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Lifting the LETR from the doormat

22 May

This morning’s seminar on reforming legal education and training, hosted by Westminster Legal Policy Forum, provided a timely opportunity to reflect on the progress so far of the Legal Education & Training Review (LETR).

The lead for the LETR, Professor Julian Webb, rightly reminded us that the function of the Review is to address the question of how best to regulate legal education and training – specifically, the scope, reach and proportionality of that regulation. He said that, so far, responses to the LETR discussion papers had reflected vested interests, and had demonstrated limited consensus and offered little in the way of alternative vision.

The optimism which I initially had about this Review has gradually been draining away. Perhaps that was inevitable. The principle of a root-and-branch review sits rather uncomfortably with the pragmatics of funding it. The notion of ’he who pays the piper’ cannot easily be pushed to the back of one’s mind. If the paymasters are incumbent regulators of professionals, the perception of an independent review in the wider public interest becomes harder to sustain. (I am talking about perception here, not reality.)

To my mind, the Review needs to look at the scope, reach and proportionality of the regulation of legal education and training for the emerging and future legal services market. The starting point should not be, ‘How can we tweak the current framework to meet the needs of the future?’. It was therefore somewhat disappointing to hear Professor Webb say early in his address that the LETR team was not starting with an assumption of any need for fundamental change. My alarm bells are ringing: the market of the present is already (and the future market will surely be even more) fundamentally different, so is it appropriate to surmise that the education and training that underpins it will not need fundamental reform?

And while I can see the attraction of seeking an evidence base for change, and adopting a planning horizon that looks toward the market in 2020, I have to confess that I would not have predicted at the beginning of 2012 some of the developments we have already seen in the first five months of this year, let alone eight years hence. Inevitably, therefore, there cannot be any evidence for the change that might have occurred by 2020. Where does this leave a fundamental, evidence-based, policy review?

I have attended many events recently that explore the work of the LETR. The overwhelming sense I am left with at these events is that the majority of participants are too readily assuming that the only issue that needs exploring is that of regulating the education and training of ‘the legal profession’ (or, on more enlightened days, ‘the legal professions’). But the Legal Services Act 2007 does not start with the assumption that legal services will only be delivered by those who are legally qualified and hold a professional title. It heralds a mix: the concurrent regulation of individuals, activities and entities. However, the present framework of the regulation of education and training very definitely starts with the professions and individual practitioners, so it is perhaps not surprising that a review that is sponsored by the main professions should assumptively start from the same, historically embedded, point.

One of the darker consequences of such a starting point is the insidious and invidious proposition that legal services delivered by those who do not hold a professional title must necessarily be of low or poorer quality, or even incompetent. If sectional responses to the LETR advance this proposition, the Review is doomed. The assumption that competence and ethics can only be demonstrated by those who are legally qualified is arrogant and unjustifiable (I have previously explored this in a different context).

Indeed, the falseness of this view is written into the very core of the Act. Parliament has already decided that legal services do not need to be delivered only by those individuals who hold a protected title, but can be offered by those individuals who are authorised, or entities that are licensed, in relation to one or more of the reserved activities. To suggest that any such authorisation should only be founded on the same breadth of education and training as those who hold a professional title is to seek to achieve by the back door what Parliament has opened the front door to avoid.

The future market will not be one where only qualified lawyers deliver legal services. We already know this – even if we do not yet appreciate the full variety of those who will, in time, be authorised or licensed. Lawyers will become a subset of the total number and type of providers. The task for the LETR cannot be limited to how to adopt or adapt the route to professional qualification for broader purposes (and, to be fair, its terms of reference do not suggest that it is). The future will also have reserved activity specialists and non-lawyers engaged in the delivery of legal services, as well as in the ownership, financing, governance, compliance and management of the entities providing those and other services. To assume that their education and training needs can (or, worse still, should) somehow be carved out of a broader legal qualification process to me presents the greatest threat – and would perhaps even deliver the fatal blow – to the credibility of any proposals for the future.

Even if we accept that the current process of education and training for those who seek or hold a professional title is not broken and is entirely fit for purpose (personally, I still have doubts on this, but bear with me), the nature and breadth of the future market must surely mean that the same process cannot possibly be adequate for the new market in its totality. A system designed for one purpose (even assuming that it is fit for that purpose) is not necessarily or inevitably fit for a different purpose.

Barely a whisper is heard about the needs of those in the broader market, and the expectations and needs of clients are almost universally unmentioned: the discourse is regrettably dominated by justification and defence of the current framework for training those who seek or hold a professional title. Until we disconnect the award and retention of a title from the quality and standards of competence and ethics required of those authorised to deliver a regulated activity, we are not even on the starting blocks of a proper debate about the future scope, reach and proportionality of regulation for legal education and training.

The LETR must therefore address the broader question first: what is the proper scope, reach and proportionality for the regulation of the (not simply legal) education and training of all those who are authorised or licensed to deliver regulated services, or who work within regulated entities? Only then should it move on to consider whether the current framework for regulating the education and training of those who presently hold professional titles has the proper scope, reach and proportionality consistent with those broader needs and objectives.  To do otherwise is to start at the wrong end of the telescope: we should be looking from the outside (market) back in, not from the inside (professions) out.

Individual regulators might well choose to impose additional burdens on individuals who wish to hold a professional title. But perhaps those regulators should first be required to ensure that market-wide minimum requirements for authorisation in relation to specific reserved activities are met before imposing additional obligations for the award of a professional title (such as a need to be authorised for more than one reserved activity). We might then find that the public and consumer interest should require a higher minimum standard for initial authorisation (say, for some rights of audience exercised by solicitors) than the current process of ‘bundled authorisation’ imposes.  The training I received 35 years ago in conveyancing should not, without a lot more (and CPD isn’t it), still form the basis for me exercising a reserved instrument activity today.

If it is clear that any meaningful consensus or alternative visions are not going to emerge from current stakeholders, the LETR faces the monumental challenge of going back to basics, with no assumptions, and ignoring vested interests. In that case, it is time for the LETR to raise the temperature, and publicly challenge all of us to consider the wider public interest in the education and training needs of all those providers who will be competing in the liberalised legal services market that Parliament has already created rather than in the historical and relatively uncompetitive, unchallenged market that the professions might prefer to see continue.

Is the LETR being treated like a doormat? I don’t think so. Will the eventual conclusions and recommendations of the LETR land on the doormat with the thud of a well-meaning and worthy, but ultimately unfulfilling, enquiry?  Not necessarily.  But unless there is more overt challenge to the established hegemony of existing stakeholders in the education and training of lawyers, we will miss this once-in-a-generation opportunity to re-conceive for the better a key component of an independent, strong, diverse and effective market, of which the legal professions must, rightly, remain a part.

