Frontal and lateral threats to law firms – the Big Four and NewLaw

In March 2015, the Economist ran an article titled: Attack of the bean-counters, Lawyers Beware: the accounts are coming after your business. This article succinctly describes the first tentative steps the “Big Four” (EY, KPMG, Deloitte & PwC) were making into the legal market. Since then, plenty of ink has been spilled over this Sword of Damocles hovering over the profession. But perhaps we are missing a more material peril, waiting in the wings: the rise and rise of NewLaw.

Clear and present danger?

The Big Four for a long time have been positioning themselves as more than bean-counters; they are increasingly recognised as multidisciplinary business advisers who can both solve complex problems and minimise risk. Their ability to scale, deploy technology and attractively bundle services does make them a major threat to the law firms status quo– particularly the mid strata. Indeed, only recently PwC Legal topped the Acritas’ Global Alternative Legal Brand Index 2018.

The US remains an obstinate barrier as almost every jurisdiction has ethics rules that bar nonlawyer ownership of law firms, nonlawyer management of law firms, and sharing fees with nonlawyers, according to an issues paper released by the ABA Commission on the Future of Legal Services in 2016.

To ensure auditor independence is maintained, the Sarbanes-Oxley Act restricts auditing firms - the core business of the Big Four - from providing non-auditing services (including legal services unrelated to auditing services) to their audit clients. This is further compounded by the conflict of interest issues which bind legal practitioners. As the Big Four seeks to expand into providing legal services, their other services (including auditing, consulting, financial advisory and tax compliance offerings) correspondingly will provide greater conflict of interest challenges.

Building momentum

However, other jurisdictions, such as the UK and Australia, are open to a legal foray. Recent acquisitive behaviour suggests strong intent to continue to develop their legal offerings. In December 2017, PwC launched ILC Legal (read this NYT article) and only last week entered into an alliance with Fragomen, while Deloitte expanded their offerings in the UK by recently acquiring Riverview law (read more here). Not only this, we are already aware of their legal muscles: PWC have over 3,500 lawyers in 90 counties and KMPG’s Legal Services network brings together 1,500 lawyers across 50 KPMG member firms. The threat is clear and present – not only to a more exposed mid-tier of law firms, but inevitably part of the work done by “Big Law” will be similarly susceptible.

The Big Four are going to go after the profitable legal work and the US legal market dwarfs other markets in terms of profitability. So, the reality is that they’ll pursue the lucrative work in both the UK and US and there are question marks whether it will be important for them to offer low-margin legal services – this more commoditised type of work may well be eaten by NewLaw offerings.

Big Four are at risk themselves

But with size and scale, comes powerful regulatory threat. There is mounting political will in the UK (and by the European Commission) to go after the Big Four “cartel”. Since the dramatic collapse of Carillion and other similar examples, the Shadow Chancellor John McDonnell has publicly stated that the Big Four could be broken up under radical new rules. The notoriously anti-business politician is not the only one challenging the scale of the Big Four, the International Forum of Independent Audit Regulators and the UK’s Financial Reporting Council have raised similar calls. While there have not been similar statements from the Conservative government, the Big Four are taking it seriously enough to prepare contingency plans.  In this environment, with the potential of politicians and regulatory proposing much greater scrutiny and even oversight, will the appetite for legal services diminish or expand?

On one hand, adding yet more potential for conflict with bundling legal and auditing services, one could naturally conclude that appetite will diminish. The attitude might be – now is not the time to deepen complexity. On the other hand, perhaps this provides them an opportunity to find new drivers of revenue; if their auditing and consulting wings are pared back by force of regulation.

The slow and steady rise of NewLaw

For roughly the past decade or so, the profession has witnessed the rise in alternative legal providers – pithily referred to as NewLaw. Only a few weeks ago, one of the largest private equity houses in the world invested $500mUSD on UnitedLex. That’s half a billion on a NewLaw company. This only adds to a mounting list of investment and acquisition in this space; the Bowmark capital investment in Lawyers on Demand, the EY acquisition of Riverview Law and the continued growth of Axiom are a few key examples. Smart people are pouring money into NewLaw and this should give traditional law firms of all levels a reason to pay attention. How do these investors expect to make their investment deliver against expectations and return on investment? The answer will likely lie in more efficient operating models – new legal service delivery models which unburden their lawyers from time-consuming administrative work with technology, have more strategic business development activities and empower their lawyers trade up to a better class of problem solving.

This isn’t to say law firms are putting their head in the sand. Many leading law firms have been hugely proactive and even entrepreneurial in this space. The previous example of Lawyers on Demand grew out of BCLP, A&O own PeerPoint, my old firm in Australia launched Orbit Legal and this list does continue – the alternative provision of legal services isn’t going away. The better law firms will ensure they’re not missing out of this new type of lawyering.

Lawyering is still a people profession, and this favours the law firms over both the Big Four and NewLaw, at least for now. The talent pipeline is still firmly pointed to the best law firms; as the best graduates are highly likely to pursue careers at top law firms. These places will still guarantee the highest level of work and mentoring for now.

Limiting the threat

Not all firms have the resource and opportunity to develop NewLaw spin-offs. So, the pertinent question becomes: how can I limit the threat of these new types of offerings? How can I retain and grow my business with the rise of different service providers? – whether they be Big Four or NewLaw. The answer to these questions will invariably involve a combination of strategy, technology, people and process. Explore further around the Future of Law blog for articles on how legal professionals and law firms can optimise their legal/commercial delivery. Here's a selection for consideration:

 

Filed Under: Practice of Law

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