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Council law teams get commercial
Law Society Gazette – 9 October 2008

Local authority legal departments are increasingly competing with private firms for public sector work. By Mark Smulian

Earlier this year, one law practice proudly opened new premises in Chelmsford, while another, based in Maidstone, turned in a handsome 24% increase in revenue. Nothing very unusual in that, except that while both compete with conventional legal firms, they are wholly owned by local councils.

As boundaries between the public and private sectors grow ever more blurred, council law departments are bidding against private firms for other public bodies' work. But they may be doing that in concert with a private partner.

The public sector legal market is large and relatively recession-proof, and entrepreneurial council law directors have decided to keep a growing proportion of it for themselves.

Council law departments are free to work outside their parent local authority in other parts of the public sector. They cannot be subsidised from council tax - private firms would be queuing up to complain to district auditors were that to happen - and so must pay their way, usually by meeting an annual income target and paying overheads at a commercial rate.

Private firms might still resent this new source of competition for public sector work, though some of them could benefit from it, as Nabarro has benefited from its relationship with Essex County Council (see case study).

Philip Thomson, the council's head of legal services, says his department's move to a building separate from the rest of the council was done to 'show a degree of independence and that we do other organisations' work'.

He traces the origins of Essex's pursuit of external legal work to the now-defunct compulsory competitive tendering regime of the early 1990s. This was, rather ironically, an attempt by the Conservative government to expose local authority work to a bracing blast of private sector competition.

One effect was that councils had to instil a more commercial culture into their law teams if they were to bid for work successfully against outsiders. Thomson says this experience led eventually to the creation of a department hungry to win external work, mainly from other councils and the probation service. He explains: 'We regard it as a win-win for our public sector clients and for the legal service itself.'

Essex sets the service an income target and a proportion of any excess can be reinvested in service, though only 'a very small part' of performance-related pay is governed by the quantity of external work won.

Seeking external clients has helped Essex to recruit and retain solicitors, since it can offer them greater career opportunities and a wider range of work than could a department that served its own council alone.

Going out and selling Essex's services was 'a new skill in itself', says Thomson. 'We had to develop that expertise and we found that clients tend to regard the standard of legal service as a given and focus on cost, so it is vitally important to give them good management information.'

Work is handled at Chelmsford regardless of where a client is based, though visits will be made as necessary, and each client has a senior lawyer allocated to look after their affairs.

Essex has an agreement with Nabarro under which the two collaborate to use their skills and capacity as appropriate. This has 'helped us to learn, for example, how to talk to marketing people,' Thomson says. 'It gives us a degree of private sector commerciality in our working culture.'

While Nabarro is happy with the arrangement, Thomson admits he does not know how the rest of the private sector views this venture. 'I know it is competition for the large firms but there is such a huge demand for public sector legal services at present that I doubt anyone is losing out,' he says. 'There is still a need for private sector expertise.'

Kent County Council was also driven to seek external clients as a result of compulsory competitive tendering, but has been doing this for longer and now has a larger client list than its neighbour.

Geoff Wild, the council's director of law and governance, says he has 140 external clients in the public sector across the UK, including councils, the emergency services, schools, further education colleges and probation services. 'It started ten years ago and was forced on us by compulsory competitive tendering,' he says. 'The in-house law department was in a parlous state with work going to the private sector and we either had to face our demise or reinvent ourselves.

'I was brought in and thought there was an opportunity to reinvent. It was quite a change in strategy and there was some concern from the staff about their security.'

The department is a trading fund of Kent, which means it is wholly owned by the council, but its accounts are separate. It charges clients, including Kent, an hourly rate and must pay for its overheads.

Kent sets an annual income target though the department has wide freedom over how any surplus is used - it can go to recruitment and the incentivisation of staff, technology and training, for example.

Income topped 1m for the first time in 2007/08, which was a 24% increase on the previous year and well ahead of the income target of 913,500.

Given such a record of success, is Kent ever tempted to sell its legal operation? 'Privatisation crops up frequently and we did assess it, but my conviction is a firm "no",' says Wild.

'There are plenty of private firms out there competing for local government business, and if we floated off we would be just another one of those in a sea of much larger firms in a competitive market place. We are seen now as an in-house operation and part of the culture of local government, which clients value.' Like the Essex team, Wild found that marketing did not come naturally to local government lawyers, since 'they do not come in to this field thinking they will have to be out there drumming up business, and it is something that needs to be learned'.

'I enjoy doing it though,' he adds. 'We do not use glossy leaflets or bombard people with materials, which I know now from hard experience does not work. Instead there is a lot of networking and soft selling based on word-of-mouth reputation.'

Kent does not yet have a private partner, but it will seek one to target the NHS market, which Wild describes as a 'specialised and highly regulated world'. He did wonder whether private firms would find competition from a council objectionable, but has found a somewhat unexpected response. 'The reaction of private firms has been quite surprising,' Wild says. 'They almost seem to find it refreshing that a local authority is acting in this way.

'I reject the view that local government lawyers are not top flight and are here because they could not hack it in the private sector. That is very far from the truth, and what we are doing is the way of the future.'

There is a new contender in this field in the shape of Legal Services Lincolnshire (LSL). This is a shared legal service set up by Lincolnshire County Council and the district councils of North Kesteven, East Lindsey, West Lindsey, Boston and South Holland, with consultancy provided by Kent.

Some 80 legal staff were pooled on 1 April. One of the new service's objectives is to generate 250,000 a year from external sources by 2011/12.

