The market for development experts

Unable to sleep last night, I logged onto the Aid Review website and started to browse through the 50 or so submissions. Many of them made references to technical assistance, so I ran a Google search – ‘technical assistance site:aidreview.gov.au/publications’ – and discovered a long list of results, including:

Significantly reduce use of technical assistance provided by Western consultants – use local rather than external advisors and institutions. (World Vision)

Reduce the proportion of aid money spent on Technical Assistance (TA) to at least the OECD average. (David Barnden and Gemme Lotha)

Reducing high-paid Western consultants and expenditure on ‘technical assistance‘ , which in 2009 consumed almost half of Australia’s aid budget. (Paul Woods, Jenna Weston and Sarita Hales)

… payments made to Western consultants to provide assistance in “technical” matters. I believe this is a wasteful use of precious aid money. (Christine Cass)

High cost is a common criticism of technical assistance. A 2008 report from AusAID highlighted the cost of consultants in Papua New Guinea: with average costs under different schemes ranging from $180,000 to $550,000.

Another criticism is the lack of evidence showing that technical assistance on average delivers results. There are a range of arguments for the ineffectiveness of TA, including: consultants undermine morale among lower-paid local staff; that foreign advisers bring inappropriate development models; that the high turnover of consultants leads to perpetual planning and reinventing of the wheel. (For a fuller discussion on technical assistance see Roger Riddell’s Does Aid Really Work?)

Taken together, these criticisms imply that technical assistance doesn’t represent very good value for money.

This next part of the article sets out a simple conceptual framework for understanding the market for consultants and argues that imperfect information leads to a sub-optimal equilibrium with high prices. The article then goes on to discuss a possible fix for imperfect information. (Note: there are also a range of political economy factors in the supply and demand for consultants, which are beyond the scope of this blog post. However, greater aid transparency, including around unit costs of consultants, may be an effective check on this – as seen recently in AusAID’s commendable response to reports on salaries paid to some of it’s consultants.)

Imperfect information

In this section, this article sets out some sources of imperfect information in the market for development experts. (For more on the underlying economics, see George Akerloff’s seminal article ‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’). In the stylised conceptual framework below, it is assumed that an aid agency wants to procure a development expert – someone with a specific range of technical skills (e.g. public financial management, educational reform etc.) and competencies (working with others, communicating etc.)

Firstly, it is difficult to gauge the quality of development experts, in terms of their technical skills and competencies. Price is often used as a proxy, but as anyone who has worked in an aid agency will tell you, this a poor guide. Another proxy used in procurement processes is to add up the number of relevant assignments on the consultants CV, a practice which skews selection towards development experts who have done lots of short term assignments rather than those with deeper experience. Of course it is possible for aid agency staff to chase up references and seek feedback on the quality of consultants by word of mouth, but this also implies an added transaction cost.

Secondly, there is imperfect information on the availability of development experts. Supposing you can find them, the best consultants are in high demand. Finding gaps in their schedules, or booking up blocks of time can be difficult, which makes it difficult to match development experts to appropriate assignments. This is a problem not just for aid agency staff recruiting directly, but also for large consultancy firms putting together bids under short timeframes and with uncertainty about whether those bids will be successful.

Thirdly, there is imperfect information about the scope of work. While a lot of effort goes into drafting terms of reference, it is often not until development experts are ‘on the ground’ that the tasks are fine tuned or even changed. Again this can lead to a mismatch in skills, and given the high transaction costs associated with procurement, a possible dilemma for managers on how to proceed.

Fourthly, there is imperfect information about on-the-job performance. A common practice among donors is to rely on self-reporting from consultants, with periodic review missions to verify overall performance. This can lead to partial or skewed information on actual performance.

This isn’t intended as an exhaustive list, nor as a criticism of individual consultants. Rather it is a stylized summary of examples of imperfect information in the market for development experts, and the conjecture is that these market failures lead to high prices and inefficient allocation of resources.

