As Law Firms Stall, Who Will Overtake Them in the Innovation Race?

This month, a legal arm of one of the Big Four accounting firms hired a top executive from Axiom Global Inc.

At the end of last year, that same business unit began selling automated contracts directly to clients. And in the future, the accounting firm wants to sign deals to take over the entire in-house legal function for clients.

This three-pronged strategy—building proprietary technology, offering an Axiom-like staffing model and outsourcing legal departments—is perhaps the most well-articulated among the Big Four's plans to alter the legal industry. Yet it is also little-known in the U.S. law firm market.

And for a simple reason: Those plans come from PwC Switzerland.

Such is the seemingly perpetual state of disruption in the legal market. A lot of things happen on the periphery, just not in the world’s largest legal market.

Five years ago, some predicted that by now legal staffing and alternative service provider Axiom, with its lower-cost amalgamation of lawyers and embrace of technology and clients’ demands for efficiency, would be the world’s largest legal services firm. By the end of 2016, the New York-based company had revenue just north of $300 million, a number more than 100 law firms achieved that year.

Reasons for the slow pace of change in the legal market are well-known. The billable hour is good work as long as you can get it. Individual clients can only drive so much change within their own providers, while other clients are content to continue their current billing models. And the legal market’s professional regulations—limiting work and ownership of law firms to lawyers—remain unchanged.

"That is our current state of the art: A stalemate," said Kenneth Grady, an adjunct professor at the Michigan State University College of Law who previously worked in a legal innovation role at Seyfarth Shaw. "We’re doing incremental change. ... Small tweaks here and there that slightly shave dollars off the bill."

That sentiment was echoed in a report earlier this month by Georgetown University and Thomson Reuters Corp., which stated that law firms have for the most part failed to respond to a changing market for legal services. Legal consultancy Altman Weil Inc. said in a survey last year that while 94 percent of law firm leaders see an increased need for practice efficiency as a permanent trend, only 49 percent of firms said they had significantly changed their approach to deliver efficient services. The report called this a "frightening disconnect".

"A majority of firms still behave as if the past 10 years really haven’t happened,” said James Jones, a former managing partner of Arnold & Porter now serving as a senior fellow at Georgetown’s Center for the Study of the Legal Profession. "Sure they’ve adopted things like some technological changes—but they really have not reoriented the way they go about or think about their practices."

Few legal market consultants anticipate a drastic up-ending of the current legal market. But a bevy of new players are making bets that they can encroach on the traditional domain of Big Law. Most prognosticators expect the Big Four to figure prominently in that challenge. For the story of how they will most likely try to do that, and what may limit them, PwC Switzerland is a good place to look.

Swiss Incursion

In July 2017, Dieter Wirth took over leadership of the tax and legal services arm of PwC Switzerland. Wirth’s goal, he said in an interview, is to become one of the 10 largest law firms in Switzerland by revenue within a few years.

The first part of his plan became public in October, when a startup firm called PartnerVine launched by selling a slew of automated corporate contracts drafted by PricewaterhouseCoopers directly to in- house legal departments.

Led by CEO and founder Jordan Urstadt, who was previously general counsel at Swiss private equity firm Capital Dynamics, PartnerVine sells automated contracts created by PwC lawyers. A nondisclosure agreement for an M&A deal costs about $100; paperwork to incorporate a business in Switzerland is about $700.

To Wirth, automated contracts are part of a broader effort to cut the costs of the legal services that PwC delivers. Helping toward that end, PwC is unencumbered by a legacy law firm business model that views innovation—especially the kind that document automation represents—as a threat to billable hours.

PwC also wants to cut costs for its clients by providing a flexible lawyer hiring solution similar to Axiom. In January, PwC Switzerland launched its Flexible Legal Resources business (something similar is available through PwC U.K.) with the addition of Marc Morant from Axiom, where he served for three years as general manager of the company’s business in Switzerland.

