CONSULTING has its
Big Three; accounting the Big Four; and executive search a Big Five. But
there is no corresponding clutch of dominant law firms. None has
amassed as much as 0.5% of an industry with global revenues of around
$650 billion a year. Even the biggest law firms may be anachronistically
inefficient. They are run by lawyers, not professional managers, insist
on charging by the “billable hour” rather than by results and use
little technology more advanced than e-mail. Nonetheless, most big law
firms have continued to be highly profitable.
In recent years, clients have begun to rebel against the billable
hour, and at being charged senior lawyers’ rates for work done by
juniors. Some have started sending basic legal paperwork to cheap,
offshore processing centres. But only now is a serious threat to the law
firms’ cosy existence emerging.
It comes from none other than the Big Four accounting networks
(Deloitte, EY, KPMG and PwC), whose combined annual revenues of $120
billion exceed the $89 billion generated by the 100 largest law firms
combined (see charts). Having already dipped a toe into the legal
business a couple of decades ago, only to retreat, the accountants have
been stealthily building up legal-services divisions. These have now
reached a size where they outgun most law firms: by headcount, PwC’s
legal arm is the world’s tenth-biggest, and all four networks’ law
divisions are in the top 40 by this measure.
The accountants insist that they do not want to compete with law
firms, and that legal services will remain a small chunk of their
revenues in the medium term. So far, they have focused on mid-tier,
process-oriented work rather than the big deals and lawsuits that elite
law firms chase. Moreover, regulation has restricted their growth: they
cannot practise law in America, which accounts for over a third of
global legal spending, and most European countries restrict their
freedom to do so. Only a few countries allow full integration of
accounting and law firms (see table).
Nonetheless, as the accountants run out of room to grow in other
businesses, they will have trouble resisting this inefficient and
lucrative market. And the law firms will find it hard to fend them off.
To Michael Roch of Kerma Partners, an outfit that advises
professional-services firms, the Big Four are “the biggest
underestimated threat to the legal profession today”.
The idea of accounting firms doing legal work is hardly new. The Big
Four have long employed lawyers to work on European clients’ tax
returns. In the 1990s the then Big Five, led by the late, unlamented
Arthur Andersen, sought to diversify from auditing and tax by expanding
into both consulting and law. With America off-limits, all but Deloitte
founded or acquired law firms in Britain.
That trend ended abruptly when the Enron scandal took down Andersen
in 2002. Garretts, an English legal practice it had affiliated with,
suffered a harrowing dissolution, in which its staff had to find new
jobs and its partners faced personal bankruptcy. Observers attributed
Andersen’s demise to conflicts of interest between its consulting and
audit arms. The accountants’ legal divisions were seen as presenting
similar risks.
Moreover, the Sarbanes-Oxley corporate-governance reform
America passed in the wake of the scandal transformed the business
environment for the surviving Big Four. Besides restricting the
auxiliary services they could offer to audit clients, it granted them a
windfall in new regulatory work. In response, the accountants mostly
closed or sold their non-tax legal practices.
Over the following decade, however, incentives increased for the
firms to revisit their abandoned experiment. Revenues in their audit and
tax divisions flatlined, forcing them to seek new business lines to
keep growing. As their corporate clients globalised, the Big Four’s
international scale—together, they employ about 700,000 people in more
than 150 countries—became an increasingly valuable selling-point.
The recession following the 2008 financial crisis prompted
businesses’ general counsels to rebel against the padded bills they get
from the law firms they use. In the same decade, several countries
passed laws opening up their legal industries. Britain and Australia
authorised “multidisciplinary practices” (MDPs), which let attorneys
share profits, without restriction, with members of other professions.
So, the Big Four moved back in, buying small law firms, poaching
partners from others and recruiting on campuses. With the flexibility to
offer discounted, fixed fees, they started to win lots of corporate
legal work. In recent years the quartet’s combined legal revenues have
grown at double-digit rates.
