Cost £23bn, Value ?

I had to wonder about the timing of research by CityUK sponsored jointly by the Bar and the Law Society published last week. Whilst the government is threatening to cut the income of legal aid lawyers and personal injury claimant (and probably as a result defendant) lawyers in dramatic ways, it promotes the profession’s success by focusing on it’s capacity to generate fee income. It’s a very interesting report, and basically appears to be part of a bid to remind the world of our professions’ strong position in relation to international oriented commercial work and also of the broader point that, commercially, the profession is a success. Fee income of over £23billion in 2009, a whopping 2.8% of GDP and a net contribution to balance of payments of £3bn (a figure £1bn higher than the legal aid budget) are impressive figures. The big firms have ridden the recession better than smaller firms it appears (partly through cutting jobs – mainly, but not solely, at the non-partner end and relocating certain functions to cheaper sites in the UK and elsewhere: cost cutting has reined in expenditure to the tune of £500m). International firms did better than domestically oriented firms. US firms also did better, building on their links with US investment banks. Things may be getting better in any event. The report notes: “Although caution remains on the business outlook, firms have begun to hire new staff in 2010 and trainee intakes are approaching pre-crisis levels.” Indeed, the report tells us profits rose more steeply in the first half of this financial year than they did last year.

The legal press understandably, and justifiably, ran this as a success story. The Gazette headline, for instance, caught my eye with ‘Legal Services generate £23bn for the UK economy’. At one level, this is perfectly proper. Indeed, it is rather nice to have a little light shining around the clouds of doom and gloom that currently gather. Legal services are an industry like any other and the size of that industry is an indicator of its success. Economists might argue that service economies depend upon increasing specialisation in divisions of labour and the legal profession is an indicator of one very successful one. Not only that, the report reminds us that on the international stage ‘our’ professions, which are themselves increasingly internationalised in there composition, do very well. But I could not help wondering how anyone outside the profession would view these figures. Imagine a headline that went like this: Doctors generate £23bn for the economy. We might feel a little less squeamish about that than we would about lawyers, but we might also be surprised if encouraged to think in those terms. We would expect to see good news stories emphasising the impact of health professionals on the nation’s health, and we might want to be reassured that we were spending more on health services compared to similar nations, but we would not expect to be invited to applaud the size of the spend in and of itself.

Thinking of it another way, I imagined how the Chairman of the CBI or the in-house Counsel Group GC100 might view this. This is how I imagined them rewriting the Gazette headline. Legal Services generate £23bn of transaction costs for the UK economy. I simplify and render cynical for effect, but I hope a fair point is made. One hopes and expects that businesses see value in their legal services beyond the cost they incur; they don’t only buy legal services because they ‘have to’. Put another way, legal services are not always distress purchases. But I doubt the wisdom of the profession signalling its success through the promotion of its bottom line. The notion that legal services has value outside of the notion that some jobs ‘just need lawyers’ is one which is not well developed, in concrete terms, by the professional bodies or academics. Both groups tend to focus on familiar legal concepts like ‘rights’ and ‘risk’ and ‘certainty’. Complexity is often the result and one with uncertain consequences. In a recent discussion on contracts I asked in house lawyers if anyone evaluated the quality of their contacts and how. Most suggested it was a matter of individual judgment. Encouragingly, I did hear of one partner in a well-known City firm who has a way, of quantifying the value of a contract to their clients.

This leads me onto my final point. The profession may need to get significantly more sophisticated in how it establishes the value of what it sells. We are seeing in both legal aid and personal injury work how a combination of economic exigencies and firmly held ideology can lead to potentially profound changes in legal services. Once client groups, be they government or big business, start to doubt the value of services then serious change can occur. The profession has been slow to grasp this: preferring to rely on argument, anecdote and opinion polls in its defence of legal service markets rather than on solid research (arguably, the best information on the value of legal aid services came from the Legal Services Commission’s research arm and Citizens Advice). One cannot expect quick or clear answers to what value is derived from good quality legal services but it may be sensible to strive for better answers than the size of a few partners pay packets.

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About Richard Moorhead

Director of the Centre for Ethics and Law and Professor of Law and Professional Ethics at the Faculty of Laws, University College London with an interest in teaching and research on the legal ethics, the professions, legal aid, access to justice and the courts.
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4 Responses to Cost £23bn, Value ?

  1. Stephen Mayson says:

    I follow your drift, Richard, but probably feel less squeamish about it! A number of reasons:
    (1) Turnover and profits/earnings are not the same – although it didn’t happen, it would be possible for £23bn to be generated and no profits to be made. Your point about value to clients is much stronger.
    (2) A rising turnover could also mean that fewer legal needs are going unresolved, which would arguably be better for society. This is subject to the debate, of course, about who is paying the legal bills. But even if the total cost of legal aid went up as a result, the cost to the public purse through reducing the overall burden of ill-health, unemployment, housing, family difficulties, and the like, of those afflicted by unresolved legal needs would almost certainly be much lower.
    (3) The real question for me is not so much the volume of the ‘value’ or turnover being generated in the legal economy, but among how many people it’s being distributed. For as long as this is inefficient and fragmented, the transaction costs being borne by clients are much more malign than merely the total fees paid.
    (4) I suspect that £23bn is an under-estimate, so you’re right to pose the questions!