A market-based reform for technical assistance?

So an issue for donors to consider with respect to reducing expenditure on technical assistance is how to make the market for advisers work better?

The idea is that if donors can get better information on the quality of consultants, their availability, flexibility in communicating the scope of work and better feedback on performance, then this will improve the functioning of the labour market – i.e. lower costs and better allocation of resources.

In order to explore how this can be done, and there will be many more options, this article looks at e-procurement of freelance workers – in particular elance.com

Lessons from the private sector

In 1998 Thomas Malone and Robert Laubacher published in the Harvard Business Review titled, “The Dawn of the E-Lance Economy.” The article spurred much discussion in the academic and business press. Its core proposition was that “the devolution of large, permanent corporations into flexible, temporary networks of individuals” was already underway.

The trend was being driven by Internet-related technologies that lower business-to-business transaction costs. The lower transaction costs enabled by personal computing and electronic networks change the “economic equation.” This change reduces the value of centralized decision making, diminishes the economics of conglomeration and encourages companies to outsource a wider variety of business functions—especially specialized functions that are peripheral to a company’s core competencies.

The authors went on to say that while “no one can yet say exactly how important or widespread this new form of business organization will become, but judging from the current signs, it is not inconceivable that it could define work in the twenty-first century.”

A practical platform: Elance.com

Inspired by this idea, Elance’s founders began planning the infrastructure required to support the “E-lance Economy.” They realized that the biggest impact of this vision would be felt in the services industry—because of its large share of the world economy, its high outsource-able quotient and the substantial inefficiencies found in today’s services supply chain. Elance saw the need for technologies and solutions that made virtual work possible and improves the way businesses buy and manage services.

Since its debut, Elance has evolved into the world’s leading project-based marketplace and workspace, helping tens of thousands of small and medium businesses outsource to service providers in a wide variety of categories—including graphic design, web design, software development, engineering, writing, translation and market research.

In 2002, Elance brought its services vision to enterprise customers with the industry’s first comprehensive solution for Services and Contractor Management. Elance’s solution, designed to streamline and automate the process of finding, buying and managing services.

Today, Elance is the most widely used application for Services and Contractor Management. More than 200,000 employees are using Elance to find, buy, manage and pay external services and contractors from more than 2,000 suppliers across 50+ services categories, including information technology, consulting, contract and temporary labor, marketing, print, human resources, engineering, maintenance and facilities.

(Note: the diagram opposite illustrates the process for hiring, managing and paying for experts. To get a better feel for the web-based tool, visit www.elance.com)

Application to aid

A recent joint evaluation on technical assistance co-funded by AusAID  concluded:

A key determinant of TA effectiveness is country management of TA personnel. Decisions about recruitment and deployment should ideally be a country responsibility, negotiated openly with development partners and based on full access to information (including the costs of alternative TA inputs). Once deployed, TA personnel should be unambiguously accountable to the host organisations they serve…

… Countries are less concerned about taking over actual procurement and often welcome the assistance of development partner partners in this aspect of the process. However, they expect to be given more voice, and choice, in decision-making on the selection and recruitment of TA personnel. Once deployed, countries expect TA personnel to be directly accountable to them, although often this is still not the case – the influence of the development partner, as ‘paymaster’, may remain strong. In practice, there are various examples of joint or hybrid mechanisms that balance competing demands for accountability.

Countries’ reluctance to take over actual procurement is understandable given the high transaction costs and imperfect information discussed above. But if the whole process was automated along the lines of the Elance model, with donors providing funding and countries taking greater control over decisions, this could be an efficient way not only to reduce transaction costs, but also make in-roads on broader effectiveness issues of ownership and accountability. Meanwhile from a donor perspective the online system would create greater transparency about what is being funded and how much is being paid.

Efforts to reform technical assistance have traditionally focused on improving management and cutting costs, perhaps we need to look more at reforms that improve the functioning of the market for development experts.