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Rise of the Accountants: An Existential Threat to Law Firms

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About The Author

Ed Harris (Regular Writer)

Ed graduated from Swansea University with a first class LLB, and is soon to begin an LLM in Law and Economics at Utrecht University. His main areas of interest are within corporate finance and developments in the business world. Away from the law, Ed is a keen footballer and also enjoys racket sports.

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There will come a time of fire and night, when enemies rise and empires fall, when the stars themselves begin to die.

Kevin J Anderson

The ‘Big Four’ are coming and if BigLaw aren’t worried then they certainly should be. Armed with decades of experience, stellar reputations and a plethora of existing clients, the Big Four accountancy firms – comprising EY, KPMG, PwC and Deloitte – have budgets not only to compete but to blow everybody else out of the water. Noting their expansion in America / the current deregulatory climate, their talent grab in Europe and the moves they are currently making in the Asian market, the accountants are at the gates of Big law and, with future proof business models, they not only have the capacity for a siege but have the resources for an all-out assault.  Whatever happens, the Big Four could soon be holding the keys to the kingdom.

Background

On 15 June 2015, Deloitte become the last member of the Big Four to be granted a licence to have an effective Alternative Business Structure (ABS), with EY, PwC and KPMG having already been granted licences in 2014. As previously discussed by Keir Baker for Keep Calm Talk Law, ABS licences enable the provision of legal and advice services by, and allow firms to set up legal partnerships or businesses with, non-lawyer managers or those with an interest, defined as shares or control over voting rights.

By implementing ABSs, the Big Four will be looking to replicate the dominance they have achieved in the auditing market – where they account for 60% of the accounting sector, including capturing the market of an incredible 95% of FTSE 350 companies – in the legal world. Evidence suggests that they are already making a start at doing so, employing the same aggressive expansion strategy that worked to great effect as they built their . 

Why Might the Big Four Be Such Threats?

Resources

In the process of developing their dominance, the Big Four have built themselves into money-making behemoths with considerable resources. In this respect, law firms may simply be unable to complete: at present, no law firm owns more than 0.5% of the global market. 

For example, in 2017, Kirkland & Ellis overtook Lathams & Watkins to become the top grossing firm of the Am Law 100 when it recorded $3.17 billion in global revenue. The figure is dwarfed by the numbers recorded by each of the Big Four: Deloitte reported $38.8 billion in gross revenue in fiscal 2017; PwC reported $37.7 billion and EY reported $31.4 billion in total turnover for the year.

This level of turnover allows the accountants to press a significant advantage in areas where law firms – traditionally slow to adapt in the first place, as seen in the somewhat sedated attitudes many firms have taken towards legal technology or floating on the stock market until recent years – cannot compete.  

Furthermore, the sheer firepower behind the Big Four due to their incredible revenues means they can invest much more heavily in vital areas, vastly outperforming rival law firms. As Andre Arudda – the CEO of Ross Intelligence – has observed:

Deloitte, for example, can spend more on training than the fee income of the world’s largest (law) firms.

Technological Disrupters

Leading disrupters in the global economy such as Uber, Deliveroo and AirBnB have outflanked their rivals by using technology to put themselves in pole position to meet the needs of customers. This trend looks set to be replicated by the Big Four in the legal sector, particularly in light of law firms being painfully slow to adapt to new markets and technology, mentioned afore. Indeed, Martin Gill, writing for Forrester Research, has stated:

Digital disruptors are tearing up the rule books, and no industry is immune. In response, firms must take a different approach to digital strategy, embedding digital capabilities into the heart of their business, rather than treating digital touchpoints as peripheral add-ons.

In August 2018, EY underlined their newfound position as ‘a leading disrupter of legal industries’ with their purchase of legal innovation outfit Riverview Law for an undisclosed amount. With Riverview perhaps most famous for its development of an Artificial Intelligence (AI) programme that, according to its creators, can perform legal tasks that are normally performed by paralegals, this acquisition has the future in mind and epitomises how the accountants aim to shift the legal paradigm. As EY itself has observed, this purchase:

will help clients to increase efficiency, manage risk, improve service transparency and reduce costs of routine legal activities.

