• Attorney-General’s Department
• Australian Competition and Consumer Commission
• Australian Securities & Investments Commission
• Australian Taxation Office
• ComSuper
• Department of Agriculture, Fisheries and Forestry
• Department of Communications, Information Technology and the Arts
• Department of Defence
• Department of Education, Science and Training
• Department of Employment and Workplace Relations
• Department of Family and Community Services
• Department of Finance and Administration
• Department of Health and Ageing
• Department of Immigration and Multicultural and Indigenous Affairs
• Department of Industry Tourism and Resources – including AusIndustry
• Department of Transport and Regional Services
• Health Insurance Commission

Background

The Australian Government operates within a complex and extensive legal framework, with 84 agencies and 106 other bodies, administering in total, over 1 000 pieces of legislation. The Government's primary purpose in obtaining legal advice is to protect its interests and meet administrative, legislative and policy objectives.

Since 1 September 1999, the operating environment for Government legal services has been predominantly decentralised, with each agency free to choose how its legal needs are met, and what level of resources should be applied to meet these needs.

There are a number of legal services models currently operating across Australian Government agencies. The most common model involves an in-house team with access to one or more external providers, although some agencies have fully outsourced their legal services function.

The Government's Legal Services Directions are legally enforceable and set out requirements for the way in which agencies conduct their legal affairs. They are administered by the Office of Legal Services Coordination (OLSC), within the Attorney-General's Department.

Audit Objectives and Methodology

The objectives of the Australian National Audit Office's (ANAO) performance audit were to:

• examine the efficiency and effectiveness of agencies' procurement and management of legal services arrangements;
• determine adherence to Australian Government policy requirements;
• examine the effectiveness of the OLSC's monitoring of agencies' compliance with Government policy requirements; and
• examine the OLSC's role in assisting agencies to comply with Government policy.

The ANAO surveyed 40 agencies to gather financial data on legal services arrangements, including the type, cost and drivers of their legal services.

Audit work was focused on 16 agencies and the OLSC.

Key Findings

Patterns of Expenditure (Chapter 2)

The survey highlighted that total external legal services expenditure for the 40 agencies has increased by 23 per cent in real terms between 1999–00 and 2003–04 (refer Table 2.1). Growth in external legal services has been predominantly driven by an increasing volume of legal work performed, with periodic increases in the charge-out rates of providers accounting for a smaller portion of the increase. During this same period, reported internal legal services expenditure has also increased, but the extent of the increase cannot be reliably measured. For a variety of reasons, accurate information prior to 2002–2003 is not available for some key agencies.

The Australian Government legal services market consists of a small number of agencies with a high demand for legal services, and many agencies with a relatively low demand that are consequently small consumers in the market. Of the 190 entities that constitute the purchasers in the Government's legal services market, four agencies had total (internal and external) legal expenditure greater than $40 million in 2003–04, and three had total expenditure in the range $10?{$40 million. The remaining 33 surveyed agencies recorded individual total expenditure of less than $10 million on legal services.

The decision on whether to expend resources on legal services is one for each agency. The level of demand for, and nature of, legal services varies considerably across agencies, and for a number of reasons. The nature of the agency's function, the extent of change to legislation it administers, the service delivery model employed (for example, the extent of outsourcing of corporate functions and activities), and the nature and level of litigation can all have a significant impact on the manner and volume of legal services procured. Additionally, some of these factors may vary across agencies due to potentially different organisational cultures, including appetite for risk and strategies to manage and/or mitigate legal and other risks.

Surveyed agencies were able to calculate or estimate the breakdown of their total legal expenditure by different categories of work. Of the six areas of legal services requested to be quantified in the survey, (refer Table 2.2), expenditure on litigation accounted for 58 per cent of agencies' legal expenditure, legal advice on specific agency legislation accounted for 24 per cent, and commercial/contract law advice accounted for 9 per cent.

Of the 40 agencies surveyed, 16 reported decreased expenditure on external legal services in 2003–04, compared to 1999–2000. Of these agencies, 10 reported an increase in expenditure on internal legal services over that period. This could suggest that, for these agencies, internal resourcing has increased over time in order to reduce the need to outsource at least some types of legal services. The most common reasons to outsource were to: seek specialist services that are not available in-house; better manage large and complex matters; obtain an independent legal opinion to mitigate the agency's risk on particular matters; and/or cope with peaks in legal advice workloads.

Strategic Planning and Review of Agency Legal Services (Chapter 3)

Agencies should have well-organised and strongly co-ordinated legal services purchasing processes at the day-to-day level. However, at a higher level, agencies also need to decide on the structure of the purchasing model that best suits their requirements. This should address the context for purchasing legal services having regard to the extent to which services are provided on a value for money basis and other considerations.

To put an appropriate model into practice, agencies should have a strong and well-functioning point of co-ordination (the legal services manager, or ‘informed purchaser') working between the agency's senior managers, and those who actually deliver legal services. The ANAO found that while some audited agencies had an ‘informed purchaser', a number of agencies required improvement in this area. Similarly, there is scope for some audited agencies to improve their internal communication and their systems for monitoring and reviewing legal purchasing decisions.

Agencies also require information on how well current legal services arrangements are working both in their own organisation and elsewhere, to inform assessments of possible changes. The ANAO also found that while several agencies were able to adjust their legal services as their needs changed, others did not have sufficient systems in place to monitor their workload and expenditure, to enable them to recognise and respond to change.

Agencies should actively manage risks to their ability to purchase quality legal services as well as managing the legal risks to their own ability to deliver programs and services (their core risks). In the context of the management of legal services, the ANAO found that a large percentage of audited agencies required significant improvement in these areas of risk management relating to the provision of legal services.

