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First in a Two-Part Series

Last spring, as word reached Constance Newman that D.C. public schools were once again having trouble procuring basics like textbooks and computers—not to mention facing another threat of delayed openings over bungled boiler and roof repairs—the control board vice chair called a couple of meetings to plow through the mess. “If the schools don’t open on time, heads will roll, and it will be the heads of some of the people in this room,” Newman declared.

And the list of folks with necks on the line included just about everyone you’d invite to solve a schools crisis: Superintendent Arlene Ackerman and her deputy, Elois Brooks, then-Chief Procurement Officer Richard Fite, and then-Acting City Administrator Norman Dong, among several others. At least one schools-procurement contractor, from the systems firm Compusearch, was also there.

One of the participants at the control board meetings, though, didn’t have to worry about Newman’s ax: Lawrence S. Herman, the partner at accounting firm KPMG Peat Marwick who manages most of the firm’s business with the D.C. government. “He was one of about 12 people that I wanted in the room to make sure the schools would open on time,” recalls Newman. “I wanted all the people who have any power to make sure that whatever has to happen to get school supplies, books…and everything ready, happens.”

And just what perspective was the KPMG partner to supply? “Larry Herman, in particular, was advising the mayor, as far as I knew, on procurement issues,” says Newman. For the record, Herman was not advising Mayor Anthony A. Williams on procurement. A review of 1999 contracts turns up no procurement partnership between the mayor and KPMG.

But Newman can be forgiven her mistaken impression. If her goal was to assemble a roster of local heavy hitters, Herman was an obvious first-round draft pick. A veteran of a decade of consulting studies on the famously malfunctioning city government, Herman could write a dissertation on how the procurement problems evolved, how acute they remain, and how to fix them. The third part of that sequence, of course, usually comes in the form of a KPMG proposal, price tag attached.

Herman’s place at the table—coupled with his mastery of 21st-century management-speak—explains in part how KPMG has inked at least 45 D.C. government contracts, worth an estimated $40 million, since the 1995 onset of the control board era. And the partner’s meeting with Newman is merely a tiny symbol of his access downtown. Several of his former minions now work in powerful positions at One Judiciary Square, and Herman knows the layout of the mayoral suite better than many who work there every day.

Williams’ underlings have even coined an affectionate nickname for the KPMG principal. “They called him Rasputin,” says a former staffer, referring to the self-indulgent svengali renowned for his proximity to the Russian throne. Mayoral staffers giggle when asked about Herman and his likeness to the Russian monk.

KPMG spokesperson Marcie Odens Peck says that Herman as a matter of policy doesn’t speak to the press. “KPMG sees no conflict between our contracts with the District of Columbia government or any work our partners are engaged in with the District of Columbia,” says Peck.

Yet Herman and KPMG tell a story broader than how an aggressive, connected businessman drums up government dollars for one of the country’s premier accounting firms. The contracts presaged the spread of D.C.’s outside-consultant addiction from the control board to D.C.’s home rule government. In the past, proud D.C.ers railed against congressionally appointed overseers for endlessly unleashing private-sector problem-solvers on District agencies. In the new D.C., however, the consultancy obsession is becoming our own.

With each deal, the consultants furrow deeper into our governing machinery. They come out just long enough to draw up a proposal to fix the next systems failure.

“We’re basically the full employment act for the Big Five accounting firms,” says Ward 3 Councilmember Kathy Patterson, chair of the council’s Committee on Government Operations.

Any firm out to win a few contracts for diagnosing dysfunction in the District government would want Herman on its payroll. The KPMG partner, after all, served as staff director on the landmark 1990 study Financing the Nation’s Capital: The Report of the Commission on Budget and Financial Priorities of the District of Columbia—also known as the Rivlin report, after current control board Chair Alice Rivlin. Of the zillions of studies and financial deconstructions of D.C. performed over the past decade, the Rivlin study to this day retains a mythical reputation for having predicted the city’s mid-’90s fiscal collapse.

