By Jason Tashea for the ABA Journal
Jami McKeon says she’s not worried.
Elected chair of Morgan, Lewis & Bockius in 2014, McKeon has been with the legal giant since 1981 and she’s seen plenty of rivals, competitors and existential threats to the legal industry come and go. “The legal market has always been highly competitive,” she says, “so changes we see today are more about the source of competition.”
Law firm consultants, however, tell a different story. According to ALM Intelligence and Altman Weil, law firm leaders are already losing business to this latest source of competition that McKeon is speaking about—and many more are concerned that this could be just the tip of the iceberg.
The source of competition is the Big Four.
Composed of the four largest accounting firms in the world— Deloitte & Touche, Ernst & Young, KPMG and PwC—the Big Four have, over the last decade, regrown their legal services offerings by moving beyond tax law and integrating their legal services into a multidisciplinary approach. While still small by comparison to BigLaw, a recent ALM Intelligence report found that 69 percent of law firms interviewed saw the Big Four as a “major threat.” Altman Weil, meanwhile, found in its 2018 Law Firms in Transition survey that nearly two-thirds of law firms with more than 250 lawyers consider the Big Four to be a “potential threat.”
Photo courtesy of Morgan, Lewis & Bockius
The Big Four have not been shy about encroaching on territory once considered the sole province of law firms. PwC, also known as PricewaterhouseCoopers, has even taken the additional step of launching its own law firm. Opened last September in Washington, D.C., ILC Legal provides non-U.S. legal services to mainly multinational companies through foreign-trained attorneys, according to its website. Its practice areas include entity governance and compliance, labor and employment law, global immigration, mergers and acquisitions, and financial and tax law.
“This is market-driven,” Richard Edmundson, managing partner of ILC Legal, told The American Lawyer. “Our clients are increasingly looking for advisers that can provide international coverage on transactions from planning to execution.”
The polyglot office has attorneys from Canada, England, Germany, Poland and Spain, all of whom are admitted in their own country but have “special legal consultant” status in the District of Columbia, allowing them to operate with some limitations in the jurisdiction.
While not offering U.S. legal advice, Edmundson said he believes that the law office, which is not controlled by the accounting firm, could practice American law with the right attorneys. ILC Legal did not return requests for comment.
More recently, Deloitte’s United Kingdom operation entered into an alliance with U.S. immigration law firm Berry Appleman & Leiden. Under the terms of the June agreement, Deloitte will buy BAL’s non-U.S. operations, which include offices in London, Singapore, Brazil, China and South Africa. “With the increased need for cross-border business travel, global organizations are recognizing the value of a firm that can bring a global footprint to help support the challenges of delivery and corporate compliance,” said Kalvinder Dhillon, head of immigration at Deloitte Global, in a statement.
For the time being, American lawyers need not worry much. Federal statutes, as well as state bar regulations, will keep the Big Four from offering traditional U.S. legal services. However, the current landscape hasn’t foreclosed the Big Four from growing and offering services in the U.S. and abroad, which has the potential to shake up a stagnant American legal market. Also, large accounting firms have several advantages over their counterparts in law. For clients looking to save money, there are clear financial benefits for going with a one-stop shop to handle both their accounting and legal needs. Due to complementary consulting services, which include technology and process improvement, they have the capacity to make their legal arms more agile than most, if not all, law firms.
This is not the first time the major accounting firms have tried their hand at practicing law.
Through the 1990s, the then-Big Five—Arthur Andersen collapsed after the Enron scandal in 2002—were quickly growing their legal services divisions, especially in Europe, wrote David Wilkins, a law professor at Harvard University, and Marie Jose Esteban Ferrer, a law lecturer at Ramon Llull University in Barcelona, Spain, in Law & Social Inquiry, an academic publication.
Responding to a slowdown in the growth of their auditing portfolios, the Big Five spent the 1990s building law firms in a traditional vein. By 2001, KPMG and PwC were the eighth- and ninth-biggest legal services providers by number of lawyers, respectively, according to the Harvard Law School Center on the Legal Profession.
By the end of the century, the Big Five were threatening to enter markets they had been restricted from, including the U.S., wrote Ferrer and Wilkins.