To ensure arrangements continue to meet agency requirements and represent value for money, agencies should also undertake regular reviews or assessments of their legal services model. The ANAO found that almost all audited agencies have undertaken some kind of review or assessment in the last five years of their legal services. However, these have been in various forms, with varying degrees of rigour. In future, the ANAO considers that agency assessments could be enhanced by the inclusion of a full-cost comparison of internal and external providers. This would assist agencies to assess the overall cost-effectiveness of particular approaches to legal services in the context of other considerations, such as the quality, timeliness, and reliability of legal advice.

Ongoing Management of Agency Legal Services (Chapter 4)

Agencies with internal legal units should ensure that the units combine a strong client service culture with a clear understanding of how the legal services they provide contribute to the work of the agencies as a whole. The ANAO found that most agencies had suitable management practices in place for internal legal services, however obtaining client feedback is an area most agencies could improve to ensure the quality of internal legal services.

Those agencies that use external legal services require mutually agreed and understood protocols for interaction. The ANAO found most agencies were coordinating requests for external legal services appropriately and actively managing the relationship with providers. However, a large percentage of agencies were not satisfactorily monitoring performance of providers and dealing with deficiencies as those arose.

Agencies should have appropriate systems in place to effectively distribute work amongst internal and external providers and to assist agencies in gaining the maximum value from legal services. The ANAO found that most agencies had matter management and knowledge management systems in place. However, over half of these agencies require significant improvement in keeping their knowledge management system up-to-date and useable.

Agencies are also required to adhere to the Legal Services Directions, which provide direction on specific issues and outline agencies responsibilities for managing legal services. The ANAO found that most agency staff were aware of the Directions and how they impact upon their role. However, a large number of agencies did not actively monitor their external providers adherence to the Legal Services Directions.

Overall, the ANAO concluded that agencies have a better chance of achieving value if they have lawyers with a strong focus on client service, are active in setting and monitoring service standards, maintain clearly understood protocols for interaction, and actively manage the provision of legal services as an integral part of their operations.

The Office of Legal Services Coordination (Chapter 5)

The OLSC is a branch within the Attorney-General's Department responsible for administering the Legal Services Directions and assisting agencies to manage their legal purchasing decisions.

The OLSC investigates possible breaches and provides clarification on aspects of the Legal Services Directions. The ANAO found that a number of breaches of the Legal Services Directions had occurred overtime. However, in some instances, the OLSC was unaware of these breaches and/or possible breaches. The ANAO considers that the OLSC should review its processes in order to monitor breaches more effectively.

The ANAO notes that OLSC currently provides a range of material on its website to assist agencies with their legal purchasing decisions. Some of this material would be of greater assistance to agencies if it included practical insights in addition to the general guidance currently provided. For example, such guidance might include how to manage the risks of legal providers overcharging for services, rather than simply identifying it as a risk.

The OLSC has an opportunity to build on its coordination and leadership role from recent initiatives to provide guidance to agencies on cross-agency legal issues. Agencies generally indicated a strong interest in the OLSC playing a greater facilitative role in sharing information and better practice strategies amongst agencies.

The ANAO notes that it is sound practice for agencies to actively monitor their legal services expenditure. In this context, the ANAO considers that the OLSC could disseminate guidance to agencies on the measurement and reporting of agency legal services expenditure. This would provide a consistent basis for agencies' reporting of legal services expenditure.

Overall Audit Conclusions

Changes to the Government's legal services policy and operating environment over the last 10 years have placed a greater onus on agencies to understand their legal services needs, and adopt appropriate arrangements.

The ANAO concluded that the quality of agency management of legal services has been variable. Some agencies demonstrated a high level of efficiency and effectiveness in the way they procure and manage legal services. Key features of this included a strong, informed, client-focused coordination point for legal services, the ability to adjust arrangements to suit changing needs, an active approach to the management of risks, and appropriate systems to monitor workload, expenditure and knowledge management needs and developments. However, the ANAO also found that a number of agencies require significant improvement in these areas. The ANAO has made six recommendations to assist agencies review their current arrangements to achieve value for money from their legal services.

The ANAO notes that the 40 surveyed agencies reported total legal services expenditure of
$446.0 million in 2003–2004 (refer Table 2.1). The reported external legal services expenditure between 1999–2000 and 2003–04 has increased by 23 per cent. The improved capture and reporting of internal legal services expenditure in recent years is a factor in the increase reported by agencies in that category. Growth has been predominantly driven by an increasing volume of legal work performed. Periodic increases in the charge-out rates of providers accounts for a smaller proportion of the increase. It is noteworthy that from 2001–02, legal services expenditure has been shared almost equally between internal and external providers with a slightly increasing trend towards internal service providers.

The ANAO concluded that the OLSC has played a broad role in the coordination of the Government's legal services. However, there is scope for the OLSC to increase its role in monitoring breaches of the Legal Services Directions, and facilitating information sharing across agencies. In addition, the ANAO recommends that the OLSC provide guidance to agencies on the recording and reporting of legal services expenditure. The ANAO has made three recommendations to assist the OLSC enhance its coordination of the Government's legal services.

The ANAO has also summarised some key features of better practice in the management of legal services. This is included at Appendix 2. The ANAO intends to produce a Better Practice Guide on Legal Services Arrangements, to provide more detailed and practical guidance to agencies.

Agency Responses

All 16 audited agencies responded positively to the report, agreeing to Recommendations 1-6, except that the Department of Defence agreed with qualification to Recommendation 6. Detailed responses from the 16 audited agencies (listed in Appendix 1) are included at Appendix 3. A further 24 agencies (listed in Appendix 1) were surveyed during the audit but were not required to respond to the recommendations in the report. General responses were received from 13 of the 24 surveyed agencies. The Attorney-General's Department agrees with the Recommendations 7-9, which were directed towards it.