On 5 May this year over 1,600 law firms who currently provide legal aid criminal defence in England and Wales submitted a tender to the Ministry of Justice (MoJ) to continue this work. From September this year that number will be reduced to only 527 successful applicants. For those firms their fees will be reduced by a further 8.75% (following a similar cut the year before).
For over a thousand firms therefore, the next few months could be viewed as living on borrowed time whilst they await the results of the tender process. Whilst many of these firms are relatively small and the MoJ has stated that it believes consolidation is required to drive efficiency, there may be several thousand redundancies as a result across the country.
Even for those firms who are confident of success this is a worrying time and we consider below what they should do in the intervening period?
- Make a realistic assessment of those firms in the applicable area who are most likely to win the tender – including themselves!
- Consider approaching those other firms and discussing the possibilities of mergers and acquisitions prior to the September announcement. Don’t leave this too late as such mergers will take time and the cessation of fees could be immediate.
- An alternative to a merger would be the possibility of entering into “Delivery Partnerships” with successful firms to deliver up to 40% of the work on their behalf in a particular area via an agency agreement.
- For those firms where legal aid criminal defence only constitutes a small percentage of revenue, they need to think about what cost cutting will need to be made if they are not successful, the potential impact on cashflow and potentially on the balance sheet / funding.
- If the firm is predominantly or all legal aid criminal defence and is not successful and does not arrange a merger then the Partners need to consider more final options. Should the Partnership to be wound down? Can it be done solvently? How will you deal with the run off cover required? There are a number of fundamental questions that need to be considered and put in place a plan B.
Gareth Harris, restructuring partner and regional head of the Baker Tilly Professional Services Group said:
‘In his speech last week, Michael Gove, the new Justice Secretary, made it abundantly clear that he intends to pursue further reform of the criminal justice system, and the news that solicitors are going on strike suggests that he will have a fight on his hands.
‘Whatever the rights and wrongs of the proposed changes, the tendering process and the fee reduction will have a major impact on an already struggling sector of the legal market. Firms who are awaiting the tender results must put in place a plan B in case they are not successful, and they should take professional advice if this could lead to insolvency.
‘Even those who are successful will have to find smarter and more efficient ways of working to cope with a fall in the fees. For those successful firms there may also be an opportunity to lead the way in consolidation and innovation in service delivery.’
Gareth Harris is a restructuring partner at Baker Tilly in Leeds and heads the firm’s regional Professional Services Group. He can be contacted at firstname.lastname@example.org or on +44 (0)113 2855210