However, after a series of accounting scandals during the 2001 financial crisis and subsequent regulation, these firms decided to pull back from offering general legal services.
At the time of the crash, Cornelius Grossmann, global leader of EY Legal based in Berlin, was working for Ernst and Young in New York City as an attorney at Donahue & Partners, a German law practice in EY’s Dutch network. He says that 2001 marked a turning point for their goals in the legal services market.
“In the past, EY tried to establish another global law firm,” he says. “When I started rebuilding the practice in Europe, I made it very clear—and that strategy followed through—that we don’t want to be another law firm.”
Grossmann explains that the law firm model was not as holistic as what EY wanted to offer, which he and other members of the Big Four describe as “multidisciplinary solutions,” a combination of legal, financial and consulting services, complemented by technology. Today, EY has 2,100 attorneys practicing in five core disciplines, including employment and mergers and acquisitions, in some 80 countries.
Similarly, Piet Hein Meeter, Deloitte Global’s Amsterdam-based managing director of Deloitte Legal, explains that their approach includes legal advice alongside improving document and process management, IT systems, analytics and other technology applications.
“That’s almost a consultative type of legal solution, rather than taking a set of facts and analyzing them from a legal perspective,” says Meeter.
While each of the Big Four positions itself as different from the others, the service offerings look rather similar. For example, this year at Legaltech, a legal technology conference in New York City, PwC representatives handed out documents that highlighted consulting services to help streamline and improve corporate legal departments. Similarly, KPMG offered services to digitize and improve efficiency of general counsel offices, and Deloitte touted its “legal management consulting.”
The Big Four also offer help with e-discovery, computer forensics and regulatory compliance.
PwC declined to comment for this story and KPMG did not respond to requests for comment.
According to the 2017 ALM report, this multidisciplinary approach has been a financial boon for the accounting firms: “All four have reported double-digit year-on-year revenue growth in recent years.”
The aggressive growth has made Big Four legal departments among the top-10 firms by revenue in France, Italy, Russia and Spain. However, the collective $900 million in revenue from the Big Four’s legal departments still pales in comparison to the $275 billion of revenue of all U.S. law firms, according to Thomson Reuters.
Nonetheless, this type of growth is a stark contrast to the reality for many BigLaw firms in the U.S., which recovered from the fallout of the Great Recession but have struggled to grow since.
According to a report released in January by Georgetown University and Thomson Reuters, demand for law firm services has been flat since 2010. Additionally, a slight uptick in attorney headcount at U.S. firms over the last five years coupled with the aforementioned flat demand means that lawyers throughout the industry are experiencing declining productivity. The study found that, across all sectors, lawyers are billing nearly 13 fewer hours per month than they were before the onset of the Great Recession.
Illustrating the decreased demand, Altman Weil’s 2017 Chief Legal Officer Survey found that 41 percent surveyed said they had cut their outside counsel budget while 56 percent increased their in-house budget.
By comparison, the Big Four have, on average, about 2,200 lawyers apiece, according to ALM. These numbers continue to grow through lateral and new attorney hires. While smaller than the 10 largest global law firms, which have 3,800 lawyers each, the Big Four offer legal services in 72 countries. Those same law firms are, on average, in 29.
Photos by Jpstock/Matusz_Szymanski/Jhvephoto/Novikov Aleksey/Shutterstock.com
NOT SO FAST
There are limits to the international growth, however, for the Big Four.
When deciding what countries to expand into, Grossmann at EY says the firm is driven by demand and regulatory limitations. India, Portugal and the U.S. are just some of the countries where the Big Four have not offered full-fledged legal services because of such restrictions.
In the States, there are two main hurdles keeping the Big Four out of the traditional legal services market. The first is statutory. In 2002, in the wake of the Arthur Andersen scandal and the 2001 recession, Congress passed the Sarbanes-Oxley Act, which limited auditing firms from providing legal services to audit clients.
The sprawling legal framework covers numerous issues, including the limitation of audit firms to provide certain legal services, which was meant to limit conflicts of interest.
Other countries—Canada, India, South Africa and Turkey—passed similar laws.
