leadership Incentive bonuses of 50 percent of their salary in 2016 and 2017; participating staff got between 25 and 50 percent.

It’s not clear how many staff were involved, but in the 2018 year there were 23 people at Fonterra - not including Spierings - earning more than $1 million, including two who earned more than $3 million.

(BusinessDesk)

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