Cash-strapped local authority legal teams are being pushed towards privatisation – and potentially on a collision course with FTSE 100 outsourcers
Last week’s Budget underlined the fact that the theme of austerity is still with us, with headline-grabbing measures on pints, petrol and pensioners not hiding the fact that a recovery is still some way off.
The country’s 363 local authorities expect to have 30 per cent taken out of their budgets between 2008 and 2015, with local government’s share of the economy set to fall from 5.1 per cent to 3.6 per cent, according to the Joseph Rowntree Foundation.
Between now and the general election in 2015 local authorities will be assessing if providing services in-house is the most penny-wise way of doing things. Back-office services such as legal will be most affected. Budget proposals for 2013/14 saw them exposed to further cuts to their legal spend despite the fact demand is growing. The legal departments at Bristol, Manchester and Newcastle City councils – three of England’s eight ‘core cities’ outside London – need to find savings of an estimated £230,000, £150,000 and £50,000 respectively by the end of this year.
But the list of solutions to realise these cuts is getting smaller. With the Government expected to take 30 per cent out of local authority budgets during a period in which the population is projected to grow by 3.5 million, the sharp slide in central government funding confirms what Birmingham City Council councillor Sir Albert Bore predicted in 2012 – this is the end of local government as we know it. Bore’s own authority, Europe’s largest, now needs to axe 1,000 jobs by 2015 and cut £822m from the budget by 2018.
Streamlining is the watchword but the role of a local government lawyer is not easy to streamline, given that the job involves how and where to spend money from the public purse. Council legal heads are responsible for signing off every use of power, advising on everything from contracts and procurement to planning, property, education, general litigation and child protection, the latter of which has seen a huge rise in work since the ‘Baby P’ case at London’s Haringey Council.
One way to handle this disparate range of work has been to pair up with another council’s legal team. There are now 17 shared local authority legal services in the country (see box, page 13). London’s Lambeth Borough Council, once officially rated the capital’s worst council, dropped its external legal spend by 48 per cent between 2011 and 2013, from £3.2m to £1.6m, after it agreed to share its legal department with neighbouring Southwark. Pinsent Masons benefited most during this time, taking on 583 per cent more work over the period (see table, below).
While Lambeth’s director of law and governance Mark Hynes concedes that it is a tough market (he talks more about this in our roundtable on public sector law, page 16), he points out that working for a local authority brings the challenges of working for a political organisation. Labour-run Lambeth has shaken off its bad-boy image, dubbing itself ‘the John Lewis authority’ by offering locals a council tax rebate if they help with local services.
Likewise, self-proclaimed ‘easyCouncil’ Barnet – a tag used in reference to no-frills airline easyJet – merged its legal department with Harrow two years ago in a bid to save £4.4m on external lawyers over the next five years. The merged entity, HB Public Law, entered a partnership agreement with Bevan Brittan in November.
But the measures are not enough. Lambeth council expects a further 45 per cent cut in government funding by 2017; Harrow and Barnet a £70m cut each. With party leaders at Barnet warning residents to expect the difficulties to continue into 2020, it is clear the shared services approach can only go so far in curtailing costs.
“We now need a different model to help subsidise the cost of legal services,” warns Hynes. “Simply running a ‘soft or cosy’ shared legal service between local authorities isn’t necessarily going to address the cost pressures.”
Indeed, the aim to insource work will become more of a challenge as work piles up and manpower continues to shrink. According to the Office for Budget Responsibility, general government employment is forecast to fall 1.1 million by 2019.
“It’s a chicken and egg scenario,” notes DMH Stallard employment partner Simon Bellm, who acts for several local authorities. “Cut your external providers and spend more in-house, cut your in-house and spend more on external providers.”
ABS – the third way
There is a third option – gain an alternative business structure (ABS) licence and operate as a separate entity. That’s the model Buckinghamshire County Council, neighbouring London authorities Harrow and Barnet and south London’s Lambeth are all hoping to adopt. Pending SRA approval, the move would create Buckinghamshire Law+, in partnership with the Buckinghamshire and Milton Keynes Fire Authority, Harrow and Barnet’s HB Public Law, and potentially two separate ABSs for Lambeth.
“There are two reasons to convert to ABS status,” explains Hynes. “One is opportunity, the other is threat.”
For the former, Hynes is considering a ‘safe’ ABS that is tied to the borough – safe because the team can be awarded contracts from the authority without a procurement process due to the so-called Teckal exemption. For the latter, he is considering an ABS entirely separate from the authority, allowing the team to compete for clients and work.
These moves are already spelling the end of traditional local government legal departments. But there’s another straw to load onto the camel’s back. Disruption of the market has made the sector particularly attractive for those outside the industry – in comes the FTSE 100 outsourcing giant.
“We have noted with interest the appetite in local government to explore the ABS as a means to deliver and receive legal services,” says a spokeswoman for Capita, the outsourcing megabeast soon to re-enter the legal market via the acquisition of Optima Legal Services (see box, page 15). “An ABS licence will allow Capita to provide regulated and non-regulated legal services to a variety of markets, including the public sector.”
