The proposed cuts to the provision of civil Legal Aid announced this week need no introducing (more on the details here and on the Law Society’s campaign here). The impact will be felt keenly by many across society, but the effect on firms operating in the area could be similarly devastating.
At the Margins
The impact of the changes, with 550,000 cases (including 265,000 family cases) no longer eligible for Legal Aid and a 10% cut in fees for civil and family cases across the board, could be a £150m reduction in income for legal aid firms.
For most firms operating Legal Aid, a 10% cut in fees could mean the difference between profit and loss. Legal Aid margins are already wafer thin, and efficiency is the name of the game in publicly funded areas of law. The proposals will also hit the smallest firms hardest, as they often rely proportionately more on their Legal Aid income and will be less able to fund gaps in cash flow with earnings already collected from other, more profitable work types.
Unfortunately, many smaller firms may conclude that the writing is on the wall for their Legal Aid practices. We would encourage all firms in the first place to get involved in the Law Society’s campaign to defend Legal Aid. However, assuming that the cuts are implemented as proposed, the question is how firms should respond to safeguard their business.
Streamlining the Business
The key to running an efficient Legal Aid practice is to streamline the firm’s cash pipeline, ensuring that each step in the process is monitored and that management can predict and manage cash inflows and outgoings to a high degree of accuracy. The structure of the business is vital, with paralegals and more junior staff performing an important function in the leverage equation. Case management should be used to set standards for task completion and to trigger actions, so that cases are completed and bills are submitted with the utmost efficiency.
Legal Aid firms' cash flow can all too often be subject to the bureaucratic operations of the LSC, but this only underlines the necessity for strong planning and regular communication with the bank – so that if there are any external problems, the situation can be dealt with and any possible accommodations made.
Managing Practices; Managing Cash
This also highlights the importance in multi-practice firms of effective cash management across the firm, as any problems stemming from the Legal Aid practice can to some extent be mitigated by strong management elsewhere. In such firms, lenders may have less sympathy for problems resulting from just one business area, and so effective financial management becomes all the more important.
Whatever the future holds for Legal Aid, from a business point of view things do not look promising. However, there are things firms can do to improve their chances of continuing to make money from publicly funded work, and law firm managers would be well advised to consider these sooner rather than later.