 
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Posted by on 22 May 2012 in Education and training, Legal services, Legal Services Act, Regulation

 

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External ownership and the forked tongue of ethics

13 Apr

Nine US general counsel have come to the conclusion, reported in Legal Futures, that there is no need for external ownership of law firms and “that the inevitable chipping away at the profession’s professionalism ultimately will do a disservice not just to the business clients we serve, but to all clients who seek the trusted and confidential advice of counsel”.  I would not presume to disagree with their judgement about their own clients.  But I would seriously beg to differ with the general sentiment implicit in the conclusion that ‘non-lawyer’ (I still hate that expression) ownership will necessarily erode professionalism, undermine lawyer-client relationships, compromise confidentiality, and encourage unethical, profit-maximising behaviour.

It is perhaps worth remembering that, despite the rapid growth in the number of lawyers in the past quarter-century, ‘non-lawyers’ still constitute the overwhelming majority of the population.  It is a bold claim indeed to suggest that members of this group are, or would inevitably become, unethical when they acquire an ownership stake in a law firm.  There is, in fact, absolutely no evidence to support this.  In part, this is because so few jurisdictions currently allow such external ownership (which makes the suggestion a contestable hypothesis, not a fact).  In part it is because, in jurisdictions where external ownership is allowed (such as New South Wales, and England & Wales), there are no facts that suggest that unethical behaviour follows.  It is, of course, possible that such evidence will emerge over time: but even if it does, it will take a long time for that evidence to reach the current tally of unethical and unprofessional behaviour of lawyers around the world.

The fundamental problem with the opposition to external ownership is that ethics is a state of mind, not a state of ownership.  There are ethical and unethical lawyers, just as there are ethical and unethical ‘non-lawyers’.  Until the legal professions rid their ranks of the unethical, the high horse of professional ethics is not a secure vantage point from which to resist ownership by those outside the ranks.  By siding with the status quo and suggesting that the case for change is not made out, opponents of external ownership conveniently side-step their own need to justify a restrictive practice whose public interest foundations and justification are tenuous and for which the supporting case in the 21st century has also not convincingly been made out.

The foundations of lawyer-only ownership seem to be built on three propositions:

  1. that lawyers need protecting from outsiders (so much, then, for their professionalism and independence, which would surely enable them to resist inappropriate pressure and temptation);
  2. that clients need protecting from unprofessional behaviour by law firms (which might be true for some clients, but does not seem to me to depend on whether or not the firms are owned by lawyers – and, given that the restrictive rules on ownership originated in an era of 100% lawyer ownership, hardly puts lawyers on the front foot); and
  3. that ’non-lawyers’ will exert unprofessional or unduly economic pressures - or, in other words, that compared to lawyers they are inherently unethical (which, as I suggested earlier, is a bold statement – and possibly even insulting).

Where, then, is the public interest case for lawyer-only ownership?  In the battle between assertion and evidence, assertion is best for lawyers because there is no evidence that external ownership is bad for clients or law firms.

While we’re looking at ‘non-lawyer’ ownership, let me also suggest that this should not be read as being synonymous with ‘external’ ownership.  What about all the other people working in law firms who help it to create value for clients and the owners?  They are internal, not external.  On what basis – other than simply because they are ‘non-lawyers’ – could anyone suggest that these individuals should be excluded from an ownership stake in the businesses they work in?  I’ve never heard a convincing defence of their exclusion.

Nor could I accept that these individuals - simply because they are ‘non-lawyers’ – would necessarily apply unprofesssional or unethical pressure if they became part-owners; or, to put it in slightly different words, that they would contribute to ”the inevitable chipping away at the profession’s professionalism [and] ultimately … do a disservice … to all clients who seek the trusted and confidential advice of counsel”.  If such a proposition were even remotely tenable, how come these sorts of people are already working in law firms?

The resistance to ‘external’ ownership is not on secure ground.  The principle of lawyer-only ownership does not hold water.  In fact, it leaks terribly - and with a rather unpleasant whiff of self-interest.  Let us instead address the real challenges.  Of course there is a risk that ‘non-lawyers’ will behave badly – just as there is a risk that lawyers will, too.  If the risk of unethical behaviour exists, let us address the risk: otherwise, the principle that the possibility of unethical behaviour must exclude certain people from ownership should, logically, in the interests of fairness and non-dsicrimination, exclude lawyers as well.

We should therefore recognise the risks and take steps to minimise and mitigate them.  That’s what the regulatory framework of the Legal Services Act does.  For example, it imposes the same professional objectives on the whole business as it does on the individual lawyers.  It also imposes a statutory obligation on ‘non-lawyers’ not to do anything which causes or contributes to a breach by a lawyer or the firm of the regulatory and professional obligations imposed on them.  So ’non-lawyers’ who behave inconsistently with professional requirements, or inappropriately pursue profit at the expense of professionalism and professional obligations, run the risk that their opportunity to be an owner, officeholder or employee in a legal business will be taken away from them.  Just as it is for lawyers.  Equal opportunity and treatment seems justifiable to me; prejudicial and self-interested bias does not.

The argument, then, shouldn’t be about whether or not ’non-lawyers’ should be allowed any ownership interest or control in law firms.  It should be about how we manage the risks that any owners – whether lawyers or not – might pose to the public, professional and client interests.  There is no inevitability about any behaviour, just potentiality and risk.  We need to manage the risks as they in fact exist and not as we might prefer them to be.

Let us stop insulting the intelligence of clients, and casting doubts on the motivations and ethics of those who do not hold a professional qualification or badge of ‘lawyer’.  Let us remove the forked tongue of ethical bias and withdraw insinuations of unprofessional, profit-driven behaviour by ‘non-lawyers’.  Because, of course, we might suggest (with tongue now firmly in cheek) that it has only been altruism and selfless client service that has made so many lawyers around the world multi-millionaires….

 
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Posted by on 13 April 2012 in External ownership, Legal services, Legal Services Act, Regulation

 

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The mirage of ownership

24 Feb

This year has started with a flurry of activity and announcements that give the lie to any notion that ABSs will be a damp squib and of no consequence, or that external capital will not be interested in law firms.  So far, so good.  What I want to explore here is whether external capital should be interested (at least without deep and meaningful enquiry into its target).

In founder-led firms, ownership has real meaning and value.  The founders are responsible for developing clients, running the business, and making sure work is performed at a profit.  These businesses usually respect the role that everyone plays, and they present an exciting, challenging, and motivating environment.  The connection between effort, investment and return is often close and evident.

However, a start-up cannot last forever, and the founders will begin to consider the future of the firm.  This has historically meant admitting new partners.  In the early days of a firm, the new partners might well have been trained by the founders and will owe a lot to their mentors.  But as the firm develops and grows, this link with the founders (and therefore with the business idea and culture they promoted) becomes more tenuous.  As a consequence, the Anglo-American ‘model’ of the modern law firm has evolved.

