Supply side substitution in legal services can be illustrated along two dimensions:

  1. Horizontal: whether or not to undertake the activity within the organisation or refer the work onto another expert. Examples include the cost assessment of a bill being outsourced to a cost draftsmen or outsourcing standard processes to reduce costs.
  2. Vertical: who within the organisation should undertake which types of work and how much should the resource inputs be. For example, which type of legal professional to use on which parts of the service.

This has been called the ‘make or buy decision’ and its scope is determined by three considerations for law firms1:

1. Decomposition – the extent to which an activity can be broken down into different parts.

2. Human asset specificity – which tasks are best undertaken inside and outside the firm, depending on in house skills.

3. Risks – such as poor performance of outsource suppliers, status impacts, and risk of being bypassed by the client in the future.


Horizontal supply side substitution: External – Expert

The most common form of supply substitution occurs with the use of external advocates. Due to rights of audience restriction on who can appear before a court and undertake advocacy on behalf of a client, the decision to refer work to an external advocate may be automatic because of a lack of skilled staff within the organisation. There are rights of audience restrictions for advocacy in Crown Court and above for Criminal Cases, High Court and Court of Appeal for civil cases, and where the court assigns counsel in Magistrates Court.

CourtNumber of defendants
or cases or applications
2009
Self Employed BarristersSolictor AdvocatesSolictorsILEX AdvocatesAs a %age of all casesAs a %age of possible eligible advocates
Appeal Courts24,300YY0.3%16%
Crown104,418YY1%16%
Magistrates (Crime)1,912,632YYYY27%100%
Queens Bench Division 18,583YY0.3%16%
High Court (Family)1,440YY0.0%16%
County Court (Family)114,440YYYY1.6%100%
Family Proceedings Court47,430YYYY0.7%100%
County Court (Non-Family)1,879,405YYYY26.9%100%
Magistrates (Civil)2,886,757YYYY41.3%100%

The table above compares the volume of activity in each courts, against the proportion of all eligible advocates who have rights of audience , and can therefore potentially supply advocacy services, in these courts.2 This simple analysis ignores the impact of specialism which will reduce the number of advocates who actually do undertake this work. Unsurprisingly the higher volume of work at a court the greater the proportion of advocates with rights of audience, reflecting the tiers of court.

In a 2004 survey of legal aid solcitors firms 42% of respondents stated that court requirements was a determining factor in decision to use a barrister.The same survey found that the other main reasons for a solicitors firm to instruct an external advocate included:

  • Lack of time to do the work in house – 26%
  • Advocacy Expertise – 20%
  • Legal Advice and case management experience – 7%

This showed greater use of barristers in criminal cases as opposed to family and civil cases. The survey did report access to an additional work stream as a motivation for keeping advocacy in house.

A more recent market study reported that solicitors tended to instruct many different barristers, substituting between different types of expert, with half of family legal aid solicitors using 5 different barristers in 5 different cases. This also reported that for family legal aid cases, self-employed barristers are used in just over one third of cases with proceedings in court3. Substitution between types of expert does take place but to what extent is unknown. One estimate suggests that 1,000 solicitors are making a living from advocacy.4

In relation to supply side substitution of advocacy it has been stated that ‘The Crown Prosecution Service is the main client of the Bar; and also its main competitor’5. In 2005 the Crown Prosecution Service (CPS) set out targets to undertake more advocacy in house, in order to provide financial savings. These are shown below, where Higher Court Advocates (HCAs) hours are substituted for self employed barristers:

2004/52005/62006/72007/82008/9
No of sessions7,43315,96728,37543,94256,519
Total HCA hours36,67975,270147,137248,851316,302
Counsel fees saved£1.7 million£4.7 million£9.6 million£17.1 million£23.6 million

A 2009 review of this strategy compared the quality of high court advocates and barristers undertaking different types of CPS work across 367 advocacy assessments.6
They found varied results which suggest that for more simple cases in house advocates deliver better quality, but where a contested trial requires advocacy, self employed barristers provided a higher level of quality:

Higher Quality?

Type of Advocate
Activity

Non Trial Advocacy
Case preparationNon Contested HearingsTrial Advocacy
Crown Advocate×××
Self employed barrister×

This substitution has been given as a reason for the rapid growth of employed barristers. However the CPS has stated that the delivery of advocacy services will continue to be done by a mix of in house and self-employed advocates7.

This reflects a view that because of the specialist skills required for advocacy, the range of choice offered by self employed barristers cannot be matched by an in-house advocate. Economies of scale mean that the in house advocate is unlikely to ever have the opportunity to develop expertise in all the areas covered by the self employed bar. This gives the self employed bar as a whole a natural competitive advantage over in house advocates in instances where the work is less standard and more specialist. This is supported by the findings of a recent report where there had been a 48% increase in the use of self-employed barristers by in house counsel.8 However where the work is more standardised and subject to greater cost pressures the scope to retain work increases with one firm reporting that it has restructured so that 80% of criminal legal aid advocacy remains in house.9

Another view10 suggests that the level of growth of HCAs was due to three factors:

  1. size of local solicitors as smaller firms are more likely to use self employed barristers, lacking capacity for in house advocacy.
  2. the concentration of chambers in an area – higher in Crown Court areas than elsewhere
  3. geographical variations in crimes – cities with greater levels of gangland crime and murders tend to generate more work for the self employed Bar, and variations in chambers cohesiveness.

