Turf war: Law firm bosses see Big Four as ‘threat’ as they aggressively expand into legal sector | City A.M.
The City’s top law firms are keeping a wary eye on the Big Four accountancy giants as the beancounters expand into the $600bn (£465bn) global legal services market.
Managing partner of City law firm Fieldfisher Michael Chissick said: “They have very ambitious plans, that isn’t in doubt, audit is in decline and it is low margin, legal has been growing for the last 30 years and is high margin. They got it wrong several years ago and they have come back with better, clearer strategies. They are a threat to firms in my strata, I wouldn’t underestimate them in any way.”
Co-chief executive of $1bn law firm Eversheds Sutherland Lee Ranson has also noticed the audit firms’ moves to muscle in on the legal turf, telling City A.M.: “The reality is they are already of a significant size, if you look outside the UK in some jurisdictions they are in the top five or 10 firms by size and in the UK now there is much more of an overt intent to expand into legal services.”
Read more: EY snaps up law business in bid to disrupt the legal sector
Nick Davis managing partner of City law firm Memery Crystal said the Big Four “will be very, very serious players in the market”.
“The Big Four will have a very large impact on the mid market. They have got such a strong client base and they are so good at integrating business services into their offering,” he said.
This week EY announced it had acquired tech-heavy alternative legal provider Riverside Law – a move that is being seen as a shot across the bows of the traditional legal market.
EY UK law leader for financial services Matthew Kellett said on Twitter:
So, we’ve acquired Riverview – you weren’t expecting that – watch this space – lines are being drawn— Matt Kellett (@MattKellett_EY) August 7, 2018
Speaking to City A.M. EY’s global legal leader Cornelius Grossman said: “We have a plan for the next five years where we will aggressively grow the legal business.”
According to a report from ALM Intelligence PwC has 2,500 lawyers in 85 countries, which would place it as the sixth-largest legal services provider in the world in terms of headcount.
KPMG and EY have 2,200 and 2,100 lawyers respectively with Deloitte on 1,800.
The Big Four have ramped up their UK legal presence in recent years following a regulatory change that allowed non-lawyers to own law firms.
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Deloitte was the last to the party, receiving an alternative business structure licence from legal watchdog the Solicitors Regulation Authority in June, following on from EY, PwC and KPMG which all received licences in 2014.
The key threat to law firms from the Big Four is their vast size and ability to invest. In 2017 PwC had a global revenue of $37bn and Deloitte posted nearly $39bn, in comparison only two law firms have broken the $3bn mark: Latham & Watkins and Kirkland & Ellis.
“The deep pockets bit would be the competitive advantage most people would point to, the research and development budget and critical mass they can bring,” Ranson said.
Law firms, because of their partnership structure, distribute most of their profits to their partners on an annual basis, making it more difficult to fund long-term investments.
Leigh Dance a consultant to law firms at ELD International said: “It is hard for law firms to compete on that playing field given the partnership model they have.”
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Grossman said: “I don’t think law firms are short of money but the commitment to put money to one side for long-term strategic moves is easier in an organisation like EY than traditional law firms when you cash out on an annual basis. EY has deeper pockets and we are happy about long-term and strategic investments which is supported by the partnership.”
The last foray the big accountants made into the legal sector was torpedoed by the Enron scandal, which turned the Big Five into the Big Four and sparked a regulatory crackdown that led to the accountants scaling back their legal arms.
Tony Williams of law firm consultancy Jomati was global managing partner of accountancy firm Arthur Andersen’s legal arm when it collapsed in 2002.
“The big problem was the backlash in relation to Enron which led to Sarbanes Oxley which placed greater restrictions on what you could do for audit clients,” he said.
“People forget that in 2001 Andersen Legal was the ninth-largest law firm in the world by revenue. It wasn’t a hick practice,” he added.
In their second push for legal dominance the accountants still face hurdles including the possibility of further regulatory crackdowns, stricter client conflict rules in the legal sector and the tension that comes from competing with the law firms that they typically audit.
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Ranson said: “If you go to the top 50 law firms and looked at their auditors most of them are the firms that are competing with them. In what other sector does that happen? How that plays out will be interesting.”
Despite the potential conflict issues it is clear that the accountants have big plans and it is a threat that the legal sector is taking seriously.
Grossman said: “We are seen as one of the disrupters of the legal market there is no doubt about it.”
He said that the acquisition of Riverview would give EY an advantage against its competition in the Big Four and among traditional law firms.
“We think this deal gives us first mover advantage and we are not going to stop here, we are going to build on that aggressively,” he said.