ConSoc seminar report: Getting value from your professional advisors

  • By Stephen Hancock

The seminar subcommittee of the AusIMM Consulting Society, under the Chairmanship of past AusIMM President Geoff Sharrock, began working up the ideas for the seminar recently held at the Grand Chancellor Hotel in Brisbane over 12 months ago.

The subcommittee members agreed that in this time of industry down turn, it would be valuable to members of the Consultants Society and to the mining industry to have a full and frank exchange about the many issues, stresses and adverse perceptions which developed between consultants and their client industrial operators during the mining boom from 2007 until about 2012.

The subcommittee members also recognised that with many very competent technical personnel now out in the job market seeking consulting roles as their next career stage, there was a need to inform them of the demands that consultants face in their job.

To meet these objectives, and with the fundamental objective of clearing the air and getting positive messages out of the discussions, the seminar topic ‘Getting value from your professional advisors’ was born. It was a day comprised of balanced industry and consultant presentations followed by equally balanced discussion and panel sessions with direct input opportunities from all those present.

Attendance

Attendance at the seminar was particularly good, considering the difficult economic times for all in the minerals industry. About 80 people attended, of whom about 20 per cent were representatives of industry, the other attendees being either consultants already or considering a future in consulting, or representatives of government agencies or from academia.

The program

Following a comprehensive introduction to the day by the subcommittee Chair Geoff Sharrock, who has had senior roles in both industry and as a consultant, the program commenced with two keynote speakers:

  • Mr Peter McCarthy – Chairman Emeritus, AMC Consultants Pty Ltd
  • Mike Johnston – President and CEO of Nautilus Minerals Inc.

The two speakers presented on very different themes, as was to be expected, and the issues they raised were supported by many questions from the audience.

The themes of the seminar and the issues introduced by the keynote speakers were then carried through in different formats by the eight following speakers who alternatively presented from a consulting or mining industry perspective. Notably, most of the speakers had been engaged at one or more times in their careers as either consultants or as industrial operatives.

The various themes addressed over two sessions were as follows:

Session 1

  • ‘Consultancy Providers – What is their perceived relevancy in today’s mining industry?’ Paul Harper, Executive Consultant and Mining Practice Leader- Advisian (Worley Parsons Ltd)
  • ‘Fee structures for consultants from the perspective of the mining industry client receiving the services’ Chris Towsey, Executive Director, Citigold Corporation Ltd
  • ‘Adequacy of sources of training and experience within the industry to create excellent consultants’ Corinne Unger, Environmental Consultant.
  • ‘Consultants and transformation – An industry perspective on key attributes for a sustained engagement’ John Landmark, Vice President Exploration, Newmarket Gold Inc.

Session 2

  • ‘The role of an independent consultant’ Andrew Scott, Consulting Mining Engineer, Scott Mining Consultants Pty Ltd
  • ‘When and where consultants are, or should be engaged and why’ Carl Pritchard, General Manager Tech Services, Jellinbah Group
  • ‘Getting the best out of your lawyers so you think better of them than you normally do’ Jonathan Fulcher, Partner, Hopgood Ganim Lawyers.
  • ‘Pass the talking stick – Why clear, effective and ongoing communication is a key element in building and sustaining successful consultant client relationships’ Sonia Konopa, Principal Resource Geologist, Anglo American Exploration Pty Ltd.

Each session was followed by close questioning of the Speakers which revealed valuable messages.

The above themes were then pursued further in the two 45-minute panel sessions which included all but one of the session speakers.

The messages for consultants

Where do consultants come from?

Most of the longer serving consultants are intrinsic products of industry experience. They subsequently depart from industry for a variety of reasons, mostly to gain some greater technical autonomy by working within less constrained and frequently more challenging environments.

Consultants are generally very fond of the areas of technology which they practice and they seek to enjoy the relationships with a wider network of workers who share and appreciate excellence and innovation in the achievement of technical solutions. They also expect to be reasonably rewarded in a timely manner for their work, their specialist skills and for their time and the expenses they incur including allowances in their fees for necessary operational overheads.