In the standard form of this model, a junior lawyer has become a partner as a reward predominantly for being a good lawyer and enduring the firm for a number of years.  Under this system, a career track of sorts is clearly identified and understood, though the length of the track has been increasing and other ways have been found to delay or avoid promotion to equity. The ‘jam tomorrow’ approach of keeping associates working hard in the expectation of the rewards, status, security and involvement of a partner has been the historical foundation of many large commercial law firms.

However, its effects are not positive, and may yet be the undoing of several.  Too often, law firms today are having to face up to the idea that clients are no longer willing to pay for the training or expensive (and often, to them, unnecessary) involvement of those below partner level.  They are also having to deal with some employee-minded partners who do not understand the nature of ownership risk, and whose expectations of a continuing high (and increasing) income is at odds with the economic climate and their own contribution.

So, in this model, what are the assets subject to the ‘ownership’ of partners in law firms?  They certainly include premises, furniture, technology, equipment and the like.  For the most part, though, these physical assets are taken on lease and are therefore more of a continuing liability than an asset; and even where owned they are a depreciating asset at best. There is, of course, the value of work-in-progress and outstanding invoices.  But these represent work already carried out – the past, not the future.  Ownership of a share in the past is certainly a questionable asset.

In fact, much of the productive value of a law firm does not appear on its balance sheet: the talent and know-how of its people, their network of internal and external relationships, and the processes and efficiencies that support them.  Nor are these assets subject to the firm’s ownership.

Yet the notion of ’ownership’, especially through the structure of partnership, is still espoused – often in tandem with its tenuous bedfellow, ‘collegiality’.  I have recently been prompted to wonder (with ‘wonder’ in both its inquisitive and amazed meanings) whether this pervasive fondness for partnership and its claimed collegiality in fact reflects a romanticised but misplaced notion of both.

The reality in too many law firms is that their leaders and partners promote and defend their ‘collegiate’ cultures while at the same time condoning the behaviour of those who operate in silos, in an environment that encourages internal competition for clients and profits, where the quest for effective cross-selling is longstanding but frustrated, where the dominant philosophy prefers short-term income extraction to long-term investment, where there is a lack of mutual respect and an unwillingness to be accountable, and where collective aspirations and management decisions are too often ignored in the daily press of individualistic and self-interested (if not downright selfish) behaviour.

If the productive assets that determine the ability of a firm to survive, develop and prosper are not owned by the business or its partners, we might expect the so-called ‘owners’ to nurture and respect those who carry that productivity.  Unfortunately, however, too often we find hyper-critical and hyper-sensitive environments where support staff, many lawyers, and even some partners, have a sense of inferiority or second-class citizenship; they are actively discouraged or overtly excluded from any meaningful involvement in the firm to which many have devoted their working lives.

In these circumstances, ownership is worth little.  It is a mirage – in the sense both of being increasingly elusive to those who aspire to it, and as not being what it is thought to be to those who have it.  I often hear partners in the large firms say that they are not interested in taking external investment.  To be honest, the real surprise would not be a firm wanting external capital, but rather the prospect of external capital falling for the mirage it would be investing in.  More of a miracle, perhaps!  But then the institutional memory of such investors might well be short enough not to recall the past acquisitions of investment banks, brokers and estate agents.

Large law firms might be relatively profitable.  However, they have yet to demonstrate that, from an external perspective, they have the stability, sustainability, discipline and cohesion that gives their ownership any true, independent, value.  The appearance of continuity can become strikingly ephemeral.  How quickly all-conquering names can be turned to dust (remember Andersen and Halliwells?).  Ownership should be valuable – and there should be a market for ownership shares.  But the mirage needs to disappear first and be replaced by a genuine pool of value.

(This post is an expanded version of a guest blog that first appeared on Legal Business Digital (£) in December 2011)

 
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Posted by on 24 February 2012 in Law firm profitability, Law firm valuation, Legal services

 

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Is legal education ‘fit for purpose’?

24 Nov

Last month I took part in the UCL/LexisNexis Legal Education Debate on whether lawyers need to be scholars. I was privileged to be one of the panellists, but found myself in some hot water for suggesting that, viewed in its entirety, the current framework for the education and development of practising lawyers was not ‘fit for purpose’. Let me explain why I reached that conclusion.

We are now into a period of outcomes focused regulation. While in favour of OFR in principle (I quite like the idea of lawyers being trusted to do the right thing), there are still some practical challenges to be overcome – in particular being able to identify what the right outcome is. Be that as it may, my starting point on education and training was less about the question for debate (do lawyers need to be scholars?) and rather more about the outcome: do we produce lawyers who are fit for practice? My view on that, regrettably, is that we don’t produce enough.

Where the outcomes are not good enough

There are five critical areas where I think practitioners too often fall short:

  1. Basic legal underpinnings of their work. We can’t reasonably expect practising lawyers to know all the technical law they will ever use. But they should be able to carry out the necessary research to find it when they need it (and too many law firms report deficiencies in this). More fundamentally, we should also expect practising lawyers to know the basics (which is why I’m shocked when some senior litigators apparently rush to negligence actions without considering duty of care, breach or causation). On this basis, even if lawyers do need to be scholars, the process often fails.
  2. The ability to apply their technical advice. Too often, we hear from clients and other sources of feedback that a lawyer’s advice, while technically correct, has not been applied in a contextualised, meaningful and valuable way that helps the client address their personal or business problem. “Here’s my advice: make up your own mind what to do with it” will hardly endear lawyers to clients or justify the fees that many lawyers seek to charge for their ‘help’. If we are training lawyers to give advice that is technically correct but of no practical utility, we are failing.
  3. Project management skills. With no apologies to those who don’t like management expressions, there is also little point in training lawyers to give accurate - and even useful – advice and assistance if they are unable to scope, price and deliver their services in an effective and efficient way, at a fee that the client regards as value for money, and that the firm regards as a fair return on the resources used. A large part of the costs debate and Lord Justice Jackson’s search for better proportionality of costs to the issues and value at stake derives from an often deep-seated unwillingness of lawyers to manage and be managed, even (or especially) at the case level.
  4. The ethical and regulatory framework of professional practice. Integrity must be a major selling point of professional practice. The level of complaints (formal and otherwise) suggests that too many lawyers just don’t get this. Or maybe we simply have too many lawyers to maintain quality and ethics?
  5. Law as a business. Despite many moves in the right direction, we still don’t have enough lawyers with the ability to build and manage sustainable and valuable business entities that are effectively structured and governed, efficiently run, and capable of surviving beyond the current generation of owners. This is often characterised as a dichotomy between law as a profession and law as a business. This is an old, tiresome and futile argument. Legal practice is both: if you charge people for the advice you give, you’re in business. There’s no reason why you can’t do that professionally and ethically while at the same time being efficient and making a profit.

I’m more than willing to acknowledge that there are many stunning exceptions to each of the five criticisms made above. There are some for whom the education and training framework of legal practice has worked superbly. However, that’s no consolation to the clients who are subjected to the worst examples of each criticism, and any number of combinations of them: for these people, our education and training system has failed them utterly.