  2. Firstly, though I like a conspiracy theory as much as the next man, I wouldn’t read anything into the timing of the report. TheCityUK (International Financial Services London and British Invisibles in previous incarnations) does this report every two years – I checked when I was writing my own story on Legal Futures and the last one was in February 2009.

    In fact, one problem with the coverage from others was actually that there was no context (finding details of the 2009 report was surprisingly difficult online). But for some context, Peter Rouse left an interesting comment on my story (http://www.legalfutures.co.uk/latest-news/value-of-legal-market-continues-to-rise-despite-fall-in-fees-at-biggest-firms).

    Since the demise of the Solicitors Indemnity Fund we have not had an accurate picture of the finances of the solicitors’ profession, but that should change with the greater information requirements that the SRA is to impose on firms.

    But on your broader point, I don’t see any particular reason to feel squeamish – I would think the CBI often judges things on this basis, actually. As you allude to, one thing these figures show is the contribution to invisible earnings law firms make to the economy and this is one of the very few corners of the City where UK businesses go head to head with international competition, most notably the Americans, and not only hold their own but often lead the way.

    More troubling is the way success is defined in relation to profits per partner, especially as it continues to go up at many firms when income is not.

  3. Richard Moorhead says:

    Neil and Stephen – thanks for your comments: great to hear from you both on this.

    Stephen: you are right about turnover vs profits – though the Gazette concentrated on that which is why I led on it. In some ways the ‘real’ story behind the figures was how – even though fees dropped the big firms managed to maintain profitability (and the apparently pivotal PPE – I share Neil’s concerns here). This was due to cost cutting which is, by my recollection, more agressive than during the 90s recession (I’d be interested if you agree with that: my recollection may be faulty). Whether this is smart business or short termist – time will tell. Firms who cut hard may struggle to grow again (given the high failure rate of lateral hires) or retain staff if loyalty has been weakened. Then again, everyone may simply have short memories about this kind of thing.

    It’s possible that rising turnover means more legal needs are being resolved but it’s not necessarily the case. There’s a brilliant article by Gillian Hadfield (‘The Price of Law: http://works.bepress.com/ghadfield/23/‘) which points up the distributional implications of turnover rises at one end of the market. I suppose part of my point about value would be that it is important to contextualise this kind if economic information with other data: distribution or volume of business would be a couple of ways of doing so (indeed the report does talk about the rising incidence of commercial disputes).

    One of the interesting things about the figures is that it seems likely that legal aid has diminished as a proportion of the profession’s income (my recollection is that at its height legal aid consituted about 15% of solicitors’ income, the proportion of earnigns from legal aid looks significantly lower, 10%ish on a rough calculation).

    I totally agree about the benefit to the public purse argument for legal aid spend on social welfare problems. This is precisely the kind of information about value the professions should be generating. Instead it came from the Legal Services Research Centre (funded by the LSC and the MoJ) via Hazel Genn and the Nuffield Foundation as well as Citizens Advice. The Law Society spent its time and money trying to come up with ‘radical’ plans for saving legal aid: a well intentioned project doomed to failure given it’s political constituencies and an, again, well-intentioned but divisive judicial review of contracting.

    I don’t quite follow your point about fragmentation – it sounds interesting but you may not have the time to take a second swing at it and it’s probably me being a bit dense fist thing in the morning.

    Neil: I wasn’t trying to suggest it was a conspiracy theory (I hate conspiracy theories as much as the next man in fact!) I imagined no one really thought about the timing.
    Thanks for the heads up re: previous incarnations – I’d like to put together a dataset on this kind of thing to track growth in the profession against economic indicators if I can for teaching and research purposes so this is very helpful. I’ll follow it up.

    You are right too about SIF. That was how we used to be able to work out how much the sols earnt from legal aid as a share of their other fee income.

    You’re may both be right on the ‘squeamishness’ point. I was trying to strike a balance between admiring the resilience of the profession and warning at how that is presented and more importantly how success is conceptualised. Cost really is different from value and as we are reminded almost daily in the blogosphere the inhouse crowd get that point very well. ABSs and big brands may get more interested in this kind of thing too: some may have the scale and foresight to do it for themselves. I am told the Bar has begun to take research more seriously (I have yet to see signs of it myself but I may have missed something) and in its pre-Martin Mears days the Law Society were much better at leading on research-based policy. Maybe the competitive threats posed by the Legal Services Act will give them and their members more of a nudge in that direction.

  4. Richard Moorhead says:

    I’ve had this very interesting and pertinent point which it’s worth sharing….

    One of the points, which may not have come across as clearly as it might, is first the strength of the legal sector in terms of overseas exports, and second the role a leading legal sector plays in enhancing and solidifying the UK’s attractiveness as a leading centre of finance, commerce and industry. As an example, referring back to the Lord Mayor’s remarks in 2003, which remain the case now:

    “The Bank of England has been reported as holding the view that the single most important factor contributing to London’s position as a leading global financial centre is the country’s judicial and legal system”. – Lord Mayor, Mansion House speech, 9 July 2003, recording the view of the Bank of England.

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