The fable of the boiling frog

It is said that if you put a frog into a pan of boiling water it will quickly jump out. But if you place one in a pan of tepid water and turn up the heat the frog will just stay there and boil. This is not something I have ever witnessed or would encourage, and in fact it seems untrue, but it is an often used allegory to explain why people and organisations do not react to slowly changing circumstances until it is too late.

It’s ten years since the Legal Services Act started the journey to change the way legal services are delivered and many commentators had expected fundamental change to have happened by now. We have seen change with some mid-market consolidation; a few new entrants have arrived, and some of those have already failed.

The legal sector is seen by some as having an inherent lack of willingness to react to a changing environment, which is often re-enforced by a natural reluctance in lawyers to make decisions that could be wrong. However, the issue for me seems to be compounded for one particular sector of the profession: those law firms operating in the legal aid arena.

The government has for many years sought to reduce the amount that society spends on legal aid and I will not repeat here the history of failed attempts to reform the sector. There still remain thousands of mainly small firms assisting troubled clients for modest fees in an increasingly heated environment.

We have seen many of the mid-tier and larger firms leave the legal aid sector, and while there are a few consolidators, generally the market is dominated by smaller firms. No doubt the government and Legal Aid Agency are frustrated that this plethora of small firms delivers inefficient service at perceived unnecessary duplication of cost and want the market to fully consolidate.

But here is the rub. If the LAA wants a smaller number of larger firms delivering value for money, why then does it make it so difficult when firms want to merge or move their work to others? We have seen the LAA apply very strict criteria when firms have been in trouble but want to move on a contract.

It has insisted that any arrears due to the crown (for PAYE and VAT) are paid and also that any payments on account that have been made are repaid before the contract can be novated. It is ironic that when a football club fails there are special circumstances whereby monies due to other clubs can be paid in priority to general creditors, something HMRC has strongly objected to. Yet now the LAA effectively wants HMRC to be preferred in cases where a firm is seeking to have a legal aid contract novated.

These sums can be substantial, and when this is combined with the well-known issues of acquiring run-off insurance, as well as the other costs of closing a firm, it is not surprising that the number of small firms delivering legal aid has not reduced.

The conundrum for the smaller practices is what to do. They cannot get out as the cost of doing so is onerous for any acquiring practice, yet they cannot make enough money to be viable and to set aside sufficient reserves to effect an orderly closure. Their partners are frequently of an age where they may want to retire but are facing the prospect of being unable to find a suitable merger partner or even to effect a controlled closure because of constraints placed on them from outside.

It is no surprise then that when we are talking to partners in legal aid firms they feel like the water is heating up around them but they cannot jump out, even though they know that logically they should.

Steve Billot is a consultant at Symphony Legal