Horizontal supply side substitution: External – Process

While the motivation for keeping advocacy services in house might be to access additional income streams for an organisation, the motivation to outsource standard processes is likely to be to cost reduction. This has been termed Legal Process Outsourcing (LPO), and can be off site, regional, or overseas.The RIR found very limited information on the extent to which legal practices are making use of this strategy. That legal process outsourcing is happening is clear, to what extent is not. One commentator reports that since the start of 2009 there has been a major increase in English legal firms outsourcing to India. For example, Clifford Chance in 2006 outsourced much of its back office to India to make annual savings of £10m. Costs can be significantly less mainly because of the significant difference in salaries of the people involved in the work: “LPO companies employ Indian legal graduates with starting salaries of about $7,000 (£4,700) — while top Wall Street firms pay their newly qualified associates about $160,000 (£108,000) a year”.11

However the 2009 PWC survey of law firm found indications of intent to outsource business processes but not legal processes.12 A 2009 survey of 81 in-house counsel suggests that the scope of LPO is significant: “Almost 6 in 10 general counsel estimate that a quarter of their workload is routine ‘commoditisable’ work and a further 27%put that proportion at closer to half of their caseload. Consequently, 41% would be happy to put some of this workload in the hands of an LPO in their home country, although notably fewer (28%) would be comfortable sending it to an LPO overseas”.13

These observations have led to speculation about whether or not law firms will outsource themselves out of a job.14  However predictions suggest that the longer term impact of LPO will vary by area. One prediction suggests that low value high volume services will be outsourced, causing a split market where routine work such as conveyancing, legal aid, and road traffic work would move abroad but niche firms would stay in the UK doing advocacy and specialist work.15

Other analysis16 predicts that LPOs will compete in three distinct ways, with different consequences for law firms:

  1.  LPOs compete on efficiency, using employees without legal training, meaning the role of law firms is to integrate and provide bespoke legal services.
  2. LPOs expand the range of services, recruiting lawyers, meaning they are in direct competition with law firms.
  3. LPOs as consultants offering a range of professional services with law firms acting as bundlers of professional services.

LPOs as consultants offering a range of professional services with law firms acting as bundlers of professional services.


Vertical supply side substitution: Internal – Resource type

As outlined above a key part of the make or buy decision process is the skills base of the law firm. Given the existence of significant information asymmetries in most client lawyer relationships, decisions about which type of resource to use are made by the law firm. By type of resource we mean the qualification and/or experience of the individual deployed on a particular activity. In the absence of any data of the complete makeup of law firm staff the extent to which this actually occurs is unknown.

The analysis from Data Platform 2010 suggests that the opportunity for this type of substitution within authorised persons is most common between solicitors and legal executives, as 72% of legal executives working at the same postcode as solicitors. To what extent substitution takes place between authorised and non authorised persons remains unclear.

A range of research has found that:

The main concerns relating to resource type of substitution are around quality, on the assumption that lower grade staff will deliver less quality service: “Suppliers may react to fixed-price systems not merely by over- or under-supplying but by varying the quality of the service. They may cut costs and therefore increase margins by using less experienced staff. Self-evidently, not all “hours of advice” are the same in terms of the quality of service delivered”.22

An alternative view is that senior experts “are shielded from easy problems by the junior colleagues they train and manage, allowing them to specialize in problems they have a comparative advantage in addressing as well as using their position, in larger firms, to monitor those below them and coordinate the hierarchies with incentives allowing those at the top of the hierarchy to exploit or maximise the human capital of those below them. Theoretically this allows for lower cost services23.

There are suggestions that this has evolved naturally over time: “the allocation of responsibility has shifted over time, as junior partners now do what senior partners used to, senior associates do work formerly done by junior partners, junior associates complete the tasks that used to be done by senior associates, paralegals take on responsibilities formerly borne by junior associates, and technology substitutes for some tasks paralegals used to do”.24

The RIR found no information to assess which of these views is an accurate summary of the real risks of substitution of inputs on the quality of advice received.


Vertical supply side substitution: Internal – Resource amount

Given the existence of significant information asymmetries in most consumer-lawyer relationships, decisions about the amount of resource to input are determined by the lawyer: “As a professional, the lawyer acts as the expert who determines how much treatment is necessary, since the customer is unfamiliar with the intricacies and peculiarities of the good in question. Aggravating this special feature is the fact that even ex post, consumers can hardly determine the extent of the service that was required ex ante”.25

The RIR found no information on the level of this form of supply side substitution. However a 2007 survey26 of barristers does suggest a possible supplier perception that higher rates of pay are linked to better service. When asked what would improve the service that they provide, 19% of barristers surveyed said better pay, compared to 9% saying better pay for legal aid, and 9% saying better listing by courts.