PCT: incredible alternatives

Otterburn Consulting recently completed a survey to inform the Law Society’s response to the government’s consultation Transforming legal aid: delivering a more credible and efficient system on price competitive tendering (PCT). The aim was to find out what the impact on firms would be, based on hard evidence and to evaluate whether the proposed system was likely to work in practice.

  • You can download the PDF HERE.

Despite the extremely tight timescale, 119 firms completed detailed financial questionnaires, representing 7% of firms with crime contracts. A number of firms also submitted qualitative information. Some of the results, for example that firms’ financial position had weakened since a previous comparable survey, were not surprising. However, what was less expected is how difficult new entrants may find it to enter the market.

The survey also found that an administrative cut in fees was equally likely to have a serious impact on firms, and so would not be a realistic alternative to PCT.

The current financial position of firms
The survey showed that:

  • That firms had seen a fall in profitability in the last two years and this is likely to be exacerbated by other changes such as the removal of significant areas of work from scope from April 2013, (especially family); reductions in RTA portal fees; and pressure on fees in non-contentious areas of work such as conveyancing and probate.
  • The firms in the survey had poor access to credit facilities, and banks may see criminal defence firms as increasingly unattractive, due to the ‘planning blight’ effect of the proposals.

Impact on the current supplier base
The majority of current firms would need to re-engineer their businesses. Due to the relatively low value of individual contracts, covering large geographical areas, firms would need to create a low cost, IT driven model, very different from the working methods of most firms, which have historically been clustered around a small number of police stations and courts.

Existing firms will be locked into arrangements in respect of staffing, premises, IT support, car leasing arrangements and other overheads, and the timetable proposed will make it extremely difficult for them to adapt. Unless they can successfully reduce their unit costs, many existing firms will not be viable and will not be able to adapt to the post PCT scheme.

Many of the largest and most successful crime firms are likely to encounter serious employment issues associated with the need to downsize. This would be time consuming and likely to lead to a loss of some of the key staff. Many firms would have to make redundancy payments that could wipe out already low capital reserves.

It is likely that some existing firms will not be able to bid, if, having done their calculations, they establish that there is a serious financial risk to the firm in doing so. This is clearly a sound commercial principle. However, in relation to organisations regulated by the SRA, there are also professional obligations. In many firms, COFAs could find themselves having to advise any other partners/managers not to submit a bid, and have to report his or her own firm to the SRA if it did so against that advice.

For some mid-sized firms, PCT may represent an opportunity to expand their business. They would have the advantage of cash flow from their existing criminal contracts and may already have systems capable of being developed. Very few of these firms however would have the level of IT sophistication needed to make a success of the geographically large contracts as proposed or the financial skills to manage such a high risk contract.

Difficulties for new entrants
It is likely that any new entrant would need to make extensive use of IT and that staff would operate remotely. New entrants would not have the experience of the challenges inherent in legal aid contracts, such as the detailed rules that need to be followed and the need for robust systems of supervision. There would be significant issues of system design and procurement, and staff training that would take several months to put in place. New organisations could not be set up within the three-month period between announcement of the tender results in June 2014 and the proposed start date in September.

Law firms are regulated entities that can take months to establish. Any new market entrant trading as a conventional firm of solicitors would need to commence the process before they were informed of the outcome of their bid, as the SRA generally takes around 16 weeks to deal with straightforward applications. There has been much speculation about new ABS entering the market; but this could be quite problematic for them, as authorisation could take up to 18 months or more. It may not be possible for the SRA to complete the process in time for new ABS entrants unless they submit their application almost immediately.

The most likely new entrants would probably be teams within existing firms setting up on their own however it is highly unlikely they would have the funds to support the business during the first year or would be wiling to provide their homes as security. Even if the partners received no pay at all their business would still not be viable in many procurement areas.

An administrative cut in fees
It has been suggested that an alternative to the introduction of PCT is simply to cut fees by 17.5% as this might achieve very similar savings. A 17.5% cut in fees would mean that salaries in the criminal department would need to be cut by 24%. However, the survey indicates that most firms would not be able to survive such a cut – firms are already operating at low staff levels and many of their costs are fixed and so would continue.

The biggest threat to the MOJ from this option would be the significant disruption to the supplier base and their potential difficulty maintaining a criminal defence service, perhaps with little warning, as firms were forced to withdraw from contracts.

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