To be a seriously valuable consultant to the industry, a common theme appeared to be that consultants should have at least ten years of industry experience, as well as CP status within AusIMM. Notably, many highly qualified and bright young consultants are emerging who have served their tutelage gaining experience working within either larger diversified or with specialised niche market consultancies. In these situations, their experience has been gained on more diverse projects but under more rigorous supervision than is commonly available within the mining industry operatives of today.

In many cases it was noted that in order to gain experience individuals seeking to be consultants need to take personal initiatives to expand their knowledge and experience. These choices frequently involve deliberate travel overseas to work or study with specifically skilled organisations, or with research or regulatory authorities. The need for such initiatives reflect on the lack of significant expertise availability within industry and within academic teaching programs in Australia.

What does industry want from consultants?

Consistent with the above messages as to the availability of experience within industry, industry seeks consultants for many roles, but especially for advice when roles and requirements arise where the mining operatives or project planners have no, or limited in-house experience. Many variations on the above theme exist. These were stated to include at least the following:

  • confirmation or validation of proposals developed internally
  • avoidance of group think decision making
  • achieving technology transfer from experts to internal staff
  • enjoining external expertise and their professional indemnity insurers to spread technical responsibility away from the industry operator clients
  • meeting the requirements for independent expert oversight or reporting required within some regulatory regimes (eg resource and reserve statements, environmental impact and sustainability statements, mine plan reviews, etc).

The industry also, from time to time, employs consultants as sources of short term contract labour and it is in this role that consulting and contracting get confused. Further, confusion of the two roles can arise where engineering procurement and contracts management (EPCM) relationships are entered into.

The speakers at the seminar expressed clearly that they saw the difference between consulting and contracting as being that:

  • A consultant brings specialised expertise or skill to add value in areas identified by the client, self manages and takes responsibility for outcomes. Various forms of payment for services are possible.
  • A contract employee is paid by the hour or day, and works under direction of client on designated tasks.

Industry speakers noted that communication is essential in the relationship between client and consultant. This was seen to be valued especially as follow up on past consulting projects aimed at finding out how past work has turned out and how future projects could be improved for the client.

Clients want their consultants to communicate closely, but they need their consultants to perform their role within both financial and time budgets and in accordance with the proposals they agreed in advance with their clients. This is where the potential for conflicts arise.

Consultants at the seminar frequently experienced time and cost overruns both as a consequence of in-house issues but also as a consequence of clients varying the issues they need addressed, adding new issues, or being late in providing necessary data or feedback, amongst other delays.

Clients should advise consultants in advance of the bases in their timing needs and should be advised quickly where matters arise to delay deliverables or which generate cost overruns. Specific extension fee or time delay authorisations should be sought to cover these contingencies both as simple business prudence and also as part of respecting the issues these may entail for the client and their organisation.

It was recognised by all at the seminar that mining industry players have, as a consequence of past experience, developed a knowledge of the consulting personnel they prefer to have working with them. Thus when inviting proposals, it is their ‘A Team’ that they will prefer. These will be those consultants with whom they have developed a close understanding, respect and continuing working relationship.

Notably, outside the government agencies and some tier one miners, it is unusual for industry to seek to pre-qualify consultants in advance for any particular tasks or issues. This is on the basis that they know who the good performers are. As an alternative to this approach, government agencies and tier one miners sometimes seek to appoint consulting panels from which their staff can seek proposal as necessary. Such panels normally are also registered at fixed fee rates for a period for the various levels of staff seniority the consultants are prepared to supply in response to requests for work.

What do consultants seek from industry?

Consultants wish to work in the longer term for industry on challenging and relevant projects which are technically and financially rewarding. They also seek to have relationships with their clients that are mutually respectful at a personal and group level and which are ongoing.

These relationships are generally built by the consultants initially demonstrating their skills through technical publications, conference attendance and through helpful word-of-mouth referrals from one client to another. These are the elements which are most important in marketing any consultant or consultant organisation to industry.

It was noted by industry speakers at the seminar that ‘cold call’ marketing without any particular target is mostly not only ineffective, but is resented as time wasting for industry personnel. Alternatively, marketing interactions that reflect an understanding and considered recommendations about project or operational issues the potential client has, or should be aware of, are valued and can lead to longer term and mutually beneficial relationships.