However, these limitations have not stopped auditing firms from offering legal and other services to nonaudit clients, “which they all now aggressively do,” wrote Ferrer and Wilkins for the CLS Blue Sky Blog. They conclude that the Big Four’s legal networks are now larger than they were when Sarbanes-Oxley was passed.
They go on to write in Law & Social Inquiry that even after Sarbanes-Oxley, “gaps in auditor independence regulation have allowed the Big Four to rebuild their nonaudit businesses, including legal services, in many countries around the world—even in the United States.”
The Public Company Accounting Oversight Board, created by Sarbanes-Oxley and run under the Securities and Exchange Commission, provides external, independent oversight of audit companies. The board’s spokesperson, Colleen Brennan, says, “Existing independence requirements would preclude an issuer’s auditor, or affiliates of the auditor, from providing legal services to that issuer or any of that issuer’s affiliates.” She adds that “the PCAOB monitors for compliance with that requirement and other independence requirements.”
The other major restriction comes from within the legal profession itself. The ABA Model Rules of Professional Conduct, which serve as the basis for the ethics rules of most jurisdictions in the U.S., favor a ban on nonlawyer ownership of law firms and a prohibition on fee-sharing of a legal services business.
Despite that, the ABA has explored the possibility of new forms of legal services delivery. Predating Sarbanes-Oxley, the ABA created the Commission on Multidisciplinary Practice to study “the manner and extent to which professional service firms operated by nonlawyers were seeking to provide legal services to the public.”
With the Big Four’s initial move into legal services as a backdrop, the commission recommended that the House of Delegates reinforce core values of independent professional judgment, client confidentiality and the avoidance of conflicts of interest while not inhibiting “the development of new structures for the more effective delivery of services and better public access to the legal system.”
This meant allowing lawyers to deliver legal services through a multidisciplinary practice, in which lawyers and nonlawyers provide legal and nonlegal services. This recommendation came with an endorsement of fee- and governance-sharing between lawyers and nonlawyers within an MDP.
The recommendations were debated by the ABA House of Delegates during the annual meeting in Atlanta in 1999.
Carolyn Lamm—a member of the commission and supporter of the recommendations who served as 2009-2010 ABA president—reminded those convened that even without an MDP structure there were some 5,000 lawyers already working at the Big Five accounting firms.
“They tell us they’re not practicing law; they’re offering environmental or tax services. They’re offering litigation support services and all kinds of other services,” she said at the debate and confirmed by email. “And the bar does not have any means to assure that the lawyers at the Big Five comply with any of the ethics regulations and/or core values” of the profession.
To her, the commission’s recommendations would bring licensed attorneys already working in MDPs back into the professional responsibility fold.
“It envisions system safeguards that the MDPs would have to pay for,” she concluded.
While acknowledging that lawyers already work in something resembling MDPs, lawyers opposing any relaxation of the restrictions on such practices warned that allowing for fee-sharing with nonlawyers would end the independence of the profession, diminish the ethical standards around confidentiality and conflicts of interest, and provide negligible benefit to consumers.
In 2000, the House voted against the commission’s recommendations and reaffirmed that fee- and governance-sharing with nonlawyers were not compatible with the rules and values of the profession. The commission was discharged.
According to Dennis Rendleman, ethics counsel at the ABA Center for Professional Responsibility, which housed the commission, the center is not currently working on the topic of multidisciplinary practice. Even so, he says, “the issue is one that will never go away.”
When asked, Meeter says Deloitte is not lobbying to change current laws and rules limiting its business model from expanding into the United States. Grossmann at EY declined to comment.
ACROSS THE SEA
While the movement for fee- and governance-sharing stagnated in the U.S., Australia in 2000 and, more aggressively, the U.K. in 2007 moved forward to create alternative business structure schemes that would allow for nonlawyers to be owners and fee-sharers in law firms.
Although he is not in direct competition with the Big Four, Simon Goldhill—the founder of Metamorph Law in London, a consolidator of small firms—says the ABS structure allows for significant flexibility that the traditional model did not.
“Before its liberalization and opening up to outside influences, the U.K. legal market had remained isolated—indeed insulated—from the development of the 21st-century consumer service culture,” he says.