This client centric approach is seen across the board of the Big Four and is perhaps indicative of the ‘solutions based’ business model.

In 2016, KPMG opened a technology development centre in Nanjing, China focusing on technology solutions for their clients. These kinds of developments pose a significant threat to traditional law firms as they are highly innovative client-based solutions, which traditional law firms are incapable of performing. As Lachan Wolfers, Head of Tax Technology at KPMG China has noted:

We [KPMG] have just under 200 software developers sitting there and their only job is to develop digital solutions …. Law firms simply cannot do that.

The accountants have also leveraged relationships with existing tech giants in search of technological solutions. In 2015, the PwC and Google Innovation lab was unveiled in Belfast – the first of its kind in Europe, with the sole intention of developing new global clients solutions.

Business Model

However, it is not just the penchant for disruptive technologies that give the Big Four an advantage; their very business model poses as big a threat as any to traditional law firms. Such a business model was recently articulated by Piet Hein Meeter, the global managing director at Deloitte Legal, who said that:

The legal profession is undergoing a massive transformation. We at Deloitte Legal see a clear need for a new type of service that combines legal advice with strategic advice across other disciplines. This is not currently provided by other law firms. Our clients want us to bring new solutions to the table, and that’s exactly the gap we want to fill. Our ambition is to become the law firm of the future.

The Big Four firms can bring everything to the table when dealing with a client. Whereas law firms are fixed on the legal aspects of deals, the Big Four have the potential to outcompete these firms not only on service but consequently on cost. For example, in an M&A deal one of the Big Four could not only provide the advisory work upfront to identify potential merger candidates but also provide tax professionals and their own team of lawyers to undertake the due diligence aspects of the deal. With the latter stages of the deal involving financial clean-up, integration can be performed by accountants and consultants respectively.

This will undoubtedly be enticing to CFO’s: not only will these firms bring lawyers, tax experts, accountants and consultants to the table, they will be able to sell the deal as one package, significantly reducing transactions costs for both parties and allowing these firms to undercut the competition.

Building From a Position of Strength

The considerable advantages of the Big Four extend to their geographical reach and existing presence markets. This advantage is further pressed when the sectors in which these firms intend to focus are sectors in which they are already market leaders.

As seen with revenues, the global presence of the world’s largest law firms is dwarfed by that of the Big Four. A Harvard study states that on average the Big Four have a presence in 71 markets whereas the 10 largest law firms are only represented in 31 countries worldwide.

Allied to this, the Big Four already have strong positions in legal markets. The most obvious is a direct consequence of their dominant audit and tax advisory business – tax law. However, the Big Four are also strong in the areas of employment and immigration. Indeed, the growing strength of the Big Four’s legal offerings can no doubt be demonstrated by the naming of PwC as the 2018 leading alternative law brand .

Number of lawyers & revenue growth

The legal arms of the Big Four already employ considerable amounts of lawyers. In fact, PwC’s 2,500 lawyers puts them at a comparable size to that of Clifford Chance and, if operating as a separate entity, would place them as the . The rest of the Big Four are not far behind, with KPMG employing 2,200, EY 2,100 and Deloitte 1,800.

Within these ranks are numerous examples of talent stolen from leading law firms, including EY’s poaching of corporate lawyers Richard Thomas and Paul Devitt from Addleshaw Goddard in 2016 and PwC’s capture of former Clifford Chance partners Mark Pistilli and Danny Simmons.

The Big Four are also making significant progress in terms of revenue growth, which should have the rest of the legal world on notice. EY have grown by more than 10% for the last 5 years and even recorded growth of 20% in the last year. With the rest of the Big Four recording similar figures the gap is undoubtedly closing.

Therefore, while the number of lawyers at EY may pale in comparison to the likes of Baker & McKenzie – which employs nearly twice as many lawyers as PwC – it is incredibly impressive when put in context of their dramatic growth of revenues and reputations in targeted legal markets.

Furthermore, with KPMG recently announcing plans to double their lawyer headcount, the Big Four are undoubtedly building legal workforces comparable to leading law firms.  