It is common for consulting briefs to involve requests for the submission of formal proposals. In some cases, (especially from government agencies and tier one miners), these are broadly advertised to any interested party. Consultants noted that the preparation of such proposals often requires a great deal of work. This work has a very low chance of success unless there have been significant interaction with the client in advance, both about their attitudes to consultants and their specific requirements in respect to the proposal in question. The general opinion of consultant speakers at the seminar was that broadcast invitations without prior consultation should be politely declined with the reasons for declining being clearly outlined.

Most of all consultants seek from their clients an equitable relationship which ensures that consultants and their staff are not being required to take on greater responsibilities than relate to the quantum of their work and the implications of individual skill application in implementing actions. This also applies to being fairly treated in respect to staff retention. The industry needs to recognise that consulting staff should not be ‘poached’ without the employing consultant having opportunity to negotiate an equitable basis for relinquishing valued staff. All staff within a consulting practice are valuable profit centres and carry with them a very substantial replacement cost within the consulting market.

Have consulting fees always been reasonable?

It was made clear that during the mining boom that many mining companies considered that consulting fees were excessive for the services provided. The dissatisfaction seems to have arisen because the ‘A Team’ was not necessarily available, many projects failed to be achieved within the time and budget frameworks and consulting projects were sometimes not perceived to have been value for money. These are very important issues.

It was recognised at the seminar that the mining boom put very great stresses on the industry and upon consultants. Specifically, staff shortages and consequent excessive workloads on individuals, plus unrealistic time frames for achieving quality outcomes were rife and staff churn and poaching were also common.

However, it was noted  that whilst the mining industry economics are dictated by commodity prices, consultant fees are governed by competitive engagement and overhead costs. During the mining boom, the competitive environment was intense as mining companies paid high salaries, which consulting firms were obliged to match and many groups previously only marginally interested in the mining industry began intensive marketing to get as much of the action as possible.

The facts are that consulting fees derive from:

  • individual salaries that are commensurate with the same experience levels within industry – 100 per cent
  • salary mark up to reflect specific skill and specialised expertise – variable per cent
  • allowances for non-fee paying work (marketing, management, skills training and maintenance, travel time, etc) – 35 to 60 per cent of salary depending on consultancy size and experience depth
  • employment overheads (accommodation, office provision and facilities transport, employment insurances, superannuation, leave allowances, worker compensation costs, human resources administration and management systems) between 40 and 55 per cent of salary depending on the size of the consultancy
  • office and specialised systems, subscriptions and premiums five to seven per cent of data processing costs
  • professional indemnity insurance coverage of at least $5 M – variable upon level of excess carried in-house
  • marketing expenses such as travel, accommodation and hospitality
  • ex gratis payments to reflect performance and lifestyle stress compensation
  • staff engagement and replacement costs based on ten per cent annual staff turnover rate, three months replacement period and three months lost revenue over first six months induction period
  • corporate working capital financing (equity return to owners, bank fees and charges, loan and overdraft interest rates)
  • margin for growth expenditure, corporate profit and dividends – 15 to 30 per cent

The outcome of the above elements is that salary multipliers, compared to comparable seniority industry personnel, need to be between 2.1 to 2.9.

It follows that simple comparisons of consulting staff costs measured against senior industry staff costs are not rational but, ironically, it is this comparison which inevitably dictates the salary levels which must be offered to consulting staff if they are to be retained, as both industry and consulting staff are drawn from the same resource pool.

Staff pay-rates in mining and exploration companies are not dependent upon the staff being viewed as individual profit centres. Rather, it is dependent upon the margin which can be achieved in the open market between commodity price and all the costs, including staff costs, involved in efficient mineral extraction, processing and delivery, and the many other costs and contingencies that need to be provided to cover project and operations financing.

It is clear from the above considerations that the bases for assessing reasonable returns from consulting and from mining are not comparable. Thus, the issue for industry is less a matter of what consulting fee rates are, but what value accrues from the expertise that consultants bring to industry. This is best measured in terms of capital expenditure saved, increased return on equity, operational cost avoided, litigation costs avoided or minimised, time saved or production periods extended or expedited.