Michelle Peters, principal at the Business Instructor law firm consultancy in London, says the traditional firm model is not a good business model. First, the billable hour limits profitability because the lawyer must work on a matter to make money. Second, firms are often ruled by committee, which makes direction and institutional change challenging. Third, lawyers are not trained in business development yet are expected to run every aspect of a firm, which cuts into their only mode of making money.
Goldhill adds that traditional law firm structures meant they could not take capital funds to grow their business. As an ABS, they can.
Carolyn Lamm: “They tell us they’re not practicing law; they’re offering environmental or tax services ... and all kinds of other services.”
All four of the major accounting firms have secured ABS licenses to practice law in the U.K.
PwC was awarded a license in 2014. During this past fiscal year, the firm’s legal operation in the U.K. brought in about $91.8 million, up from $63.6 million in 2015. The most recent revenue numbers put PwC just short of the top-50 U.K. firms by earnings, according to LegalWeek.
Jordan Urstadt is the CEO of Partnervine, an online marketplace where firms sell their automated legal documents. He says the Big Four’s increased pressure on the legal market will lead law firms to externalize and “productize” their offerings, which include information, resources and expert advice.
Both Grossmann at EY and Meeter at Deloitte make clear that technology in the form of artificial intelligence, automation and information management is a critical component of their offerings. Their development and deployment of technology will be accomplished by a mix of in-house development, acquisition and contracting with outside companies.
In one example, PwC teamed up with Partnervine to sell automated legal documents online. By creating this new marketplace, in-house counsels anywhere in the world can assess the offerings and buy the contract they need, saving the lawyer time and creating a passive income stream for PwC.
With many merger documents for sale on Partnervine, Urstadt says, “it’s great because it shows what software can do for M&A—a major driver of revenue at law firms and one of the sacred cows of the legal industry.”
Similarly, Deloitte has alliances with Kira Systems, HotDocs and Thomson Reuters. PwC has teamed up with Google. And EY is working with LinkedIn and Microsoft.
To remain competitive, Morgan Lewis has expanded internationally, including in China, and has ramped up its eData services, a discovery and data management program that combines legal and tech professionals.
“We remained focused on offering elite service and building strong relationships with clients who trust us to know their business and give them legal advice in the broad array of areas where they need us,” Morgan Lewis chair McKeon says. “That has been the approach that has made us successful, and the existence of new and different competitors has not changed that.”
Like Morgan Lewis, Simmons & Simmons, a large law firm based in England, has been commoditizing legal information for over a decade. The firm’s navigator product takes regulatory and compliance data from numerous countries, organizes it and provides it as a subscription service for clients to access.
“The firm has to adapt and look to service their clients in different ways,” says Charlotte Stalin, a partner at the firm’s London office. Similar to McKeon, she denies that any market entrant has forced them to change.
While the firm’s navigator product is a managed service, Stalin says it is more than that because it complements traditional legal advice, which remains their core product. Since the navigator launch in 2007, it has expanded to include derivatives, securities and other subject matter areas.
Law firms offering products like this are still the exception. Instead, “most firms have been able to maintain their profitability at acceptable levels through a combination of reductions in headcount, tightening of their equity partner ranks, reductions in expenses, and continuing (albeit modest) rate increases,” states the Georgetown and Thomson Reuters report.
Not just a big-firm issue, the Big Four’s push into legal services can affect the totality of the legal market.
“I think everyone should be cognizant, regardless of the size of the firm,” argues Chad Burton, a liaison for the ABA’s Commission on the Future of the Legal Profession and CEO of CuroLegal, a legal technology company.
Burton says he believes that rules limiting fee- and governance-sharing at law firms will need to be confronted and changed for the profession to evolve, be more competitive and better serve consumers.
Meeter at Deloitte agrees, saying that he sees good reasons to have rules that maintain the independence of a lawyer, but that “there is a need to revisit this topic given the development of the marketplace.” He adds: “Clients are increasingly demanding that integrated type of approach.”
Peters, who has watched similar changes in the English legal market over the past decade, adds: “The law firms are coming around to the realization that they need to evolve or die.”