The Big 4 accounting firms are making aggressive inroads into the UK legal market and are committed to changing the sector’s landscape in the years ahead. In this blog, we examine their chances of success.
“The ambition is to be a significant player in the legal market.”
These were the words of Deloitte UK Legal’s new managing partner Michael Castle after he joined Deloitte from Allen & Overy earlier this year. His words echo similar sentiments in recent months from the other Big 4 accountancy firms, PwC, EY and KPMG.
The top law firms are taking the Big 4’s foray into the market seriously. Fieldfisher managing partner Michael Chissick admits “they are a threat to firms in my strata. I wouldn’t underestimate them in any way.”
Memery Crystal’s managing partner Nick Davis has similar concerns. “They will be very, very serious players in the market,” he says. “They have got such a strong client base and they are so good at integrating business services into their offering.”
Haven’t we been here before?
Back in the 1990s, the then Big 5 (the same four plus Arthur Andersen) were making very similar noises. But their attempts foundered following the Enron scandal and the subsequent disintegration of Arthur Andersen in 2002.
By that time, Andersen Legal had become the world’s ninth largest law firm by revenue. The scandal and subsequent concerns about audit firms offering non-audit services led to the accounting giants pulling back (though not withdrawing totally) from the legal sector. The magic circle and large US firms expanded to fill the void, and it seemed that the rise of the Big 4 in the legal market had been seen off.
Not so, says Professor Wilkins, director of the Center on the Legal Profession at Harvard Law School. “The legal profession thought they’d banished [the Big 4] to Middle Earth, but in fact, they reformulated their strategy to take advantage of changing dynamics.”
So, what’s the strategy?
“Our model is not to go head to head with law firms. We offer something different,” says Nick Roome, head of KPMG’s UK legal services business. This is the same for all the Big 4, who seek to combine legal advice with advice across other disciplines such as accounting, tax, compliance and due diligence. It’s a service offering that law firms simply can’t compete with.
Financial muscle and investment in technology
The Big 4 have other enormous advantages over even the largest global law firms. One is financial muscle. The revenue of the world’s two largest law firms, Kirkland & Ellis and Latham & Watkins, is around US$3.5bn, a sum that is dwarfed by the Big 4, whose revenues are approximately ten times this amount.
The Big 4 have shown that they are willing to invest all this money is new technology, something law firms have been slow to do in comparison.
EY calls itself as “a leading disruptor of legal industries” and put its money where its mouth is last year when it bought legal innovation company Riverside Law for an undisclosed amount. Riverview is best known for developing an AI programme that can perform legal tasks normally performed by paralegals. It will, says EY, “help clients to increase efficiency, manage risk, improve service transparency and reduce costs of routine legal activities”.
KMPG meanwhile employs nearly 200 software developers whose sole job is to develop digital software. And PwC has a joint innovation lab with Google in Belfast whose goal is to develop new global client solutions. Even the largest law firms can’t come close to competing with this.
A client base to die for
Another key advantage the Big 4 have is the fact that between them they control 60% of the accounting sector and their clients include 95% of FTSE 350 companies. In other words, they already act for most of the clients the leading law firms are fighting over.
They have a geographic advantage too. The Big 4 have a presence in more than 80 legal markets around the world, whereas the top 10 law firms are only represented in 31. Not satisfied with this, in recent years the Big 4 have made a sustained push into the legal sectors of emerging economies, with EY and PwC, in particular, recruiting heavily in Asian jurisdictions.
So, should junior lawyers think about joining a Big 4 firm? They would be wise to consider it. PwC currently employers 2,500 lawyers worldwide, a similar number to Clifford Chance. KPMG employs 2,200, EY 2,100 and Deloitte 1,800. And numbers are rising. The Big 4 are starting to poach lawyers from leading firms and have made lateral hires in recent years from several top UK firms including Allen & Overy, Addleshaw Goddard and Clifford Chance.
Deloitte’s Michael Castle said following his appointment as managing partner in March that the firm is in sustained hiring mode. The firm is seeking lawyers across its corporate, employment and tax litigation practices, all areas where the firm is already strong and getting stronger.
“The immediate plan is to build the legal capability,” says Castle, “and to tie that up with other aspects of Deloitte Legal like the consulting, the alternative legal services and the technology products to deliver legal solutions to clients.”
Traditional firms have been warned. It will be interesting to see if the Big 4 get it right this time around and, if they do, how the world’s leading law firms react.