How should consultants be employed by industry?

It was noted by industry speakers at the seminar that consultants are rarely engaged on anything other than a fee plus expenses basis, but that industry really preferred that consulting would be better awarded around lump sum fees because it reduces markedly the magnitude of management which needs to be applied. Indeed, such a basis for payment could be preferable to the consulting industry, but it simply transfers the need for the inevitable management of time and fee extension authorisations to both parties.

The best form of consultancy engagement would then appear to be one based on mutual trust and regular communication, using a retainer paid to secure the availability of agreed staff at fixed rates against orders issued by the client from within specific budget provisions administered by the client. The clients’ budget constraints should be understood in broad terms by the consultants so that specifically appropriate fee rates can be set that are acceptable to both parties within a simple form contract.

Industry speakers presented their present situation as being in survival mode at least until commodity prices rise. As a consequence, there is a serious reluctance to engage consulting support. When they do, the need was expressed that consultants need to sell their fee rates and services differently and especially their travel costs.

These attitudes represent a serious impasse for the consulting industry, since without the skills that consultants supply, the probability of the industry avoiding serious issues over time will diminish and without a supportive work flow the availability of expertise within the consulting industry will be lost as specialised staff necessarily depart the industry. Worse still the number of bright young people entering academic training for industry employment will decrease yet again.

Given the scenario and attitudes put forward by industry at the seminar, the best future arrangements for industry could be to adopt a retainer payment system for at least the most trusted members of the consulting industry in order that the consulting industry can itself survive to support the industry as it moves from survival to expansion mode.

Considering the different ways in which value should be assessed for consulting services as compared to full time industry personnel, consultants should not be considered by industry as simply being staff that can be appointed to fill short term stop gaps for skills that cannot be afforded full time within mining project assessments or operations.

Indeed, excluding independent planning or external review roles undertaken as part of system quality assurance or to fulfil regulatory responsibilities, there are many operational roles in which consultants should probably not be engaged. These include activities which are essentially the daily responsibility of the mine management, such as:

  • mine plan implementation and monitoring
  • mine safety programs
  • mine water, waste and contaminant management
  • societal and cultural relationships
  • mine closure and rehabilitation
  • post-closure mine site stabilisation within the local environment.

It is recognised that with the industry being so diverse in both size, location and impact that the economics of employing consulting staff in the above roles will vary. Indeed, younger consulting staff can benefit greatly from spending time in operational roles, but the fee rates for undertaking such roles should be adjusted to reflect the mutual benefit which derives where such engagements are agreed.

Alternative approaches to consulting and contracting engagement

A novel form of consulting/contracting engagement was presented by Mike Johnston of Nautilus Minerals Inc. He is managing the development of almost entirely new technology to support deep offshore sea bed mining. Nautilus used a technology strategy based around ‘Design Challenges’ to which groups of contractors contributed concepts. Those assessed as most suitable by the Nautilus team were then the winners and were engaged to develop those concepts into practical designs.

In addition, Nautilus conducted consultant workshops for young academics interested in consulting in the future. These were to consider and to determine as groups the issues which needed to be resolved and the relative importance of those issues to meeting the technical and regulatory constraints of proposed operations as well issues which could be fatal flaws.

In both cases the approach is aimed at stimulating new thinking to develop experience and knowledge in a cross fertilised group environment and to generate strategies that can be incorporated into an adaptive management framework. The approach is accepting that with new technology and operational demands failure is acceptable and that strategies need to be designed which can accommodate failure by having alternative pathways.

It was not clear how or whether the participants in the initial competitions were paid for their input and how intellectual property rights might be allocated. Certainly, similar systems have been used in the past in Australia for large public infrastructure and building projects. In these cases, the reward and fees derived from the eventual contract bid opportunity.