Since 2013 EY Legal has expanded from 23 countries to 64. It merged
with a Chinese law firm, Chen & Co, and hired a partner from
Freshfields, one of the “Magic Circle” of posh London solicitors. In
2012 Deloitte scooped up Raupach & Wollert-Elmendorff in Germany,
while PwC recently took over an immigration-law boutique, Bomza, in
Canada. KPMG was the first of the four to register an MDP in Britain,
which lets it give its lawyers there full-fledged partnerships in the
firm. Now, as a proportion of the combined revenues of the ten largest
firms in each country, Kerma Partners calculates that the Big Four’s
aggregate market penetration ranges from 4% in China and 6% in Britain
to 20% in Germany and 30% in Spain.
The Big Four are taking a more focused approach this time. Rather
than building full-service firms, they are concentrating on areas of law
that complement their existing services: immigration, which sits nicely
with expatriate tax work; labour, which goes with human-resources
consulting; compliance; commercial contracts; and due diligence. So far
they have resisted taking on the priciest law firms for high-value work
on capital-markets transactions or mergers and acquisitions. They are
also steering clear of non-tax litigation, which could result in them
suing potential audit or consulting clients. But they are seeking to
build broader practices in under-lawyered emerging markets where the
international law firms do not have a presence but the accountants do.
Kill billable hours
For now the Big Four seem content with stealthy growth. By tiptoeing
around the strongest firms, they have planted a flag on the margins of
the profession without setting off alarms. “I don’t think we disrupt the
existing law business that much,” says Leon Flavell, the head of PwC
Legal. But his goal is to more than double its revenues by 2020, to $1
billion a year. The legal business is not growing fast enough for PwC
and the other three accounting giants to reach this sort of turnover
unnoticed. Eventually, they will go head-to-head with law firms.
So far, law firms have been sanguine about this looming risk. Those
in America can afford to be complacent: the accountants’ lobbyists are
too busy advancing the interests of their existing businesses to push
for an opening of the legal profession. Even if they tried, America’s
legislative bodies are infested with lawyers, who would surely fight
back. This should ensure that the market remains protected for the
foreseeable future. Similarly, the Magic Circle firms in London can rest
easy for now: Europe’s finest lawyers can still name their price for
the most challenging, “bet-the-company” work.
Those most at risk from the attack of the bean-counters are the
profusion of mid-tier legal firms in liberalised markets. Since their
profit margins are already low, they cannot afford even a modest loss of
market share. Unfortunately for them, much of their business is
high-volume, repetitive tasks—just the sort of work that the Big Four
excel at standardising and automating.
Most of these vulnerable law firms have been slow to react. That may
be because their clients are telling them not to worry: in a recent
survey by
American Lawyer magazine, 90% of
companies’ general counsels did not think their business would buy legal
advice from an accounting network. However, those general counsels may
themselves be cut out of the loop, as the Big Four sell their companies’
finance departments a “one-stop shop” service, with legal work bundled
together with consulting and tax filing.
A handful of innovative law firms have tried to “self-disrupt”, to
pre-empt new entrants. In 2011 Allen & Overy, a Magic Circle member,
set up a service centre in Belfast to handle routine aspects of big
deals. It now employs almost 400 people there, including 70 lawyers, at a
fraction of London salaries and rent. At the other end of the market,
in recent years groups of mid-tier firms across the globe have linked up
to form loosely integrated networks. In January Dacheng of China joined
a Western confederation, Dentons, to create an alliance that employs
6,600 attorneys.
Although the giants of the legal world have sought to mimic the
accountants’ cost and scale advantages, they remain minnows compared
with the Big Four. Only the likes of PwC and Deloitte can muster the
capital and technology (and relatively cheap labour) to industrialise
the artisanal model of legal practice that has endured so long.
Businesses that spend heavily on legal advice stand to save a fortune.
But law firms that are sub-scale and inefficient risk ruin. The Walmarts
and Amazons of professional services are at their gates, and the legal
industry’s halting pace of creative destruction is set to accelerate as a
result.
Postagens