If we’re going to sit on a high horse of exceptional quality and ethical integrity, then we’ve set a very high standard for judgement. It might be tough (and yes, it might even be unreasonable) but any significant number of deficiencies will mean that the system is failing. I’m not therefore suggesting for a moment that the whole education and training framework is not fit for purpose, or that no part of it is performing at an exceptionally high level. But judged on the standards and expectations that are set – by the market, regulators and clients – there are far too many manifestations of incompetence, poor service, or unethical behaviour. So, judged on this outcome, my conclusion is that the current education and training framework is not sufficiently fit for purpose (with appropriate apologies to those practitioners and educational providers who are doing a superb job).

The links in the chain

Starting with the outcome, then, the chain of educational development is not reliably strong enough to produce the breadth and depth of competence and skill that twenty-first century legal practice now demands. It seems to me that each of the academic, vocational, training contract, and continuing professional development stages has a role to play, and forms a link in that chain. Unfortunately, each is to some extent (i.e. not totally or universally) now broken in its contribution to the next stage, resulting in the systemic shortcomings described above.

I therefore welcome the education and training review being co-chaired by Dame Janet Gaymer and Sir Mark Potter (and it was pleasing that Sir Mark was able to attend the debate). I look forward to hearing their conclusions and proposals for addressing the systemic shortcomings in the present approach.

The future world of legal practice will not support a one-size-fits-all approach to the structure and delivery of legal services. It will not, therefore, support a similar approach to education and training. We need to be clear about the core knowledge and skills that are necessary in the twenty-first century to justify the award of any protected title and the privilege of practising in one or more of the reserved activities. At the same time, that entry point also has to provide a robust enough foundation for supporting a practitioner’s diversification into any of the near-infinite possibilities and opportunities that the new world might offer.

 
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Posted by on 24 November 2011 in Continuing professional development, Legal services, Regulation

 

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One more time: we are NOT deregulating

23 Aug

Time and again I hear (or read) that the Legal Services Act is deregulating the legal services market.  It is not.  Everything that is currently regulated remains so.

It is true that people who are not authorised persons (shorthand = legally qualified) are able to offer legal services that are not reserved activities.  This was true before the Act, which makes no difference to this situation.  So no deregulation there.

It is true that the Act now gives the power for the reserved activities to be changed.  It would therefore be possible for something that is currently regulated through reservation to authorised persons to become deregulated if the activity ceases to be reserved.  But I have heard not a whisper that this is likely to happen.  So no deregulation there, either.

Now, an activity that is presently not reserved could become so (the Legal Services Board is just starting to look at will writing and estate administration).  But that would bring what is presently unregulated – if not done by authorised persons – within the regulatory framework.  So still no deregulation.

Existing regulators – or even new ones looking for approval – can apply to regulate more reserved activities, but that will bring their members within (or more firmly within) regulation.  Still no deregulation.

And finally, people who are not authorised persons can apply to become members of legal disciplinary practices (until the ABS licensing framework comes into play), or members of ABSs, or to be approved as Heads of Finance & Administration (or the SRA-equivalent of Compliance Officers for Finance & Administration), and ABSs as entities will need licences.  In other words, more people who are not currently regulated will have to become regulated in order to operate.  No deregulation.

For the life of me, I can’t find any deregulation.  Perhaps what the ‘deregulators’ are really griping about is the increase in regulated competition.  But that’s a gripe about competition, not deregulation.

I’m left with the feeling that the complaint is really about new regulated competitors who will do things differently.  For the detractors, the issue seems to be the supposed hordes of ‘pile-it-high, sell-it-cheap’ merchants who are going to swamp the market and who will ‘inevitably’ ignore professional standards and produce low-quality services.  To them, ’different’ couldn’t possibly mean better, more client-friendly, or cost-effective (yes, alright, cheaper).  This difference could be described as ‘liberalisation’, but it’s not deregulation.

The fact is, it’s time to face up to three uncomfortable truths.  First, there is a risk that the future will see more unregulated providers offering non-reserved legal services.  However, that could always have happened, and is not a result of provisions of the Act or a form of deregulation.

Second, there is indeed a risk that the new regulated competitors might rip off their clients, provide poor service or behave unethically.  However, they will be regulated, so the response does not lie in barring their entry or shouting ‘foul’ about their scale or methods, but in the regulators doing their job and taking robust action against the transgressors.

Third, and perhaps most difficult, is accepting that the present regulated community has authorised persons who are not doing a good job.  Sadly, some of them are incompetent, unethical, engaging in criminal activity, misleading clients, overcharging, providing poor service, or running their businesses in ways which would, frankly, be laughable if they weren’t so serious in their consequences.

I know it’s not the majority of practitioners who behave in these reprehensible ways; but for professionals to adopt a ‘holier than thou’ stance, and assert that all new entrants are ‘bound’ to cut corners, behave unethically and sell cheap, low-quality services, hardly does them any favours.  It can only be interpreted as self-serving objection dressed up as concern for clients.  Unfortunately, those same professionals have for years defiantly ignored a mountain of evidence – and still mounting evidence – that they are not delivering what the market or clients really want.  This focus on concern for clients I’m afraid has a hollow ring to it.

Until the professions accept that they are not universally made up of competent, ethical, high-quality, individuals and firms who are of undoubted integrity AND that the new regulated competitors are not inevitably all unruly shysters and charlatans, they are not likely to gain much of a serious hearing about the effects of liberalisation.  After all, the Parliamentary intent is to liberalise.

So, please, no more talk of deregulation.  And because none of us knows how many unethical and poor quality providers there are in the currently regulated community, let’s stop taking cheap shots at new regulated entrants who are collectively likely to have no different a profile to the professions’.  It’s time to get on with the new world rather than seek to deny, defer or avoid it.

If there comes a time when there’s incontrovertible evidence that regulated practitioners and firms have failed in their obligations (rather than just assertions and assumptions that they surely will), and when there’s incontrovertible evidence that the regulators have failed in their duties of identifying and dealing with transgressors (rather than just assertions and assumptions that they surely will), then that will be the time to create a fuss – and, believe me, someone will.

Until then, let’s get on with it, instead of wasting time and energy misdescribing the inevitable.

Postscript: There is also an excellent post by Richard Moorhead on this topic: The Deregulation Debate – My Twopennyworth.

 
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Posted by on 23 August 2011 in Legal services, Legal Services Act, Regulation

 

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Breaking News: Humpty Dumpty falls off wall …

16 Aug

News just in: “It will come as a shock to many to hear that Humpty Dumpty (also known as the traditional law firm business model) has taken a tumble. Worse still, all the king’s horses and all the king’s men couldn’t put Humpty together again. Yes, it’s true: however you look at it, Humpty is well and truly scrambled.