Ultimately, Wirth sees PwC drawing from these pieces to build out the capability to run entire legal departments through a managed service or outsourcing model. A year ago this month, PwC announced it had hired 600 of General Electric Corp.’s tax professionals in a deal to handle the conglomerate’s international tax compliance work. Wirth said PwC’s legal team has its sights set on similar deals to outsource “on a completely, holistically integrated basis” entire law departments.

"We can offer that at a lower cost compared to running those operations inside the company as a cost center,” Wirth said. “That will make the big push. And those are the big volume projects we are going after.”

Managed Services Potential

PwC would not be the first to take on a large portion of a law department, but outsourcing is a model with the potential to change the economics—or at least the incentives—for delivering legal services.

Earlier this year, DXC Technology Corp. hired UnitedLex Corp. to handle the technology services company’s contract management and immigration services over a five-year period. The deal involved “re-badging” a group of former DXC employees, including some lawyers, as UnitedLex employees.

UnitedLex CEO Daniel Reed said the company has since secured two similar-sized deals with Fortune 200 companies that are awaiting public announcement later this year.

“I think that is evidence that our approach is working and it’s driving massive, massive scale,” said Reed, a former associate at Greenberg Traurig.

Reed said the deals change the risk calculation for in-house legal departments by putting the onus for cost control on UnitedLex, which has a profit incentive to drive down costs. In the case of DXC, UnitedLex said it was able to cut costs for the company by 30 percent.

One reason that UnitedLex is able to make meaningful investments is that its capital structure differs dramatically from law firms. They have a balance sheet, financed in part by a private equity arm of JPMorgan Chase & Co.

“We have a balance sheet to financially guarantee what we do,” Reed said. “So if we scope out something and promise we can deliver a solution, if we’re somehow wrong, maybe we under scope it, we are on the hook for that. The client is not. We bear that risk.”

PwC’s Wirth also sees managed services as an important part of changing the legal services delivery model.

“To reduce costs without increasing the risk for the client, we need to come up with different legal models than we have seen in the past,” Wirth said. “And I think the combination of those three elements is an answer to these challenges that clients are facing.”

Big Four Limitations

Even so, there are potential limits to how far a Big Four accounting giant like PwC can go in its efforts to disrupt the legal market.

PwC’s legal operation, which now consists of more than 3,300 lawyers across 90 countries, is housed within its much-larger global tax business, comprised of more than 41,000 tax professionals. The firm’s tax and legal business last year had revenue of about $9.5 billion. Making up a quarter of PwC’s gross revenue, tax/legal is the smallest of the firm’s three main business lines—assurance, advisory and tax/legal.

Within this vast network, PwC Switzerland’s tax and legal department is an even smaller slice, bringing in revenue from tax work of about $180 million, said Wirth, head of tax and legal at PwC Switzerland. Wirth estimates PwC’s share of the market for tax services in Switzerland at about 40 percent.

But he said it’s unlikely that PwC Switzerland could achieve that kind of market share for legal services. Rules requiring audit firms being independent would limit PwC’s reach into legal services. Wirth said cornering just 10 percent of Switzerland’s legal market would be a success.

“I think 10 percent is the goal, and we are far away from that,” Wirth said.

Of course, PwC faces even bigger restrictions in the United States, which remains the world’s largest legal market. Last year it launched a stateside law firm, ILC Legal, to handle international legal issues. Wirth said the United States is an important part of PwC’s plans to outsource legal departments, but he declined to comment further on how it would seek to provide U.S. legal services.

PwC’s approach to legal services, through automated contracts on PartnerVine or via an outsourcing model, is in many ways designed to sell efficiency directly to in- house legal departments.

Jordan Furlong, a consultant to law firms, called that general approach a “no-brainer.” But he noted that law firms are still limited by the billable hour and traditional compensation structures from offering similar services.

"If you’re not committed to preserving lawyer hours the way law firms are,” Furlong said, “then you have a lot more options than law firms do.”

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