Cut price advice

Lawyers have always received a bad press. As far back as the 15th century Shakespeare’s Henry VI recommended ‘the first thing we do, kill the lawyers’. And Adolf Hitler declared he would ‘not rest until every German sees that it is a shameful thing to be a lawyer.’

So, why such resentment? It can be sourced back almost entirely to one thing: lawyers’ reputation for profiting from the misfortune of others. Or, perhaps more accurately, it is simply that people resent paying the expensive fees they charge.

But maybe it is time to give lawyers a break, because right now they are suffering - and this time it is you, the social landlord, who is profiting from their misfortune. After years of paying steadily increasing legal fees, social landlords have turned the tables on law firms and are squeezing them for all they are worth. Inside Housing’s first ever legal fees survey reveals that not only has landlords’ yearly spend on legal services fallen by more than a third since 2007/08, but next year looks like it could be leaner still for housing’s legal advisors.

We asked 24 housing associations and arm’s-length management organisations throughout the UK how much they spend on legal fees - and crucially, what they expect to happen to their spend next year as public sector cuts start to bite. The results make encouraging or sobering reading - depending which side of the table you sit.

New order

Client-side, the news is undoubtedly positive. Social landlords are growing increasingly savvy and determined to get value for money. And for the first time they are working together to drive down fees. For law firms, though, there is little in the way of good news.

First up, the total spend of social landlords is on the slide. In 2007/8 survey participants spent almost £28 million between them - equating to £5,112 per home. This figure almost halved in 2008/09 as the credit crunch hit, effectively paralysing many landlords, halting developments and corporate deals and therefore the need for legal advice along the way. Legal spending rose slightly to £18.4 million last year (£3,356 per home).

This possibly reflects a nascent economic recovery - but is still a massive 34 per cent fall from the 2007/08 peak.

So what will next year bring and is the worst over? Our survey suggests not. Perhaps the most significant statistic to emerge is that 72 per cent of associations and ALMOs say they expect to spend less on legal fees in the next financial year. Of the remaining 28 per cent, 14 per cent expect to spend the same and 14 per cent expect to spend more - with mitigating circumstances, such as the costs of a major group restructure cited, in each case.

The sliver of good news for law firms is that these findings do not necessarily mean social landlords are paying less for their services - just that they are using them less. Unfortunately, despite landlords spending more on some legal services, the bottom line for law firms remains the same: there is less money coming in.

Public spending cuts

So, is the spectre of government cuts the reason social landlords expect to spend less on fees? When asked how much they reckon public sector cuts will impact their legal spending, 29 per cent of those polled say ‘not at all’. Yet, conversely, another 29 per cent warn tightening state finances will have a ‘significant’ effect, with the remaining respondents split between ‘slight’ and ‘very slight’ impacts. Combined, however, this means 71 per cent of those polled expect public sector cuts to affect their legal spend. Ouch.

While this is an ominous statistic for the landlords whose spending will be curtailed, it is much more sobering for the law firms hoping to advise them. Fewer than half of those social landlords expecting to spend less on advice say their budgets have been cut for the next financial year. This indicates that these landlords are expecting to spend less on fees not because they will be strapped for cash, but in the belief that either they will not have as much work for their lawyers, or, as comments from the survey suggest (see box: in camera), they expect more bang for their buck.

The subject of legal fees is inevitably a thorny issue for law firms to discuss. Whatever they say, their reputation suffers. If they admit they are reducing their fees it suggests that they need to do so. If they do not admit to price cuts they appear inflexible and expensive. It is hardly surprising then that no firm is willing to go on the record to admit to reducing its fees.

Yet our poll suggests that is what they have been doing. Last financial year, 35 per cent of landlords claim to have paid their lawyers lower average fixed fees on the previous year, while a quarter say they paid their firms lower average hourly fees. All of these respondents attribute this to landlords driving a harder bargain and firms becoming more competitive as a result.

So how are housing providers doing this? First, they are buying legal services in a more competitive manner. This is partly out of fear of strict European Union procurement rules, but increasingly it is due to the financial benefits it can yield. For example, landlords based in the south east are using lawyers in the north west where fees are lower. Some are even switching to in-house counsel to cut expenditure.