How could this happen? Well, sources close to the wall from which Humpty fell, say that although he was close enough to the wall to see the writing, he hadn’t actually read it.”

In many ways, the traditional law firm business model has been an accident waiting to happen.  For me, a business model is a statement about how the firm coordinates four elements to structure the business and deliver its strategy. They are (a) creating value for clients; (b) resourcing the firm to create that value; (c) financing the firm to secure those resources; and (d) producing and distributing returns on the investment to make it all worthwhile.  (For more on business models, see  LSI working paper at http://www.legalservicesinstitute.org.uk/LSI/LSI_Papers/Institute_Papers/Working_Paper__Business_Models_in_Legal_Services_–_The_Meaning_of__Business_Model__(2010_Update)/.)

In terms of these four elements, the traditional law firm business model can be expressed in summary as: (a) using a cost-plus, time-based, lawyer-focused charging structure (which often bears no relation to value to the client; (b) a lawyer-driven human leverage model with as many resources as possible internalised within the firm; (c) finance provided by internal equity (partners) and external debt (banks and asset finance) – though much of the internal equity is often also the result of bank lending – and all managed within a partnership structure and culture characterised by confused roles, disdain for professional (that is, effective) management, and inefficient decision-making; and (d) returns created by growing turnover (rather than managing for profit) with rewards extracted entirely as income, usually within 12 months of earning them.

The message that Humpty missed was that, on all four elements, the traditional law firm business model is broken. So to those who say, “If it ain’t broke, don’t fix it”, I say: it is broke, so get on with fixing it as quickly as you can.

On the first element, creating value for clients can’t be done on a cost-plus model, time-based pricing, or where creating value is confused with adding value (most clients really don’t care about legal updates). But negotiate a better deal or outcome for them, or make their personal or business lives easier, and then you’re on track. Understand where the firm sits in the supply and value chain, and who else is claiming part of the value paid by way of fees for legal services, and then work out where the real value lies to the client and deliver it.

For the second element, neither employing lots of qualified lawyers to do things lawyers don’t have to do, nor using people to produce bespoke outcomes when technology or processes could give more consistent, reliable or cheaper results, represents a sensible route to 21st century resourcing for productivity and cost-efficiency. Nor does insisting on doing everything inside the firm when outsourcing or joint venturing are viable alternatives.

The third element relates to finding feasible sources of investment. When firms have been removing under-performing equity partners (who want their capital back) and postponing promotions (and so not admitting new sources of capital), internal equity capital is in shorter supply and debt capacity is constrained by the reduction of people to back the borrowing. Although banks have not stopped lending to law firms, debt is not so easily available and now tends to come with stricter terms and covenants than it used to. Alternative financing (including external public debt as well as public and private equity) should not be lightly dismissed with a wave of the hand and “we don’t need it and we don’t want it”. Maybe firms don’t want it; that doesn’t mean they won’t need it. And it doesn’t mean they’re fit for investment when they do decide they need and want it.

Law firm governance and structure also need reworking to provide better decision-making processes, more disciplined businesses with skilled and effective managers (I don’t much mind whether they are lawyers or not so long as they can do the job), and more attractive vehicles for investment, recruitment and retention. The professional partnership is an increasingly inappropriate vehicle for this. In business terms, professional partnerships are really not that special, and maybe it’s time we stopped exempting them from the requirement to incorporate when they have more than 20 partners (though in Humpty’s case, it will need more than a shell company to fix the problem!).

Finally, the returns need improving and re-thinking. Any business that takes its entire returns as current income is completely missing the point of being in business. Effective business models will differentiate income and capital returns, short-term and long-term rewards, and salaries, bonuses and dividends (whatever labels are applied to them).

And so the breaking news story concluded: “It is remarkable that Humpty Dumpty was able to stay on the wall for so long, and his downfall certainly represents the end of an era. We can’t say that he wasn’t warned. The writing is still on the wall, and it’s not too late to avoid falling off and creating a mess. But then you know what they say about needing to crack a few eggs to make an omelette.  The future certainly needs a new recipe.”

 
16 Comments

Posted by on 16 August 2011 in Legal services

 

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Does my BUT look big in this?

14 Jul

As we move closer to October, I have an increasing sense that the reality of change is hitting home. Nevertheless, there are still some nay-sayers and delaying tactics in evidence. Here are the common objections, along with my response.

“I didn’t become a lawyer to be a businessperson”
Maybe you didn’t, BUT that’s what it takes in the 21st century, so if you don’t want to do it, don’t: shut up shop.

“I can’t make enough money from what I’m doing”
You’re right, and I sympathise, BUT to make more you need to change what you’re doing or how you’re doing it. You won’t make enough from doing the same things in the same old way.

“The Law Society should do more to represent us and protect us”
To whom and from whom? You have a point about your representative body, BUT remember that there are members who welcome the changes and the opportunities right across the spectrum of size, type of practice and geography, and there are many clients who are desperate for more relevant, accessible, user-friendly and cost-effective legal services. There are a lot of disparate and conflicting views to represent!

“The SRA should protect us from competition”
Wrong: that’s not part of a regulator’s job. BUT what the regulator should do is create a regulatory playing field that’s level (in the sense that all those who fall within the regulated community should be subject to the same ‘rules of the game’).

“It’s not fair, though, because we can’t compete on equal terms”
You’re probably right. The regulatory playing field might be level, but the competitive one isn’t if others have more reach, more resources, better technology, closer contact with consumers, and so on. BUT that’s what competition is about – winners and losers. Find your competitive advantage by offering something that’s more meaningful and valuable to your clients, and you won’t lose them to anyone else. That’s fair, isn’t it?

“We’re too small to invest in technology and marketing”
You might be right, BUT you do have the opportunity to combine with others to offer a broader or deeper range of services and provide a platform to investment and development. Do it.

“We act for vulnerable clients, and they won’t be able to afford access to justice if we pull out”
This might be true, BUT it’s a political issue, not a regulatory one. The advent of ABSs is not inherently likely to reduce access to justice or quality (and might improve both); and the regulatory objectives in the Legal Services Act require us all to work to improve access to justice.

“ABSs don’t offer anything to me; and I don’t want to grow, or be managed by someone else, or have external funding”
It’s your right to make that choice, BUT what you want and what you need aren’t necessarily the same thing. The days of being the only arbiter of how you’re in business are now behind us.

 
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Posted by on 14 July 2011 in Legal services, Legal Services Act, Regulation

 

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CPD: compliance, competence or development?

27 May

I attended the Bar Standards Board’s Clementi Debate on 26 May.  The subject was whether the education and training of lawyers in England & Wales is fit for purpose.  The content and debate, however, were more narrowly focussed on the fitness for purpose of continuing professional development (CPD) for barristers.  It seems to me, though, that the issues are of broader application and importance.

