Big Four circle the legal profession
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In March, the head of the UK’s Financial Reporting Council suggested the time had come to consider breaking up the Big Four accounting firms. Stephen Haddrill called on the Competition and Markets Authority to examine the case for “audit only” firms.
The argument for breaking up the Big Four — Deloitte, EY, KPMG and PwC — and separating their audit function from the range of other professional services they offer looked quite compelling in the wake of the collapse of Carillion, the British outsourcing company which was linked to aggressive accounting practices.
Nor are anxieties about the effect on audit quality of the expansionist ambitions of the Big Four restricted to the UK. This year, the International Forum of Independent Audit Regulators said it had identified accounting failures in two-fifths of the 918 audits of listed companies it inspected in 2017.
Given that the growth of the Big Four has been particularly pronounced in the legal services market in recent years, leading law firms will be watching the arguments for and against spinning off these companies’ audit arms with keen interest.
Some argue that the global business and political climate has become less hospitable to the Big Four’s designs on the legal sector. Having surfed the wave of globalisation and the deregulation of legal services around the world that followed the UK’s liberalising Legal Services Act in 2007, they now face the twin forces of protectionism and populism. These political developments threaten to close lucrative global markets, particularly in emerging economies that are lightly regulated.
Does all this spell danger for the Big Four’s dream of absorbing law-related services into their “integrated services model”? One leading expert has warned the legal profession against celebrating prematurely.
In a recent article written with Maria Jose Estaban, David Wilkins, director of the Center on the Legal Profession at Harvard Law School, declared: “Reports of the death of the Big Four’s legal ambitions have been greatly exaggerated.”
For one thing, as Prof Wilkins points out, we have been here before. In the 1990s, the then Big Five (today’s Big Four, plus Arthur Andersen) made a concerted effort to move into the legal market. That attempt foundered in the wake of the Enron scandal, in which Arthur Andersen was centrally implicated and which led to its disintegration in 2002. The so-called Magic Circle law firms grew rapidly as the remaining Big Four drew in their horns.
“The legal profession thought they’d banished [the Big Four] to Middle Earth,” Prof Wilkins says. “But in fact they reformulated their strategy to take advantage of changing dynamics.”
Over the past decade, the accounting firms have sought not to replicate the large law firm model but rather to refine an integrated services model that operates at the intersection of tax, finance, consulting, strategy, information technology and project management.
Nick Roome, head of KPMG’s UK legal services business, recently told The In-House Lawyer magazine: “Our model is . . . not to go head to head with law firms. We offer something different.” The same is true of the other members of the Big Four, whose legal activities have grown prodigiously: PwC employs 3,600 lawyers in 98 countries; EY has 2,200 lawyers in 81 countries; KPMG about 1,800 lawyers in 75 jurisdictions; and Deloitte has more than 2,400 lawyers on its books.
The most nimble and innovative law firms recognise they must respond and also that the Big Four’s multidisciplinary model offers opportunities for collaboration. The status quo is not an option.
“Clients want integrated solutions,” says Prof Wilkins, because they do not think of their challenges in legal terms — they are just challenges. “Law firms have to respond to this.”
This need not mean that the complete convergence of law firms with the providers of integrated, business-oriented solutions is inevitable. “There is always room for various forms of specialisation,” he says.
However, there is one area in which the Big Four do have a head start and which they plan to conquer: harnessing technologies such as machine learning and other forms of artificial intelligence to provide more efficient and better legal services.
Richard Susskind, author of Tomorrow’s Lawyers, an influential study of the future of the legal profession, and a consultant to Deloitte Legal, says: “What’s interesting about the Big Four is their commitment to new technology. They come to a market where they have no legacy to protect, so they are able to start with a blank sheet of paper. It seems to me self-evident that the Big Four will be hoping to emerge as market leaders in legal technology.”
While most leading global law firms will, Prof Susskind says, have “a story to tell” about innovation and technology, these are yet to have shown a decisive effect either on turnover or on ways of working.
There are exceptions, however. Prof Susskind picks out Margin Matrix, a digital derivates compliance system developed by Allen & Overy with Deloitte. Or take Schillings, a firm that has transformed itself in recent years from a law practice into an integrated professional services partnership.
