The Legal Services Commission has come up with a new solution to the perennial problem of the increasing legal aid budget. It wants to move to a system of paying for outputs instead of inputs. At present, the firm would report how much time it had spent on a controlled work matter, how many letters have been written, how many telephone calls made and received, and the firm is paid for this. These items represent the inputs the firm makes to the case. The LSC thinks it should pay for the number of cases concluded, the number of clients seen, the number of various different types of results achieved for clients, in other words the outputs. Some people have asked what other business is entitled to charge on the basis of its inputs. In most fields of enterprise, a business is paid for the end product.

There are a number of problems with this new policy. Most other businesses produce standardised work. In the field of litigation, while much work comes within certain parameters, it has to be skilfully tailored to the needs of the individual client. The cases that fall outside the parameters are not always clearly identifiable at the outset. And the businesses concerned are not usually working at prices set by the buyer, but at prices they themselves have set after calculating what their costs are and what they consider to be a reasonable level of profit. While account has to be taken of what the market will bear, most markets do not consist of a single purchaser with absolute power to buy (or not) and to set the price. Most of the legal aid market does.

The first fruits of this new enthusiasm (if one leaves aside the long-established standard fee scheme for crime) can be seen in the new Tailored Fixed Fee scheme for legal help and controlled legal representation (together known as controlled work).

Under the old system, the firm would send a monthly report to the Commission, setting out the time spent and letters and telephone calls on each of the matters completed that month, and the LSC would pay the bill.

Under the new system, the Commission pays the firm a fixed fee for each case, regardless of the amount of time spent on it. To calculate what the fee should be, the LSC looks at what the firm’s average bill was in 2003-4 in each category of law, and pays the firm that average figure for every case, regardless of how much time is spent on it. The figure includes disbursements and VAT. Unfortunately, the Commission is still requiring firms to provide a detailed report on the time spent on matters, as they feel they need this to ensure that firms are not cherry-picking simpler cases or stopping work earlier than they should.

There are a number of refinements to this basic scheme. Immigration work is entirely excluded. Firms have a choice as to whether they include their mental health work or not. Family lawyers who are in the Family Advice and Information Service (FAInS) pilot have to remain on an hourly rate.

There is an escape mechanism for more expensive cases. It is set at the lower of £2,500 or three times the firm’s fixed fee. If cases reach the threshold, and they are outside the firm’s case profile in 2003-4, then the firm can claim the costs of the case calculated on an hourly rate basis.

Although disbursements are included within the fixed fee, there is a provision that if the firm’s overall level of disbursements increases above the 2003-4 level, they can claim the extra money. This means that firms that can reduce their disbursements will increase the financial viability of the work; but if a firm has to spend more on disbursements, that extra expenditure will not come straight out of the firm’s own income. Had the Commission insisted on maintaining its original proposal to keep disbursements within the fixed fee but without agreeing to pay any additional expenditure, this would have set up a clear conflict of interests between the lawyer and the client who needed a disbursement. It is still not entirely clear that the final version of the system does not do this.

It would be fair to say that the profession’s response to this proposal has been mixed. More than one respected lawyer’s reaction was, “about time too”. For those firms with a stable client base, and for whom controlled work is reasonably predictable, consistent and low level, this scheme is probably highly beneficial. But firms with a different profile, who undertake substantial cases under controlled work, or who have unpredictable or varying levels of costs, are understandably much more cautious. Some equally respected lawyers are aghast at what is proposed, and think it will mean the end of their business, or at least an enforced drop in quality.

The scheme was introduced on a voluntary basis from April 2004, and will become mandatory from April 2005. The Commission has indicated that it expects the scheme to last only for 12 months, after which it will move to something different, on which it is not yet ready to consult. The model currently under consideration is for regional or national fixed fees, as opposed to fees tailored to the individual firm’s work.

The LSC has other plans afoot that extend the policy of paying for outputs. It has made no secret of the fact that it would like to explore standard or fixed fees for certificated civil work. There is no timescale available yet for this, but it is likely that a pilot may emerge from the Fundamental Legal Aid Review, which is due to report in the Spring.

And we have recently seen the publication of the Commission’s plans for competitive tendering for police station and magistrates court work in crime. Under these plans, firms would be asked to bid either a single price for “a case”, whether police station, guilty plea or full trial, or a matrix of prices for different types of cases, however the concept of a case might be defined. The Commission proposes to ask firms to offer to take on a number of duty solicitor slots. They will determine the number of contracts to be offered by allocating contracts from the cheapest firm upwards, until 100% of the duty slots are filled. The firm would then be paid the price bid, or possibly the market-clearing price (the price bid by the most expensive of the firms needed to allocate all the contracts) as a fixed price for every case.

The only reference to quality in the consultation is that firms will be required to pass a threshold quality test. If their outcomes and other statistical data are within broad parameters, they will be passported through the quality test. For those whose outcomes fall outside the norms, there will be a peer review to assess the quality of the work. There will be no other assessment of quality in the bidding process.

In the introduction to the Competitive Tendering consultation paper, the LSC makes reference to yet another initiative. “The Commission is also developing two pilots that will test ‘block contracting’ and enhanced incentives for quality. The evaluation of these pilots, and other measures the Commission has introduced in recent years to reform the way services are purchased, will feed into the implementation of the purchasing strategy that the Fundamental Legal Aid Review is developing.” What those block contracting pilots might look like is as yet unclear, but the general thrust of LSC policy is obvious.

All of these proposals will inevitably have an impact on the relationship between solicitors and the Bar. The effect will be quite limited in controlled work, but the impact will spread as the policy of paying for outputs is rolled out. Under all of these schemes, the incentive that is placed on the solicitor is to keep as much of the work in house as possible. Effectively, the solicitor is given the budget and must manage it as best he can. This may well mean solicitors undertaking more of their own advocacy work. It is also likely that where now cases are routinely referred to Counsel for advice, more use will be made of senior solicitors. The work available to junior members of the Bar may well diminish.

It is possible that many more firms will want to employ barristers. If the Clementi idea of Legal Disciplinary Practices is rolled out, then opportunities for barristers to go into partnership with solicitors are likely to be encouraged by these developments in the funding models. The introduction of outside ownership of law firms, which Clementi also controversially supports, would have a further dramatic effect on the ways in which legal services are delivered.

In years to come, when we look back, we may see the tailored fixed fee scheme as the first small step in a long march into an entirely new legal landscape.