The Legal Services Commission has today published the Otterburn research into Lord Carter's reforms.

The report summarises Otterburn's assessment of the potential impact on the criminal supplier base of the fee reductions proposed in Lord Carter's Review of Legal Aid Procurement, in particular during the transition, and indicates that the financial position of many criminal suppliers is highly fragile.  Some firms are financially strong, however these are very much in the minority.

It's key findings are: -

1. Lord Carter's report proposes a relatively swift timetable towards best value tendering and a relatively brief transition during which firms are expected to achieve substantial change. It is assumed firms will adapt and change quite quickly and there is little allowance or leeway built into the timetable to allow for unknown or unforeseen difficulty. It is proposed that fees will be cut before firms have a chance to increase their efficiency through re-structuring, indeed it is likely that many firms will see their cost base increase during the transition rather than decrease.
2. It is very difficult to quantify the potential impact on the supplier base, however the available data would suggest that many firms are on the verge of financial difficulty, or are already in some difficulty. There is a real danger that the LSC may lose the confidence of the supplier base, and perhaps more importantly their banks. The closure of firms or departments does not necessarily reduce supply in the long term, however in the short term it makes the transition very much more difficult. Some of the firms that may be most affected are the mid sized firms that are key to the effective operation of the system long term.
3. In their report, LECG make the point strongly that the proposals represent major change and that it is difficult fully to anticipate potential problems and where they might occur. This high level of uncertainty combined with a lack of reliable data would suggest the LSC should proceed with caution. If possible, proposed cuts in fees should be delayed and the transition extended. Contingency plans should be drawn up should local supply difficulties occur and the LSC have to intervene.
4. The projections contained in this report suggest the difficulties facing firms will become critical if cuts in fees are introduced from April 2007. It will take some time for the impact of these to work through, however, combined with recent changes such as Means Testing and Fixed Penalties, the cumulative effect could drive a number of firms out of business.
5. CDS capacity is most likely to be impacted by difficulties experienced by firms with criminal fees of between ?200,000 and 1m. These firms will generally need to grow in size, but may well find it extremely difficulty to do so. These firms are not especially profitable at present and will often lack the resources necessary to survive a period of significant change and turbulence in the market.
6. Funding is likely to be another issue that many firms will find difficult to overcome in the timescale envisaged by Lord Carter. Larger legal aid firms tend to have high gearing1 and high levels of partner capital. This capital is normally generated through retained earnings however many firms are earning low profits. Although the banks will support firms with a good business case and effective management, their investment is likely to be related to the amount the partners can also contribute, which may be limited. Also, some firms may have difficulty satisfying their banks that they have the necessary level of management expertise.
7. Mixed firms that undertake private client work as well as legal aid may well be affected by the Legal Services Act as this will increase competition, in particular in areas such as conveyancing. Those firms that provide a cross subsidy to their legally aided work may no longer be able to do so.
8. The combined effect of these changes together with those brought about by the Legal Services Act may put particular pressure on criminal firms that also undertake civil and family, as the latter two areas are generally less profitable, and will probably be the first to be closed.
9. The underlying message from this report is that the transition is likely to be a risky period and that the LSC should approach it with extreme caution. In particular it should focus on confidence building, and the most effective way of doing that is likely to be to delay any reductions in fees until firms have had a chance to re-structure, to extend the transition, and to be flexible.