With those entries on his C.V., Herman was well prepared to charm the control board. The board, after all, assumed power in June 1995 with little respect for the D.C. government’s self-corrective powers. Like most outsiders who parachute into town to save the District, the board’s five members concluded not only that city government was a disaster, but also that solutions were way beyond the grasp of those in power.

Because the board lacked the staff to pull off a municipal turnaround on its own, there was only one alternative: consultants.

In its first two years in power, the control board dished out $18 million on consulting contracts, an amount that raised few objections from citizens or elected leaders. A chunk of the money went to Booz-Allen & Hamilton Inc., which was completing a report on the D.C. police department. IBM also signed a contract to overhaul the District’s tax system.

But the board’s modest outlays for accounting advice mushroomed into a Big Five bonanza following President Bill Clinton’s August 1997 signing of a congressional D.C. rescue package, which mandated that the control board hire platoons of consultants to overhaul everything from fraying carpets at the Department of Consumer and Regulatory Affairs to snow-plowing jalopies at the Department of Public Works.

And those projects weren’t even a fraction of the gem that KPMG snared from the control board through open competition in September 1997—a five-year, $21 million whopper of a contract for the construction of a new financial management system for the D.C. government. Then-Chief Financial Officer Williams cheered the imminent exit of the government’s ’70s-era municipal accounting technology.

“In an age where people can talk across the world in a matter of seconds, we still have to wait 45 to 60 days for our managers to get information,” said Williams at a control board press briefing at the time. “We’re way behind. We’ve got a lackluster, age-old, obsolete, antiquated system.”

At a Dec. 11, 1997, “roll-out,” KPMG promised to outfit the sleek new product with all the latest features, including “real-time, on-line management reports,” “immediate snap-shot[s]” of financial position, automatic updates to the city’s checkbook, and—a must for any self-respecting accounting module—a function that “enhances District’s ability to act as a ‘smart customer.’”

Too bad the city didn’t have that last feature in place before buying the KPMG product, known as the System of Accounting and Reporting (SOAR). According to sources close to SOAR, the system has not delivered on the “real-time” functions promised by the firm and falls short on its performance-measurement features as well.

“It’s not what people want their reports to look like,” control board Executive Director Francis Smith acknowledged to LL a week ago. Off the record, a D.C. government colleague put it a little more vividly: “[Herman] must be a real rainmaker if he sold us that piece of shit.”

SOAR’s glitches have booted up a crisis for Williams’ successor as chief financial officer, Valerie Holt. Last week, Holt announced that the system would be 45 days late in spitting out the city’s fiscal year 1999 audit—a document required every year by Feb. 1, according to congressional mandate.

Holt and KPMG attribute the lag to the city’s unrealistic one-year implementation schedule for SOAR—a product other municipalities have implemented with greater success over three or four years. “Additional time is needed to fully implement the system and to format the information necessary to produce the [audit],” said Holt in a prepared statement.

And according to KPMG’s Peck, “this is the same system that KPMG has successfully implemented and that is working effectively in 23 other state and local governments—including Fairfax County, Prince George’s County, Prince William County, the state of Maryland, and Montgomery County.”

Williams, whose stratospheric reputation as CFO is coming back to earth with SOAR, abandons his “Mr. Accountable” lines when asked about the system. “We’d have growing pains if we were implementing at a leisurely pace and growing pains at a fast pace,” said the mayor at last Saturday’s Neighborhood Action forum.

Unlike the air conditioner LL purchased at Circuit City, SOAR has required numerous upgrades and general tinkering—which in this case are partly to blame for 31 contract “add-ons” that have elevated KPMG’s take from the original $21 million to $32 million, according to a Jan. 6 report by Patterson’s Committee on Government Operations. Furthermore, the CFO has used SOAR’s open-ended budget to sign with KPMG a slew of sole-source contracts unrelated to financial management. (The add-ons are the focus of LL’s next installment on KPMG.)