Interim project manager Sarah McCombie says: 'We are already starting to get enquiries from outside partners, and we have not yet even started marketing.' LSL will seek business from other nearby councils, the police and fire services and NHS trusts. It has been set up not just to generate income, or even to make savings from economies of scale, but to solve recruitment problems that afflict small rural councils.

McCombie says: 'The problem was that the individual councils could not retain staff, who would join them to be trained and then leave. In fact, two of our councils had no legal staff and contracted it all out. Now we can offer better career progression and wider experience.'

LSL's financial model differs from those of Kent and Essex in that the partner councils have committed to keep to their legal budgets for its first two years but after that, when it should be generating income, LSL's surpluses will be used partly for reinvestment and partly to reduce the hourly rate charged to the original partners. 'That is quite radical,' McCombie says. 'We are looking at whether to become a limited company in year three, so we could reward staff outside the pay rules of a council.'

Not all councils are looking to go down the external client route. Mirza Ahmad, corporate director of governance (acting) at Birmingham City Council, notes: 'We are not going far afield, but we work with public sector bodies in the city as they require it.

'We do a lot of work with schools and with the West Midlands police and the National Exhibition Centre, but we are not looking to win work elsewhere because we are a very large organisation and there is ample for us here.'

How might the growth of tender-chasing law departments affect local government lawyers? Staff may need to be recruited when work is won, but may equally be left jobless if clients defect.

Suzanne Bond, chair of Solicitors in Local Government, thinks the phenomenon is positive, on balance. She points out: 'Some local authorities do not have the size to support a full department and those that act like Lincolnshire are going to gain a wider range of work, which is a benefit.

'It will become more attractive to solicitors to work there and I think we will see more councils do that.

'Those councils that are very small may not have been able to offer a wide range of work to their employees, who had to leave to further their career.'

Bond suspects that councils will have an important advantage - besides bidding in the little-exploited field of NHS work - in being used to the public sector's working culture. She admits the risk that this could lead to solicitors losing their jobs as contracts end and new suppliers are appointed is a theoretical danger. But 'it is true of any department or private practice that the work has to be coming in to keep your staff busy'.

But, Bond adds: 'I do not expect the traditional model of a council legal department that just works for its home authority to disappear - there are hundreds of councils and they all do things differently.'

Nevertheless, it may well be that larger councils will decide that a combination of income generation, wider legal expertise at their fingertips, and easier staff recruitment and retention means that their legal departments should venture out of the comfort zone of their parent council into the world of tendering.

Size matters: the private partner

James Snape, a partner in Nabarro's project group, helps to manage its relationship with Essex. Under this partnership arrangement, Nabarro helps Essex to run its law practice. In return, when work needs to be farmed out to the private sector Nabarro will, all else being equal, win it. The relationship began in 2002, when Essex sought bids from potential private partners. The firm offers Essex lawyers training and secondments, and advises the county on practice management in fields such as finance, information technology, tendering and databases.

An example of how Nabarro works with Essex is that its expertise is used on the sort of complex private finance initiative deals with which councils must increasingly contend. One example is Essex's contract to switch from land filling of waste to facilities that will use anaerobic digestion.

'We are hoping to expand services to other local authorities,' Snape says. 'I don't see the spread of this approach in the public sector as a bad thing that will take work from firms. Nabarro is not looking to do a high volume of routine work anyway.'

He concedes that other firms may feel differently and notes there would be cause for concern were a council to subsidise a law practice that competed against private firms. It would be difficult for a council to justify that to its auditors.

Snape says another mutually advantageous aspect to the relationship is that it can generate work for both partners. 'If Essex pitches to a local authority it can say that it can supply advice on specialist litigation and tax, for example, through its relationship with Nabarro, and that because it is a large purchaser of services from us its clients would get the benefit of the discount it enjoys.'

Joint pitching has yet to prove successful, Snape admits. Bids for public sector roles in which Essex would have done the routine work and Nabarro the more specialised matters have got down to a final shortlist but no further as yet. 'I think the concept will be quite attractive to public bodies because of the lower costs and the cultural empathy that comes from having a local authority involved, though there is perhaps a concern that if there is pressure on capacity Essex would put its own work first,' he says.

'When you are looking for efficiency savings, size does matter. I do see this approach expanding with councils coming together, perhaps to serve their local part of the National Health Service.'

Context: efficiency agenda

Local government has long been under pressure to seek efficiency savings. This moved from being a vaguely desirable goal to one actively pursued after Sir Peter Gershon's review of public sector efficiency in 2004. Since then councils, and indeed the rest of the public sector, have had specific targets to meet.

Councils must achieve 3% cashable efficiency savings each year over the 2008/11 comprehensive spending review period - about twice what was demanded in the first three years after Sir Peter reported.

One obvious, and comparatively painless way to make these savings has been through councils sharing back-office services. Law is just one example along with human resources, payroll and information technology and benefits the administration of a service that can be provided by one council for several partners.

Lincolnshire's joint law service is the largest example to date of shared services in law departments, though there are a number of cases of two or three district councils sharing their lawyers.

Further consolidation may come from local government reorganisation. So far this has affected Bedfordshire, Cheshire, Cornwall, Durham, Northumberland, Shropshire and Wiltshire, where all existing county and district councils have merged into a giant 'unitary' authority. In the cases of Bedfordshire and Cheshire, there are two successor unitary councils. Reviews are in progress to reorganise Devon, Norfolk and Suffolk and others may follow, although the government has not specified any.

Since these reorganisations will see legal staff amalgamated into one large department they will have the scale to compete for external work. With finances tight - local government received a real terms increase of only 1% in the comprehensive sending review - pressure from council finance directors to find savings through sharing in law and other areas is bound to intensify.