I don’t need to rehearse here the content of the presentations.  Thankfully, not all speakers started from an assumption that the present approach was fit for purpose.  What disturbed me was my own growing sense of unease through the evening – for reasons I couldn’t initially pinpoint.

All present seemed to agree that CPD was ‘a good thing’, with its implicit consequence that lawyers who undertook sufficient and relevant CPD would be (and were) better practitioners.  I would not dissent from that proposition – even if we might (and the panellists did) differ on the meanings of ‘sufficient’, ‘relevant’ and ‘better’.

What the Debate did not address, despite some suggestions that it should, was the public interest in regulatory intervention in CPD.  It is a regulator’s function to determine whether or not a practitioner is competent to practise.  It might even be their function to require CPD to be undertaken.  But how prescriptive should that requirement be?  And in whose interests is the intervention made?

The current approach is to require a certain number of hours to be undertaken (the proposal for the Bar is that from January 2013 this should rise to 24 hours a year).  My sense of the meeting was that all agreed that a ‘one size fits all’ approach was not sensible, because the nature of practice changes over time, as do personal development needs.  I must be missing the point, though, because it seems to me that a universal requirement for 24 hours a year is a one-size-fits-all requirement.  So the ‘sufficiency’ proposition appears to be on shaky foundations if framed in terms of an input (hours) rather than an outcome (competence).  But at least a minimum number of hours makes compliance easy to assess (for the regulator and the regulated) … even if it actually fails to assure continuing competence.  That might explain part of my unease.

There is clear evidence from CPD providers – and it has changed little during this country’s 25-year experience of professional CPD - that, as the CPD year-end approaches, lawyers will attend (in body, though rarely in mind or spirit) any CPD event that will get them over the hours threshold.  The content can be entirely irrelevant (to competence); and the behaviour (in making the choice and in not being truly ‘present’) is not what one might expect from a professional.

Some maintain, against this background, that CPD is fit for purpose.  That begs a fundamental question about what the purpose is.  The reality in the circumstances I’m describing is that the CPD obligation has achieved compliance, but not competence or development.  Compliance without competence or development strikes me as a rather sterile objective. (It might be true that education is never wasted – if, in the circumstances I assume here, there has been any; but that is still not necessarily the same as competence or development.)  The relevance requirement therefore also lies on some shaky foundations.  My unease mounts.

I confess to admiration for the New Zealand approach (thanks to panellist and BSB board member Matthew Nicklin for this): a requirement in the code of practice that a practitioner “must undertake the continuing education and professional development necessary to ensure an adequate level of knowledge and competence in his or her fields of practice”.  What a refreshing approach: treating practitioners as responsible professionals, able to make their own judgement about sufficiency and relevance – and being willing to be judged and held accountable after the event (on the basis of competence demonstrated, or not) rather than being told before it to satisfy some arbitrary input proxy (hours spent).

So, does this sometimes insufficient and irrelevant process nevertheless produce ‘better’ lawyers?  Of course it might.  But I’m not sure that this should be the objective for a regulator (as opposed to a representative body).  Surely, regulators, through regulation, should confine themselves to securing minimum levels of competence (which might nevertheless be set at high levels) rather than pursuing aspirations based on relative competence beyond that minimum level?  After all, regulation is an intervention in otherwise private activity, and such intervention should in my view be justified in the public interest.  What, then, is the public interest here?  My conclusion would have to be that it is to protect clients from incompetent practitioners, and to achieve a broader confidence of the public in the competence of those authorised to provide legal services through maintaining standards for authorisation and removing those practitioners who fall below them.

My contention, therefore, is that the regulator should assure competence.  This is in part an issue of the qualification and entry requirements sufficient for becoming an authorised person under the Legal Services Act.  CPD has nothing to do with this.  The regulators must then over time be satisfied that a practitioner is suitable to remain an authorised person.  Is CPD relevant to this?  Yes of course; but only, I think, in a sense more limited than current CPD requirements assume.

If a practitioner is the subject of a serious complaint about competence or service, or is found to have been professionally negligent, there must be questions to be asked about their competence and the public interest in them remaining able to practise.  I would regard it as an entirely relevant question then to ask whether or not they had undertaken any CPD to maintain the currency and relevance of their competence, and to explore in detail exactly what CPD they had done and when.  That should legitimately inform a regulator’s judgement about the extent of culpability in relation to the professional lapses complained of and the assessment of continuing fitness to practise.  But that judgement will be exercised in the specific circumstances of a particular complaint, at a certain point in time, and in the context of the practitioner’s performance at that time and in the period leading up to it.

I’m led to the conclusion that the true value and utility of CPD as a regulatory obligation can only be judged in retrospect, and that to seek to prescribe in advance (especially by something so crude as an input measure of time spent) misses the point.  The public interest requires an assurance of competence at the point of authorisation, and action to remove from practice those who subsequently fall short.  It is not well served by universal and broad-brush requirements that ensure compliance rather than competence.

In the end, therefore, I’m drawn to the New Zealand approach.  Every lawyer should be under a regulatory obligation to maintain their competence and fitness to practise.  The New Zealand approach requires that.  Of course, CPD should be encouraged: development beyond the minimum required to practise should be a lifelong quest for any self-respecting professional.  Personal aspiration and motivation will drive this, supported by the professional representative bodies.  I question, however, whether the regulator should be focusing on professional development beyond the minimum competence required for practice.

The regulator should certainly remove from practice those who have been demonstrated not to be up to the required standard of competence.  That is a specific judgement required after the event in light of a range of circumstances, including whether ‘sufficient’ and ‘relevant’ CPD had taken place.  Disciplinary proceedings against those who have not undertaken enough CPD hours (failure to comply) does not actually assure their continuing knowledge and ability (failure of competence) – and probably costs the professions something in practising certificate fees to no great avail.

My unease therefore relates to:

  • the confusion of compliance with competence and development; and
  • regulators’ focus on achieving some abstract and relative notion of ‘better’ when their attention should be directed to removing the incompetent and unethical from practice.

Consequently, CPD should relate to competence; it is not secured by compliance with an hours threshold, and development beyond the required minimum level of competence is a personal and relative matter.  Whether someone has fallen below that minimum level cannot be assured by CPD, and can only be judged confidently in retrospect.

My conclusion is that the scope for prescription of CPD requirements is therefore more limited than current approaches appear to acknowledge, with the result that regulatory intervention relating to CPD goes further than the public interest requires.

 
5 Comments

Posted by on 27 May 2011 in Continuing professional development, Legal services, Legal Services Act, Regulation

 

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PEP talk: beyond the low-hanging fruit

07 Apr

Most of us realise that profit per equity partner (PEP) is a distorted and distorting measure of law firm success. But its use persists.

