A shake-up in how government tenders $68 million worth of annual legal services spending is under way as the Ministry of Economic Development (MED) moves into the second stage of its procurement reform programme.
Both MED and a legal services expert say the moves should bring substantial savings to government as it cuts back its balance sheet in a political era defined by fiscal restraint.
The first stage of the reform of government procurement – how it buys goods and services from the private sector – is largely completed, with MED offering all-of-government contracts in four areas of government spending – vehicles, stationery, print devices and computers.
Until Minister for Economic Development Gerry Brownlee introduced the reform, 200 government agencies tendered their own contracts for purchasing of goods and services, creating inefficiencies and duplications, and meaning many private firms could theoretically have had 200 separate government contracts for providing one type of product.
Now, as these individual state agencies’ contracts end, the government is attempting to make them go out to tender together, for say, pencils, so that a single contractor can supply all of government.
This first stage is expected to save the government a minimum $115m over the five years of each new contract. The new agreements will be negotiated over the next two years, as old contracts end.
Having proven the all-of-government contract process works with the first tranche of tenders, MED’s manager for the procurement reform programme, Chris Browne, says MED is taking it to the next level.
“You’ll appreciate when New Zealand government goes out to market for the first time as one whole group, I think it is fair to say the suppliers treated it with an equal amount of excitement and fear,” Browne says.
“From one hand they saw the benefits of trying to work once with government, as opposed to 200 times – one tender as opposed to 200 tenders. But equally of course for them they recognise if they miss out, there’s potentially a big impact on their business,” he says.
“If you look at the first contract areas there are always winners and losers – there always is with this stuff. The companies that have come on board, we’re getting good feedback on how it is working.”
While the first tranche of tenders was for goods, the second tranche of all-of-government contracts being tendered will be for services – legal services, utilities and energy management, air travel and travel management, and recruitment.
The government currently spends about $68m a year on legal services in contracts with 203 different legal practices, Browne says. The contracts are for external legal services, or contestable work such as commercial, property and employment law.
This represents about 3 per cent of legal spend in the New Zealand market and “obviously in Wellington it’s a bigger proportion”.
Browne couldn’t give a precise target of how much MED was looking to save due to ongoing work in the build up to the April tender, “but Minister Brownlee has said he expects a minimum [saving] of 5 to10 per cent from any all-of-government contract,” he says.
RON Pol is CEO of Team Factors Limited, a legal efficiency consultancy based in Wellington. He says there is plenty of scope for improving value for money in government legal services, but whether much will be achieved by the tender depends critically on how MED goes about it.
“If it’s treated mostly as a procurement exercise, sure, they’ll save some money. This is because there remain considerable information asymmetries, where law firms have much more information than government agencies about the best pricing and service range offered to different agencies,” Pol says.
“There are also areas in which savings can be made by more effective purchasing. For example, using selected law firms specialising more deeply, across agencies, in specific areas, rather than, as now, where all the big firms cover pretty much all the same areas as each other.”
Similarly, more effective use of specialist boutique firms rather than, as now, a number of agencies which have a panel comprised only of the big firms, could help.
MED’s Browne agrees. “We acknowledge that given where the expertise is in certain areas, there’s potentially a lot of smaller firms that are going to have a place in any panel,” he says.
Pol feels the real value for government and, ironically, also for law firms is in developing a smarter all-of-government operational model across its entire legal functions.
“Here, for example, there are literally dozens of practices by government agencies themselves that inadvertently increased the cost of legal services. There is quite considerable duplication of services in some areas, particularly when multiple agencies sometimes seek virtually the same advice on the same project from several law firms,” he says.
“Huge amounts are wasted on tender processes that sometimes drive more cost into the system than they save. Some government agencies have huge teams of in-house counsel performing low-level commodity work that could be performed more cheaply and effectively by a law firm.
“On the other hand, some legal departments are so lean as to be anorexic; constantly overworked and having to send some of the most strategic work to law firms which can sometimes be better done by in-house counsel closer to the ‘business’.
“Quite a few in-house legal teams remain structured around old areas of legal practice rather than what’s really important to the relevant government agency. Many government law firm selection processes in effect simply switch between the same old law firms, without really providing much impetus for firms to consider adopting some of the new methodologies to deliver certain types of work,” Pol says.
Of course, every law firm contracted to the government will be wondering whether they are going to keep their contracts or be cut.
JOHN Ivil, who manages all-of-government contracts for MED under Browne, says a number of law firms have rung asking about the reform. MED has also been talking to a cross section of large, medium and small sized firms for feedback on the process.
“We definitely don’t go into it with a view of how many contracts we’re going to establish – it depends on the results of the market engagement,” Ivil says.
“In fact if you look at the first four all-of-government contracts it varies – in office consumables there are two contracts, for vehicles there are ten. It just depends where the market is.”
Whether any firms lose business depends on the balance between consolidation – using fewer law firms to maximise pricing deals and deepening relationships to further streamline services, and specialisation – using a wider range of specialist firms for key work types, not just across traditional legal specialties but also government work types and categories of work.
“For example debt collection work can often be done more effectively by a number of small, focused firms with much lower overheads than the mega-firms,” Pol says.
Typically, though, the tendency is to reduce the number of firms, at least in the first instance, and the loss of government contracts could accelerate the process of firm closures and consolidation.
“This would be particularly likely in the local government sector, with a total legal spend in the order of $60m annually, particularly if there is even more of a shift to the big firms from the reasonably significant amounts currently spent with regional, local and boutique firms.”
LOCAL government is not yet included in the all-of-government contracts, MED’s Ivil says, but it is certainly on the agenda in coming years. But it seems likely that some consolidation will occur, Pol agrees.
“In which case a few firms – those who receive a significant proportion of their revenue from government – have much more to lose. Amongst the biggest firms, this includes Buddle Findlay and Chapman Tripp, Minter Ellison and Kensington Swan.
“With a number of government agencies using ‘all the big firms’, the impact of more public sector consolidation could also see a serious impact on one or two of the big firms as well as many of the smaller firms currently performing government legal work.”
This would be seen by government as a lesser evil if it were to happen. Both the public and private sectors’ balance sheets were hit by the recession which the economy is struggling to shake off.
The procurement reform process is seen as one of the ways to help New Zealand out of the fiscal situation it is in, MED’s Browne says.
It’s a freshening up of the way government does business.
Listening to Pol, this could be a refreshing wakeup call for New Zealand’s law community.Photographs by Sabrina Hyde