Capita is not the only multimillion-pound outsourcer eyeing up the public sector legal market. CapacityGrid, launched by outsourcing provider Liberata in 2011, paired up with North West Leicestershire District Council’s legal team last week after the council was hit with budget cuts of 40 per cent. The partnership, the first of its kind, will enable Leicestershire council to market its legal service to some of CapacityGrid’s 140 local authority clients across the county.
But outsourcing giants have been running much of Britain since the Thatcherite privatisations of the 1980s. The London Fire Brigade now outsources its 999 calls to Capita, while Serco has contracts involving British prisons, speed cameras, Ofsted, the armed forces, the UK Border Agency, the Docklands Light Railway and even London’s ‘Boris bikes’ scheme.
According to research by Oxford Economics the outsourced market for public services has an annual turnover of £82bn, representing about 24 per cent of the money spent on public services in the UK. If predictions from analysts at Seymour Pierce deliver, this could rise to £140bn by the end of the year.
Pros and cons
This rapid privatisation of public sector services is affecting local authority legal teams. Harrow’s legal department is now understood to be reliant on an ABS licence so it can advise staff in the borough’s libraries after John Laing Integrated Services took over the library contract last September.
“A local government lawyer should be able to advise staff working in the local library, but if those staff are employed by a private company they can’t,” explains one public sector legal chief. “The only way to advise [due to regulatory rules] is to set up an ABS licence or apply to the SRA for an exemption [for restricted legal activities].”
To push the ABS application
process forward a handful of local authority legal chiefs organised a meeting with the SRA on 14 March. A caseworker has now been given the task of dealing with ABS requests from local authorities and will be responsible for pushing the licences through in the next few months.
Going it alone could bring substantial savings to local authorities in terms of generating profits and saving on external counsel costs.
“I know a hospital that was using [legacy] Herbert Smith for a piece of litigation,” notes one local authority legal chief, pointing out the dangers of relying on outside advice. “It’s fine to use expensive commercial lawyers but not when it’s taxpayers’ money. It’s just ridiculous.”
When Conservative-controlled Suffolk County Council launched its own advocacy unit in 2011 it shaved off £150,000 in childcare advocacy in the first year. The council has since admitted that the £264,000 cost of its in-house commercial legal team would have been 40 per cent higher if the work had gone to an external partner outsourcer and 120 per cent higher – £580,000 – if it had gone to an external lawyer.
Scandals in the wind
Few organisations are scrutinised as closely as local authorities. The backlash surrounding Suffolk’s initial plans to outsource its services a year earlier highlights a big problem for outsourcers. Despite many of them being responsible for providing public services since the 1980s, taxpayers either do not know what they do (only one in five people polled by Social Enterprise UK knew most children’s homes are now owned by private companies) or simply do not like them.
High-profile scandals involving botched government contracts with the four main suppliers – Capita, G4S, Atos and Serco – have not helped. The mismanagement of the electronic tagging contracts with G4S and Serco has resulted in tens of millions of pounds of wasted payments, while G4S’s profits fell by a third last year due to its failure to supply enough guards for the 2012 Olympics. In January, the Ministry of Justice (MoJ) fined Capita £46,139 for flaws in its court interpreter service, one mistake being the registration of a dog as an interpreter.
Outsourcing deals with local authorities have also cast doubt on privatisation plans. When Barnet’s IT supplier 2E2 went into administration last year the council was allegedly left almost £200,000 out of pocket shortly before its 10-year outsourcing agreement with Capita was challenged in court by a local resident. And last summer Somerset County Council was forced to pay £5.9m, including a £2m legal bill, to settle a contract dispute with IBM-owned outsourcing partner Southwest One.
Although change lies ahead, with a parliamentary committee calling for tighter controls on public sector contracts only last week, outsourcers expanding into the local authority legal market are clearly doing so at a particularly sensitive time.
The end and the beginning
With local authority legal teams poised for competition, questions hang in the air over whether outsourcing will be enough. As Bore predicted, colossal cuts mean the local government we have known is rapidly coming to an end. It is now up to the sector’s legal departments to decide where they go next.
Timeline: the Capita/Optima relationship
Capita Legal services will be home to a 600-person strong legal services team, with 150 legally qualified personnel and 50 solicitors.
September 2013: Capita submits ABS application so it can acquire volume outfit Optima Legal Services and Optima subsidiary Cost Advocates. Under the plans Optima’s offices in Glasgow, Bradford and Newcastle will transfer to Capita Legal services.
January 2013: Capita enters the legal process outsourcing (LPO) market after running a successful pilot with Pinsent Masons. Capita says it will look to rapidly expand its LPO offering to compete in the UK sector.
2010: The SRA tells Optima to sever links with Capita Volume powerhouse Optima Legal Services after it finds their relationship breaches rules governing non-lawyer investment in firms. Capita has provided a series of loans to the firm amounting to £35m.
2007: Optima has been under investigation by the SRA since May 2007 (but is only told at the end of 2009 that it has gone too far in its relationship with Capita and has to reorganise its structure).
2006: Optima launches and outsources its administrative, payroll, HR and IT services to Capita, meaning 234 staff are effectively employed by the company.