It is distorted because its underlying metric (net profit) is perversely stated relative to any ‘normal’ business. The accounting treatment of professional partnerships, combined with the taxation of them, encourages a full income extraction approach – that is, all profits are usually taken out as income within as short a period as possible after the financial year to which they relate.   There is usually no allocation of any element of ‘wage’ or employment cost to an equity partner, and no recognition that some element of the distribution of net profit is a return to invested capital and to entrepreneurial risk.  To some extent, therefore, allocations of net profit represent a short-term income distribution of what in other businesses would be longer-term capital growth.  The ‘net profit’ of a professional partnership is accordingly not comparable to that of most other businesses – and so is relatively (and significantly) over-stated.

PEP is distorting because it drives behaviour that seeks to maximise the numerator (net profit) and minimise the denominator (equity partners).  For example, in many firms, the ‘strategy’ recently has been to appoint new partners not as equity partners but as salaried or fixed share partners (or similar variations on that theme).  In the six years to 2010, figures from the annual Legal Business surveys of the top 100 firms show virtually no net growth (just 2%) in the number of equity partners in those firms.  Over the same period, the number of non-equity partners increased by 40%.  

As the financial crisis took hold, and law firm revenues began to fall, managing profit by increasing human leverage and fee income was no longer the name of the game.   Attention turned to cost-cutting programmes to reduce expenses in the (often vain) hope of maintaining profit levels.  Unfortunately, law firm profitability is much more sensitive to fluctuations in revenues than it is to variation in expenses.

With costs reduced (usually by trimming back-office and related overheads, and squeezing suppliers), the profit management project turned from maintaining PEP through cost-cutting to PEP engineering through denominator-cutting.  Having stemmed the influx of new equity partners (as described above), attention turned to removing underperforming equity partners.

All well and good, and often long overdue.  But if a firm chooses the wrong partners to cull - that is, those who have a client following (or book of business) - reducing denominators will also result in a loss of revenues, and the net effect might be neutral (or worse) for PEP.  On the other hand, if the removal of partners does not significantly affect fee income, that rather suggests that net profit has been shared with people who were being allowed to take more than their fair share of this mixed return to productivity, investment, entrepreneurialism and capital.  To put it another way, the PEP was distorted by being available to those who were not worth it.  Removing them is not achieving any true saving to the business but is simply restating the firm’s profitability on a fair and proper basis.

So, by this stage in the economic playing out of the financial crisis, the low-hanging fruit has been taken.  Removing surplus costs from the business, along with equity partners who were not making a net contribution to it, simply puts the firm on to its true footing.  These have been tactics that perhaps bought some time – probably in the hope that by now ‘normal’ practice and PEP would have been restored.  To some extent, it might even have worked: the American Lawyer figures for US law firms’ profitability for the calendar year 2010 show some restoration of PEP.  It will be very interesting to see if English law firms’ results for 2010-11 mirror this.

Unfortunately, it’s not looking as though this creates a sound platform for future profitability in the face of continuing flat revenues for law firms, and a cost base that many think has been pared back as far as it can be.  The old ’normal’ is still not expected to make an appearance any time soon.  If the right costs have been cut, and the right partners removed (or retained), there is no further scope for maintaining or improving PEP by using the same tactics.  Indeed, to do so would run the risk of jeopardising the business since such an approach would imply removing valuable partners and reducing the firm’s resources and support to (or below) a critical level. 

So, where next?  Although the tactics have so far addressed both the numerator and denominator of PEP, arguably, they have not really addressed the fundamentals.  The next temptation is usually to redesign the profit-sharing arrangements, normally with some performance-related or bonus element.  In English law firms, the tendency is to pull up short of ‘eat-what-you-kill’ systems.  What is too often missed, however, is that once the firms and partners’performance is properly managed and underperformers removed, the firm’s problem is not its profit-sharing structure but not enough profit to share.  Changing the way in which profits are shared at a time when there is not enough money to go round is inherently dangerous; a lot of babies are thrown out with the bath water.

My conclusion, therefore, is that with no scope for more of the same, and little point in moving the profit-sharing deckchairs, now has to be the time to look at the fundamentals - and that means returning to the numerator.

Future approaches to PEP management must, in my view, be the result of reinventing the firm’s business model.  The elements of that model are: creating meaningful value for clients in the performance of the firm’s services; resourcing the firm to create that value; financing the firm to secure those resources; and generating sufficient returns to the firm’s stakeholders (and I’m assuming here that the ‘right’ equity partners are now in place).  The first two of these are the fundamental issues that need immediate attention, and both are elements that crucially drive net profit.  It is true that these two elements also contribute significantly to the fourth – returns. By challenging management’s thinking about having the ‘right’ resources (including how many equity partners the business really needs), they will have some effect on the denominator, too.  But value creation and resourcing fundamentally drive the generation of net profit rather than the sharing of it.

First, then, the firm’s revenue needs to be grown by concentrating on creating value for clients.  This requires the firm to be close to its clients, to understand what value looks like to them, what represents success in the transaction or resolution, and to demonstrate how the firm can deliver real benefit.  It isnot the same as ‘value added’, which is usually found in the periphery of the relationship rather than at the heart of the professional service itself.  This exploration is also a necessary part of achieving competitive advantage.

Second, the cost base needs to be revisited – or, rather, redesigned.  This is more far-ranging that stripping out surplus overhead, squeezing suppliers and looking at outsourcing.  What’s required is not so much outsourcing as alternative resourcing.  Thinking about the entire configuration and use of the firm’s resources is necessary, including: lawyers and non-lawyers, professionals and support staff, human beings and technology, craft and process, physical and virtual, internal and external.  Using new approaches to case and project management, and integrating the firm’s business process and support functions into a seamless and more cost-efficient infrastructure, are an inevitable part of the redesign.  This might result in legal or business process outsourcing (LPO or BPO); it might mean using cloud technology, paralegals or professional project managers; it might mean off-shoring; it might mean collaboration with suppliers or even competitors to secure otherwise elusive economies of scale.  In short, the result will be a new way of structuring the delivery of legal services which does not merely adjust the firm’s cost base but designs a very different approach to making profit.

Understanding and delivering value creation and new resourcing approaches are still in their infancy in law firms.  But these must be core to the next wave of managing the PEP numerator.  At the same time, the denominator must not be allowed to drift out of kilter again.  Profit is the outcome of the firm’s business activities, but it is an outcome that needs to be managed actively.  If it is, perhaps then PEP can begin to move beyond distortion and then approach some semblance of a meaningful measure of return – at least in a professional partnership.

 
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Posted by on 7 April 2011 in Law firm profitability, Legal services

 

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Of legal aid and lemonade

01 Apr

Legal aid and hard facts

As we wait for the Government’s response to the consultation on its proposals for legal aid, it might be worth reminding ourselves of some salient facts:

(1)  This country cannot afford publicly funded legal advice and representation for all citizens on all legal issues that will face them in their lifetimes: difficult choices therefore have to be made about what falls within the scope of legal aid and what does not.

