Thank you for inviting me to speak this afternoon. Over the course of the next ten minutes, I’ll cover what we, as a consultancy firm, think about the proposed PCT model and whether there are alternatives to PCT that would save significant sums of money.

• This is the text of a speech given by David Gilmore on May 22nd 2013 as referred to in David’s blog – see HERE.

In our firm, we have experience of tendering, competitive and non-competitive. One of my colleagues spent two years studying different models of competitive tendering, another was a Director at the LSC and later the MOJ and I co-managed a pilot on Crime Price Competitive Tendering in London in the late 1990s.

I’ll start by talking about the London pilot and its conclusions.

In the late 1990s, the Legal Aid Board as it was then called experimented with various forms of tendering and block contracting. I shall only mention the crime PCT pilot.

In London, we invited the largest 30 firms to participate in the pilot and I recall that 25 accepted the invitation.

A small number of managers in London which included the then Chief Executive, Steve Orchard, negotiated hourly rates face to face with each of those 25 providers.

Every provider ended up being paid at a different hourly rate. The difference between the lowest paid provider and the highest paid provider was very significant. Of course if PCT is implemented in its current form, the same thing will happen.

During the 1990s pilot, we invited the 25 firms to come to meetings held at the Legal Aid Board and, as you would expect, those firms started to meet privately and appeared to have nominated a couple of spokesmen to speak on behalf of those firms.

There were two main conclusions from the pilot. One was that face to face negotiation of rates was not a good idea. Firms ended up being paid on the basis of their negotiation skills rather than the quality of the advice being provided. This represented a lack of transparency which would be impossible to defend today.

Secondly and most relevantly to PCT, we felt that the idea of moving from so many providers to so few posed an unacceptable risk to the Government and to the taxpayer. We felt that the 25 firms would form a strong alliance and that our negotiating position would be unacceptably weakened. We were concerned that should PCT be implemented in 2000, we’d be in a weak position when it came to re-negotiating new contracts. So, as a result of those conclusions, PCT was not implemented in 2000.

It’s easy to apply that second conclusion to the proposed PCT model. In my local area of Leicestershire, it is proposed to reduce the number of providers from more than 30 to just 5. In neighbouring Nottinghamshire, only 6 providers are sought.

Now, if the 5 providers were able to use loans or savings to survive the next three years, they might be in a strong bargaining position when it came to the next round of PCT. If they didn’t get what they wanted what would the MoJ do? Invite the Nottinghamshire providers to work in Leicestershire? No, because either some or all of the Nottinghamshire firms would be the same providers working in Leicestershire or they would have formed a close alliance by then.

If the MoJ in three years’ time wanted to row back and get other providers back into the market, they would find that hard to do as partners will have closed theirs firms and moved on.

We have already seen this scenario happen in Leicester with Family and Social Welfare Law.

A few years ago Leicester City Council in partnership with the Legal Services Commission, held a competition for one provider to deliver a number of categories of civil law including family and social welfare. This was called a Community Legal Advice Centre otherwise known as a CLAC.

A4E won the contract and subsequently many agencies were forced to close including the local Law Centre. A4E’s business plan was dependent upon winning a very high number of contracts up and down the country.

Over the past few years, a relatively small number of CLACs have opened up in different parts of England over the past few years.

The Government later decided that it did not want to roll out CLACs throughout the country and all CLACS were closed in March of this year. In Leicester, this was bad news for A4E and particularly bad news for the City Council who had put all of their eggs into one basket. The council over the last year have worked very hard to row back and re-engage with the advice sector. But it’s proving difficult. Many specialists in Leicester have now left the advice sector.

Just a word about economics. As competition is reduced, supply is decreased. It is basic economics that as supply goes down, price goes up in the long term. That is in the interests of the few that survive only. This is why there is a small number of large firms making huge profits providing public services to government. For instance Capita’s profits increase at a significant rate year on year. Last year, they posted a ｣470 million pound profit. And Emma Harrison from A4E was able last year to take a ｣8.6 million pound dividend! This may be acceptable in other industries but not in the legal sector where justice must come before profit.

So, you will not be surprised that I do not support the idea of contracting with a small number of providers.

We’ve heard other commentators speak about client choice being abandoned and I endorse those views. If you have not read it, Stephen Halloran & Nick Titchener of Lawtons Law in Hertfordshire have written an excellent blog that has been reproduced at LegalVoice.org.uk. In that blog, they quote David Cameron’s Big Society speech in July 2011 where he heavily promoted the concept of client choice.

Abandoning choice in the criminal legal sector will lead to miscarriages of justice which will be disastrous and expensive to later correct if they can be corrected at all.