Future proof - Emerging markets

A particular area of focus for the Big Four has been the emerging markets, especially Asia. The opportunities in these markets are huge for legal businesses, though the Big Four already hold numerous advantages.

With the European economy experiencing growth rates of around 2%, and Asian economies such as China and Singapore experiencing growth rates of 6.5% and 3% respectively, the emerging markets are undoubtedly attractive. This is underpinned by BMI research predicting Asia to account for 40% of global GDP by 2030

The aggressive expansion of the Big Four in emerging markets can be seen through various recent hires: EY recruited 6 lawyers from Troutman’s Asian Office in May, while PwC made multiple partner hires in Hong Kong as well as strengthening their collaborative structure in the region.

Not only do these Asian jurisdictions have far less regulatory red tape than their European and American counterparts – allowing the Big Four to completely own their legal arms and therefore undertake greater integration with other aspects of their businesses – but the Big Four also benefit from significantly greater brand awareness amongst the Asian population than traditional law firms. The reasoning for this is two pronged. Firstly, the Big Four have been active in these markets for over a century, with PwC opening its first office in China in 1906. Secondly, the Big Four are largely credited with globalisation in Asia and have stellar reputations among the populations due to the benefits local businesses received from being introduced to global markets. On the other hand, while companies in the UK and the US may have built up relationships with Magic Circle and Wall Street firms respectively, when it comes to emerging markets, company loyalties most likely lie with the Big Four. 

Deregulation: No Stopping Them Now

At present, law firms may take solace that parts of the legal market share are shielded by legislation. This is particularly true in the USA – the largest legal market in the world at $300bn.

Yet, the Big Four can take comfort from recent US trends, namely the de-regulatory agenda pursued by President Trump’s government and the success the Big Four have had in spite of the regulatory framework.

As a result of the Sarbens–Oxley Act of 2002, accounting firms generally aren’t allowed to offer legal services to companies that they audit; non-lawyers can’t generally own or operate a law firm or share fees with those who do.

However, in recent times the Big Four have managed to gain a foothold in the US, as seen with PwC’s establishment of ILC Legal in Washington DC and Deloitte’s alliance with Berry Appleman & Leiden LLP. These deals adhere to traditional rules that have served to insulate US law firms from competition from the Big Four and yet in Deloitte’s case, allows US businesses to access Deloitte’s Global Immigration services.

If the Big Four really wanted to upset the applecart, the US legal market would be an attractive target and potentially even a plausible one. There is speculation as to how well the Sarbens-Oaxley Act would stand up to challenge on anti-trust grounds.  The Big Four unquestionably have the funds – if the Big Four wanted to chance their arm on a court victory against the US regulators, the legal fees would be a drop in the ocean – and, as it always has, money talks, particularly in corporate America.

Regulatory change is a legitimate proposition according to ALM research, with 56% of America’s law firm leaders anticipating regulatory change allowing accounting firms to practice law. In particular, 24% believe this will occur within the next 5 years.

If this were to happen the situation would be less centred around the Big Four breaking into to the US market, but more the gates being opened for them.

Conclusion

The Big Four undeniably pose a significant – but as of yet unrealised – threat to the legal landscape as we know it.  With lessons learnt from the failed past expansion, turning the Big Five into the Big Four with the demise of former accountancy titan ‘Andersen’, their unparalleled budgets and penchant for innovation and technological change, the threat posed by the Big Four is palpable. 

Whilst the rhetoric from the Big Four remains anything but menacing, the same methods have been applied that were so effective in gaining the stronghold in the consulting and auditing sector: the recruitment, the spending, the investment in emerging markets have been put into motion.

Of course, there are many factors that could put an end to this potential, including the . In the wake of the Carilion scandal, House of Parliament select committees have blasted the ‘UK's audit market as a cosy club incapable of providing the degree of independent challenge needed’, which has resulted in a Competition and Markets Authority report proposing a radical shake up of the auditing sector.  Whilst it remains to be seen the extent to which these reforms are implemented and whether or not it may even hasten the Big Four’s push into law, it seems the wheels of the Big Four’s legal advance are in motion and Big Law better be on notice.

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Tagged: Commercial Awareness, Commercial Law, Competition, Legal Business

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