Prof Susskind says he often asks law firms who their competitors are. “They’ll mention someone who looks quite like them. But I tell them that the competition that will kill them won’t be like them.”
One-stop shops: the best in integrated services
After the purchase of Riverview Law in September, the consulting firm is on its way to integrate a managed legal service with 2,200 lawyers working across 81 jurisdictions. It has used strategic alliances to integrate and digitise professional services in the past: last year, it concluded a deal with Concur, an SAP travel and expense company, to help business travellers understand their immigration and tax obligations. The firm is leveraging data in other products, such as its cash analytics tool, built on a Microsoft cloud platform, to help companies aggregate data on their cash flow by analysing customer and vendor invoices. This enables companies to use their working capital better. For one client, it achieved $100m in working capital improvements.
With over 2,400 lawyers, the firm recently launched its Legal Management Consulting service line, which combines consultancy with risk advisory and operational expertise for in-house legal departments to help them increase efficiency. The legal arm has become more integrated into the risk advisory and tax businesses. The firm has a number of products that combine data and technology with law and professional services such as DoQminer, an AI based data-extraction tool.
The legal services provider has grown rapidly since its founding in 2011 to nearly $50m in revenues and a headcount of over 700 people. The company’s lawyers, engineers, consultants and business experts work with major corporate law departments. It acts as a strategic partner to law firms to provide support on a broad spectrum of business operations, including technology, human resources, marketing and procurement. It recently launched an operation in Krakow in Poland, which it plans to expand to add an EU hub to its global operations, joining centres in the US, UK, India and the Philippines.
Established in 2003, Exigent has built on its low-cost legal outsourcing with a range of technology, data analytics and consulting services. While the majority of its 500 staff are lawyers, the fastest growing part of the company is its contract and data optimisation team. The company now employs more than 20 data scientists and contract experts to advise company legal teams on improving processes and to manage and analyse big sets of data. It has also developed proprietary software for clients to manage contracts.
The firm, which employs 1,800 lawyers, offers integrated advisory services with a multidisciplinary focus in Europe. It is growing in Australia with the hiring of Stuart Fuller, former global chairman of King & Wood Mallesons. In May, Jürg Birri, KPMG’s global head of legal services, set an ambitious target of nearly doubling the size of its legal services arm to 3,000 lawyers over the next three years. He expects KPMG’s member firms, spread across 154 countries and territories, to continue investing in legal service operations.
In 2013 in the UK, PwC secured an alternative business structure licence, creating PwC Legal, which was fully integrated into the advisory business in 2016. With 3,600 lawyers, it is the largest legal arm among the Big Four professional services firms. It recently showcased its approach to convergence for an Australian private equity client when it performed the entire range of tasks required for a major acquisition. It also made a strategic alliance with Fragomen, an immigration law firm with offices in 25 countries, to cater to the increased compliance on tax and immigration requirements of business traveller clients. In a first among the Big Four, which are not licensed to practise US law, PwC opened a Washington DC office with international lawyers to bring the global firm to US clients.
The UK-based media and private client firm began to reinvent itself as a reputation business in 2012. It now employs lawyers, cyber security experts, military experts, risk advisers and consultants to manage reputation and privacy issues for clients. The change in what was once a defamation law firm could be a precursor of what is to come for big law firms as they move away from a focus on practice areas and industry sectors to structuring around specific topics or business challenges. Of the 75 employees who earn fees, half are lawyers.
Over the past decade the news, information and technology company has made more than 200 acquisitions, including legal services and legal technology businesses. In 2018, after a series of divestments, the business began a streamlining process to reorganise its legal, tax and accounting businesses around customer rather than service lines. Legal services are expected to account for 43 per cent of company revenues over the next year.
The company, established in 2006, works to improve efficiency at in-house legal divisions and law firms by combining professional services with technology. It helped DXC Technology increase its speed of contracting, which is credited with improving DXC’s share price, and set up ULX Partners to offer outsourced back office services to law firms. It recently secured a funding arrangement with CVC Capital Partners worth $500m to help its expansion.
Zico was one of the first integrated professional service businesses in south-east Asia, combining 16 professional areas such as law, consulting, and tax advisory services. The group has had a number of successes, including work for Uber and Shopper 360. The firm now numbers 472 professionals across the holding company and member firms.
Profiles research: RSG Consulting
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