Consultation Paper
There are some holes and apparent errors in the paper. I do not have time to cover them now but like others, I’d like to make a comment about the timetable.

In the private sector, you learn to allow for some slack in timetables. If you think a job will get done by Wednesday, you say Friday. This way you hope to under-promise and over-deliver. The LSC have often had to put back timetables in the past but they did not try to deliver anything as extreme as this over the past 13 years.

I won’t explain why the timetable is problematic. That’s obvious. It’s more interesting to think about why the MoJ agreed to this timetable. It appears that the Treasury has insisted that further massive savings must be made immediately. When such pressure has been applied in the past, civil servants from the LSC have been able to argue their case and explain why such reforms cannot be achieved in such short timescales. This time is very different. Clearly, a senior figure in either the LAA or MoJ has gambled that it can be done very quickly. This is a gamble which will almost certainly backfire.

Engaging with the Government

There is much debate at the moment about whether your representative bodies should engage with the government about PCT. I can see both sides of the argument but I believe from past experience that you are better off engaging.

The last reform that was as big as PCT was arguably making franchising compulsory in 1999. At that time, I managed a team of Contract Managers (then known as Liaison Managers) and we were bemused about The Law Society’s lack of engagement with the Legal Aid Board. The official policy of The Law Society was to boycott franchising and firms were advised by them not to participate. Because there was no engagement, it made it easier to bring in the reform without having to make any changes. Of course, a few days before the deadline, The Law Society changed its mind and advised firms to join. This caused huge upset as firms worked through the night to prepare office manuals and franchise applications.

What Happens Next
So, should you prepare for PCT? Many are not doing so and refuse to work out the effect of the reforms simply saying that it cannot work.

I agree that it will not work but every firm must demonstrate why.

For solicitors this means engaging with the Law Society survey, meeting your MP and showing them your figures and explaining that you would be breach of your professional Code of Conduct if you tendered for work at an unrealistically low level of payment.

If there is a subsequent judicial review against PCT, surely the court will want to see evidence of the profession attempting to work out what these proposals would do for their businesses and whether the profession had acted reasonably.

You should use excel spreadsheets for two distinct purposes. One to show what would happen to your bottom line if you experienced a % reduction in income. Second to show whether it’s possible to build a model using the historical data published in the consultation paper. But doing nothing is unwise and a huge risk.

Eddie Stobart sees you as a wounded animal. They are ambitious and see themselves as a major player in the future. So did A4E a few years ago.

From reading my client’s financial accounts, I know that almost all of them have no prospect of making it work. Medium and large firms have no hope because of the expenses associated with running a law firm of size.

The only providers that have some hope of coping are those who work without staff from home or from a small serviced office.

Why? Because diseconomies of scale are more likely to apply to crime law firms than economies of scale. Our experience has been that as firms grow, they experience diseconomies of scale as they rent decent offices in order to attract talented staff. They purchase expensive case management software in order to be efficient, and of course they pay for training courses and practising certificates.

So, is the future under PCT sole practitioners operating from home? On the face of it, the figures might add up. You could replace your case management software with an excel spreadsheet, you could watch bargain basement webinars in place of face to face training. You would not need to pay for practising certificates. You’d provide the absolute minimum because (a) that’s all you could afford to do and (b) there is no incentive to provide a quality service but you’d survive.

But hang on, there is a flaw. If you’ve got a fifth of the market share you’d have to grow and get that office, buy expensive software and attract and maintain staff.

Alternatives for debate

Finally a word about alternatives. If the profession chooses not to engage, the outcome will either be a number of firms bidding at unrealistic prices or if the government does not achieve enough interest, it will simply reduce rates across the board. That is unacceptable.

I’d like to mention a couple of alternatives. I think at some point you may have to offer alternatives which could be subject to further debate.

One alternative is to offer consortia instead of PCT. The MoJ is very keen to reduce transaction costs as well as contract management costs. If you had a service company sitting on top of say 10 providers that Service Company could manage the contract and be responsible for its members meeting contractual and quality assurance standards. Members of the consortium should experience lower costs through the use of shared back office facilities and members would be free to focus on what they are good at i.e. providing expert legal advice.

A further alternative is market consolidation through Peer Review. In other words, reverting to the LSC’s strategy of 2005 of only seeking to contract with providers that achieve a score of ‘1’ or ‘2’. Some are worried about how subjective a peer review can be. However, there are many safeguards built into the system.

The real problem is expense – who would pay? The Government feel that peer review is too expensive to be used widely. You already have to pay for Lexcel or SQM. If you would be prepared to pay for a Peer Review, it might be something that you had to negotiate with.

This is what I think clients would choose and the taxpayer would also receive better value for money.