Although the SOAR contract has yet to open a new era in municipal finance, it has opened a period of extraordinary coziness between KPMG and the city’s powers that be. It was installation work on the SOAR package that brought Herman into contact with Williams, who supervised the system until he left his CFO post in June 1998 for his successful mayoral campaign.

According to mayoral spokesperson Peggy Armstrong, the then-CFO “came to hold Herman in high regard” for his efforts on behalf of the city. Social outings ensued, as Williams and his wife, Diane Simmons Williams, dined occasionally with Herman—a ritual that has continued through Williams’ tenure in the mayor’s office.

“He’s a member of the mayor’s kitchen cabinet,” says a source who requested anonymity.

Insider wannabes dream of story lines like Herman’s, a progression of influence, wealth, access—and scant publicity. A computer search of Washington Post archives over the last decade turns up only a handful of references to Herman’s D.C. work, none of them in the 13 months since Williams took power. Herman’s most recent Post mention, in fact, came as part of a list of donors to Williams’ 1998 mayoral campaign; Herman gave $1,000 and also helped organize a brown-bag lunch with a group of associates for candidate Williams.

At a Jan. 25, 1999, press conference, however, Williams committed an indiscretion by blowing his associate and friend’s cover. In a spiel on appointees to top government posts, the mayor blurted out, “We have Larry Herman providing pro bono help in the mayor’s office….We want to be actively involved in the corporate community.”

The act of charity that Williams referenced before the cameras was a re-engineering study of mayoral functions volunteered by Herman & Co. Williams advertised the free analysis as a victory for his program of “public-private partnerships,” in which the administration “leverages the good will of corporations and nonprofits in the District” for the sake of better government.

Inviting Herman to snoop around the mayor’s office, however, has to qualify as an arrangement of “mutual leveraging,” to borrow Williams’ phraseology. Consultants thrive on access—access to decision makers, access to their confidants, and access to information on what emerging crises their firms can then plan to fix. Access, furthermore, yields insight on how the government works, which is then plowed into bids and proposals for more work.

Mayoral Chief of Staff Abdusalam Omer says he called on KPMG because “I’m familiar with them. I asked a number of people, and they were the ones who came through.” Omer adds that he contacted Booz-Allen & Hamilton, among others. Marie Lerch, a Booz-Allen spokesperson, says her firm never received “a formal request.”

Like his boss, Omer is a friend of Herman’s. “We’ve been out to dinner, but he’s not a drinking buddy,” Omer says. Omer credits KPMG with centralizing support and administrative functions and with eliminating the once-sovereign mayoral budget office. “You don’t need five people to handle a $4 million budget,” says Omer.

While KPMG has coached Omer on centralizing functions, Herman’s proteges have over the years spread out among key posts in the District government. “I will rob consultants from the accounting firms whenever possible,” says Omer.

He ain’t kidding. Allison Allis left the firm to work in Williams’ Office of Competitive Services (OCS). Former KPMG staffer Lisa Morgan works as a deputy to Omer. Noel Bravo, another former KPMGer, started in the Williams administration as deputy chief of staff and has since moved to the Department of Parks and Recreation. Matthew Morris went from KPMG to the D.C. budget office, and Hyong Yi went from the firm to Omer’s office.

“It’s a really incestuous thing they have going,” says a former KPMG consultant.

It’s also good business. In the coming years, the mayor’s office may very well supplant the control board as the accountants’ No. 1 customer. One fertile area is managed competition, where OCS inked a deal with KPMG last year, and where Williams is planning an onslaught of studies on “activity-based costing”—a fancy name for putting a price tag on municipal services, as well as a function that just happens to be one of KPMG’s specialties.

Another potentially profitable consulting topic just happens to be the target of Williams’ ongoing takeover plan: the school system, a bureaucracy that is to management consultants what tobacco is to class-action lawyers.

Williams, though, suggests that Herman will have to get in line with his competitors. “He’s not getting any better treatment with me than anyone else because of his relationship with me,” says the mayor.CP

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