Defense Minister Ehud Barak
Photo: Alex Kolomoisky

Defense Ministry pays McKinsey NIS 100M

IDF streamlining program formulated by global management consulting firm McKinsey encompasses only 40% of military spending, yet company paid more than five times its contract

The Defense Ministry paid global management consulting firm McKinsey and Co. nearly NIS 100 million (about $27 million) for formulating a streamlining scheme for the Israel Defense Forces, which it submitted in 2009 and is currently overseeing its implementation.


McKinsey originally submitted a NIS 22 million ($6 million) bid, meaning that the company was in fact paid five times more than agreed on, Calcalist has learned.


The ministry paid McKinsey for compiling a report and implementing the recommendations submitted in 2009 as regards the potential to cut procurement, construction and maintenance spending, which constitute 40% of the defense budget.


At the time, the report was presented as the first part of the streamlining program which was later to include a report on other budgetary items, mainly the sensitive matter of personnel downsizing; however, work on the second part of the report never began.


Payment ballooned incrementally

The contract included a provision which allows expanding the scope of the project to 50% under the terms of the original agreement; however, in effect the budget grew even more.


Sources within the defense establishment say the tender ballooned incrementally: "The timeframe allotted to McKinsey was insufficient ant the tender was repeatedly extended."


Furthermore, it was alleged that McKinsey not only authored the report but also oversaw its implementation far more comprehensively than stipulated in the agreement, despite provisions in the initial tender from 2008 precluding the oversight of the project by the winner.


The agreement with McKinsey was the outcome of cuts demanded from the military by the Brodet Committee, which in the wake of the Second Lebanon War determined that Israel would not be able to shoulder military's budgetary requirements.


Nonetheless, the committee did advocate an addition of NIS 100 billion ($27 billion) to the budget on the condition that NIS 30 billion ($8 billion) would come from streamlining efforts.


Exceptionally low priced bid

McKinsey won the Defense Ministry's streamlining tender with a final bid of NIS 19.27 million ($5 million) for a 30,000-hour timeframe over a three-year period, which should have amounted to NIS 22 million ($6 million) plus expenses.


The offer is measurably lower than McKinsey normally charges for similar projects and reflects an "exceptional discount" of 36%, the company said.


Several major budgetary cuts are attributed to McKinsey's efforts, which led to less spending on raw materials and on payments to suppliers. In recent years, the Defense Ministry occasionally reported cuts in spending resultant from the report; however, estimates on the extent of the cuts are varied.


The Defense Ministry said in response, "The agreement with McKinsey was carried out as per the rules. The defense establishment, together with McKinsey, formulated a streamlining program which should lead to cuts in procurement, maintenance and construction over a ten-year period, amounting to about NIS 14 billion ($3.7 billion)."


McKinsey said in response, "We do not discuss our clients publicly."


Click here to read this report in Hebrew



פרסום ראשון: 12.27.11, 14:57
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