(2)  The ‘right’ choices about scope need to be made, otherwise there will be vulnerable people without legal advice and representation in circumstances where the common consensus in any decent society would be that it should be available.  The wrong choices could also result in the total bill to society increasing, if the absence of legal advice and representation leads to greater costs to healthcare, housing, unemployment, family breakdown or welfare benefits.  These are policy decisions.

(3)  The Government and other public authorities could bring down the demand for legal aid (even in circumstances where everyone thinks it should be available) by taking steps to ensure that front-line staff perform their duties competently and make the right decisions first time so that claims and appeals against actions and decisions by public servants are reduced.  The public purse might still end up paying, but it’s important that the costs of quality, incentives for good performance, and ‘polluter payment’ for poor performance, are allocated to the proper budgets.

(4)  The legal aid bill will be reduced by around £350 million: except to the extent that any of this reduction is achieved by the reduction of the Legal Services Commission’s administrative costs, of course the turnover of legal aid providers in the aggregate will go down.  It is not the job of the Government, the LSC, regulators or taxpayers to keep law firms in business (or profitable).

The market for lemons

If consumers find it difficult to assess the quality of the service being provided to them, they will only be prepared to pay an average price for the uncertain (and therefore presumed average) service.  Over time, this will cause providers of a high-quality service to leave the market because they will be unable to achieve a fair price for what they offer.  This will, in turn, lead to a further reduction in the average quality of service available.  A 2001 report for the OFT noted that, in this situation, if a firm providing a high-quality service cuts its prices to compete with cheaper rivals, and consumers interpret this as evidence that the firm is now providing lower quality, the firm may even hasten its own demise.

Consumers might, therefore, consciously choose not to instruct high-quality providers because they find it difficult to assess the true quality of what they are being asked to pay for.  Rather than risk being ‘ripped off’, they decide not to pay a higher price (for what might well be better quality) and instead opt for cheaper providers.  This creates a downward spiral of consumers paying cheaper prices to lower-price competitors who stay in the market as higher-quality and higher-priced businesses leave it.  The result of this ‘adverse selection’ leads to a market that has generally reducing quality and price – Akerlof’s (1970) so-called ‘market for lemons’.

A number of reasons have been put forward to support the argument that adverse selection would have little effect in the market for legal services.  Most obviously, all lawyers must meet minimum educational standards, which automatically deselect those without that education from the consumer’s range of choices.  The availability of a forum for complaints from consumers (the Legal Ombudsman) should also have a disciplinary effect on the profession and encourage non-hazardous behaviour, as will the possible use of conditional and damages-based fee arrangements – particularly where the risk is not all borne by the opposing party.

The high level of importance placed on a good reputation for lawyers is also thought to act as a strong tool in reducing adverse selection problems.  In addition, the nature of the legal services market itself solves some of its information asymmetry, in that at least in contentious matters quality issues do not solely concern the practitioner representing a given client, but are comparative to those representing the opposing party and are potentially subject to judicial comment.

However, all of these reasons can be said to apply already within the legal aid market, and therefore can no longer act to curtail the development of the market for lemons.  Indeed, in the context of legal aid, the ‘lemons’ issue could be compounded.  It is not so much that the client might engage in adverse selection, but that a monopsony buyer (the LSC) chooses not to pay for high-quality providers.  It does this not because it finds quality difficult to assess, but because it can – and, by some views, must – drive down the cost of legal aid.  There is a public interest tension at the heart of this choice.  If we accept (as I believe we must) that the total legal aid bill must be reduced, there will be an inevitable trade-off between the scope of legal aid and the risk to quality.

Even if scope is cut back, the broader the scope of advice and representation remaining available, the higher the demand will be (relative to even narrower scope).  To the extent that any removal from scope or of eligibility does not achieve the desired reduction in the aggregate cost of legal aid, cuts in the cost of provision within scope will have to be imposed.  It would be idle to pretend that this would not reduce providers’ income.  (Whether it also reduces providers’ profit will depend on the responses of providers to consolidation, restructuring. and the use of technology and processes to deliver economies of scale that could maintain prior levels of profit.  For the LSC to use fee levels to drive such changes in behaviour is not unreasonable, and I remain to be convinced that quality and access to justice would inevitably be compromised by such changes – though there is clearly a risk that they might.)

So, the risk for Government is that scope and fee reductions will drive high-quality providers away from the provision of legally aided advice and representation.  This creates a serious possibility that legal aid will become a market for lemons with generally reducing price and quality, and fewer high-quality providers choosing to remain in it.

If life hands you lemons …

Some years ago, a friend of my wife gave her a kitchen plaque which said: ‘If life hands you lemons … make lemonade’.  I take this to be an exhortation to seek something palatable out of inherently bitter or unwelcome ingredients.

If legal aid is (or becomes even more of) a market for lemons, the challenge is to find the equivalent of lemonade.  It might not be your preferred drink; there might even be different varieties (traditional, cloudy, and so on); and there will also be different perceptions of the quality of various brands.  There is not necessarily a single, homogenous result; but there is the prospect of something passable.

What might the legal aid equivalent of lemonade be?  At the heart of the dilemma, it seems to me, is a questionable assumption that quality and cost are inseparably linked – or, to put it another way, that any reduction in price must lead to a reduction in quality.  Other industries have had to grapple with this apparent conundrum.  Quality is not a singular concept but a variable one (see my views on this in Quality, values and standards: the future legal landscape).  So the inevitability of the link is not apparent to me.

The solutions must suggest gaining scale that can produce economies of scale through consolidation and acquisition (or possibly cooperation through joint ventures and the like), and to innovate delivery through new processes and technologies.  The restructuring of firms to reinvent the delivery and staffing of legal aid provision must follow, as night follows day.

What is absolutely clear is that simply expecting to carry out legal aid work in the same way as before – with the same people, structures, and costs – cannot survive a new approach in which the aggregate income available to legal aid providers is less than before.  Something has to give.  Income will reduce in the aggregate: but any given firm’s income will not go down if it can increase market share (hence the need for scale and consolidation).  If the income for each unit of provision (act of advice or assistance) goes down, profit does not inevitably reduce if the firm’s cost base is restructured (hence the need for innovation in delivery, process and staffing).

The flavour of this legal aid lemonade is not difficult to guess.  It’s not really a question of whether one likes it; it’s also no longer a question about whether or not it’s ‘right’.  It is going to happen.  (I have written above and elsewhere about the Government’s obligation to address the systemic issues of matching rights and funding, and the need to remove hurdles from the courts and from public authorities’ decision-making processes: see Civil legal aid: squaring the (vicious) circle.)

I sympathise with legal aid providers.  Life is tough, and it’s about to become even tougher.  I regret that my sympathy will do nothing to generate income or profits for legal aid lawyers.  But against this backdrop, it would be better to start making lemonade than staring at a pile of lemons wondering what to do with them.

 
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Posted by on 1 April 2011 in Legal aid

 

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