But to drive a really hard bargain, some landlords are clubbing together to achieve economies of scale. Our survey reveals that 23 per cent of participants have either formed a consortium to procure legal services, or are in the process of doing so.

One of the first examples of housing associations doing this is the Housing Associations’ Legal Alliance consortium, a partnership made up of Metropolitan Housing Partnership, Peabody, Phoenix Community Housing and Servite Houses. Each member will pays an annual subscription fee of £6,000.

HALA will in the next few weeks appoint a consolidated panel of law firms to act on its behalf, which is expected to reduce members’ legal costs by 20 per cent. And since 82 firms have applied to join the panel for between eight and 15 places, intense competition could cause costs to fall further.

Proactive procurement

HALA was set up by Katrina Robinson, head of legal services for Servite Houses, who grew sick of paying the same fees and getting no improvement in external legal services or added value like free training or advice.

‘If you are a Guinness Trust, or a Glasgow Housing Association, then you have the weight and scale to negotiate good deals,’ explains Ms Robinson. ‘If you have fewer than 30,000 homes under management and spend around £1 million a year, then it makes sense to form a procurement club - it’s a no-brainer.’

Ms Robinson went to see Leo Fattorini of legal cost consultants Kennedy Carter Legal. He has established similar consortiums for councils. The model devised for HALA allows members to share advice and includes a central online function to track spending. ‘Now is a very good time to go to the market,’ says Mr Fattorini. The process is definitely leading to better value; we have managed to save up to 50 per cent on fees from top firms.’

While this is a compelling argument, it could sound overly aggressive given the need to maintain long-term relationships with firms. Mr Fattorini insists that it is not. He argues that between 2003 and 2008 solicitors’ salaries were increasing by 10 per cent each year, and also warns that the window to fix fees at attractive rates may well shut in the next six to 12 months as the economy improves and transactions increase.

Richard St John Williams, a partner at Cobbetts, says that it is not just the social landlords that are pushing down fees - it is also other law firms. ‘There has been an influx of more peripheral firms expanding and looking to muscle in on the social housing sector market,’ he says ‘They think the easiest way of doing this is by offering cheaper rates which causes fee deflation. This more reckless approach to winning new business can under-price the market.’

Competitive pricing

Nick Billingham, partner at Devonshires, points out that many firms - his own included - did not increase fees last year, and that effectively equates to a reduction once inflation is factored in. He also argues that while landlords are looking for better value deals, this does not necessarily mean lower fees. ‘I think housing associations are only 40 per cent interested in fees compared to 60 per cent guided by quality,’ he argues.

Indeed, our survey suggests a willingness to put quality first. Our respondents agree unanimously that they are not prepared to sacrifice the quality of legal advice in order to save money.

That said, a surprising proportion - 41 per cent - have clocked a change in the standard of legal services they have received over the past two years. More than half say standards have fallen, leaving clear room for increased competition among firms hoping to knock any complacency on the head.

As a result landlords are looking for extra services and better value in addition to lower fees. For example, as well as negotiating the 20 per cent discount from its lawyers, HALA also expects a package that will include the benefits of free in-house legal training and access to free legal advice for housing officers at short notice. But these are perks rather than deal makers - many of which were on the table before landlords clubbed together. Now, social housing providers want to save cold hard cash.

‘Independently, we only had limited success in negotiating fees,’ explains Susan Hickey, finance director at social landlord Peabody. ‘There were attempts to “add value” in terms of the provision of free advice or some movement towards fixed fee arrangements, but that has been more about using an established relationship with a few regularly used providers than any real sea change in the market. That is why we are so excited about HALA; it offers the prospect of substantial cost savings while creating a platform for further collaboration and improvement.’

It remains to be seen how many social housing providers choose to join similar legal procurement clubs - and to what extent law firms will suffer as a result. But what is certain is that, for now at least, the balance of power has swung decisively client-side. Social landlords would be well-advised to make the most of this opportunity while it lasts.

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