The applicability of such approaches in relation to smaller consulting briefs for the mining industry does not seem likely, but in the future it is probable that group input from experts in social and environmental sciences may be used as a basis for identifying the common sense strategies for new project developments, especially in potentially environmentally and or culturally sensitive areas. It is possible that the coal seam gas and shale gas developments in Queensland, NSW and Victoria could have benefited from this type of approach being applied in advance of the initial exploration work.

Marketing consulting services to the mining industry

The mining industry appears to believe that there are many consultants available to service the industry. It is just a matter of finding the person who suits the specific requirement of their project. Marketing by consultants should then be directed at achieving this recognition.

Industry stated that they made their judgements of the areas of excellence of their consultants based on published papers, unsolicited proposals of direct relevance to industry and word-of-mouth commendations. The difficulties for consultants with marketing to these expressed preferences is that industry personnel do not regularly attend conferences and seminars in the same numbers as do government and consultant employees. Thus, gaining knowledge of specific relevant industry issues requires consultants to be out and about at mining sites and offices across their market areas. This can be a very significant expense and reflects in the fee rates albeit adding to consultant expertise of direct relevance to the value of the work which industry can expect.

Receiving low fee rate bids may seem attractive to industry but low fee rates are not consistent with the realities of the operational costs which apply to maintaining expertise within a consulting business. This will in time impact upon the availability of expertise to meet the variety of needs that the industry requires.

Industry speakers stated that they presently equated consulting fees with the equivalent cost of a permanent employee at the same level of seniority within their own company, with a salary multiplier of about 1.4, plus some margin for specialist expertise.

Some sole operator consultants might be able to operate at such rates but only by not providing properly for the overheads and liabilities as would be expected of professional experts offering specialised advice to the industry.

Notably, a sole trader consultant who presented to the seminar commented that he did little direct marketing apart from communicating with long term clients from time to time or when meeting them at conferences. Clearly, he had clients who considered him to be part of their ‘A Team’. Be this as it may, the clear message remains that the best marketing by consultants is direct communication, and especially face-to-face communication where possible.

Industry speakers were consistent in their preference for lump sum submissions and this preference should be noted by consultants, but as stated, it is not commonly an equitable arrangement for consultants. Indeed, the marketing of lump sum services is likely to add costs to industry at least over time.

The best marketing should be directed towards clients with whom a close and respectful relation has already been developed. This could have the form of a retainer based relationship around an agreed time quantum fee for a fixed period to cover regular advice availability, with particular distinguishable projects undertaken around agreed well understood briefs costed as lump sums.

The advantage of the above approach is that there is limited marketing cost associated with it and the unpaid time element of client interaction is very much reduced whilst the consulting rates are reduced by the regular availability of uncontested work for clients who remain at all times still in control of their budgets for technical advice.

A variation of the above involves clients selecting relatively small panels of consultants directly contracted to supply advice as necessary by industry clients. This approach is being used in some cases by tier one mining companies and by governmental organisations, but regrettably the selection processes are not uncommonly administered by bureaucrats who have no basis for distinguishing between competing consultants other than on fee rates. This can lead to aberrations in the outcomes for the industry. I have personal experience of the exercise of consultant panel selection being based on a fee rate auction conducted over a period of several hours only. This certainly led to aberrations as, not only were the final selections less value adding than previously, but also the availability of the ‘A Team’ was lost!

The ultimate message

Times are commercially very tough for both mining industry operators and for consultants, albeit that productivity and efficiency at many operations is very high despite margins still being tight.

Consultants or consulting companies need to market directly to the mining industry decision-makers and must seek mutually beneficial client arrangements. The consultant must seek to convince industry that their skills are such that they are able to add value to the client’s business and to their direct client contact’s personnel’s prestige within their organisations. This will only be reasonably achieved where industry and their consultants are willing and able to put in the time necessary to ensure that the value add is achieved efficiently and equitably for both parties.

Industry should seek to firmly establish a mutually respectful relationship with their consultants early in any project so that they understand the issues which must be addressed and the internal factors which depend upon timely solutions and results being achieved.

Industry also need to be active in ensuring that their consultants can maintain their competence and be adequately compensated for the value adding advice they are/ or will be called upon to provide.

These notes were compiled on behalf of the AusIMM Consulting Society 2016 Seminar subcommittee

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