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Up to now, most ABS activity in the UK has focused on consumer law. But if a trend of the last couple of years accelerates, corporate and commercial firms may find their comparative immunity from ABS competitors coming to a bloody end. The accountants are back. In fact, despite past reverses and the Arthur Andersen debacle, they have never really been away.
As a survey by The Economist, entitled, The Attack of the Bean Counters, has noted, the inequality of arms between the Big Four and Big Law is striking. Combined, the worldwide billings of PWC, Ernst & Young, Deloitte and KPMG are $120 billion, dwarfing the $89 billion of the world’s top 100 law firms. By headcount, PWC is the world’s 10th biggest legal practice, and plans to boost legal services revenue to $1 billion by 2020.
Concerns about conflicts of interest have been at the heart of opposition to ABS, and indeed conflicts between Andersen’s consulting and audit arms were widely seen as key to its collapse. For a time afterwards, accountants lost interest in legal services and sold off their non-tax operations, but three factors drew them back. First was the recession, which sharply reduced their traditional fee income. Second, the globalisation of corporate clients made international reach a potent selling point: EY Legal has expanded from 23 countries to 64 since 2013. Already, the Big Four’s combined share of revenue of the top 10 law firms in each jurisdiction where they operate ranges from 4% in China and 6% in the UK, to 20% in Germany and 30% in Spain. Third came deregulation and the emergence of ABS.
The UK is juicy prey for these big beasts, the more so because accountants are not yet allowed to own or control law firms in the biggest market of all, the US, nor in Brazil, or India. For the moment, the most lucrative capital markets and M&A work of City law firms is not under threat, as accountants focus on areas such as tax and regulation. But that is unlikely to last. As Damon Runyon once observed: “The race is not always to the swift, nor the battle to the strong, but that’s the way to bet.”
The Economist highlights the potential for accountants’ propositions to trigger conflict within clients. According to a survey by American Lawyer magazine, 90% of general counsel said they would not buy from an accounting network, but they may well end up being overruled by the chief executive and finance director, lured by the attractions of a global one-stop shop selling tax, audit, consulting and legal in a competitively priced package. Long term, there is no compelling reason why US corporate counsel should have a different attitude to their counterparts elsewhere.
The Economist’s conclusion is that while the “bet the farm” work of the global law firm elite is comparatively safe for the moment, the mid-market is under immediate threat, and long term, no one can rest easy. The profession’s typically “artisanal” approach to service delivery cannot stand. With a combination of deep pockets, sophisticated business skills, global networks and client lists to die for, the accountants will be formidable adversaries. As it states, “The Walmarts and Amazons of professional services are at the gates, and the legal industry’s halting pace of creative destruction is set to accelerate as a result.”
It may be right, but law firms need not passively accept their fate. Their first asset is the benefit of incumbency, which should never be underestimated. The story of legal tenders over recent years is that while they have resulted in large-scale culling and weapons-grade pencil sharpening, the number of brand new firms appointed to panels is low. This is no reason for complacency, quite the opposite. The history of business is littered with the corpses of those who failed to see change coming. But it does mean that good law firms have the opportunity to protect their markets, by taking a leaf from the books of the accountants and honing their business skills to match their legal skills: developing and implementing potent strategy; equipping and motivating their people; selling and marketing with panache; embracing technology to deliver the work and run the business; pricing, being accomplished in project management and finance. These are all areas where large accountancy firms excel and are prepared to make big, long-term investments. The best of our law firms are a match for them, but still too many come second. Until now, it has not mattered very much. Before long, it may make all the difference.
Stephen Gold was the founder and senior partner of a multi-award-winning UK law firm. He now acts as a consultant, non-exec and trusted advisor to the profession, nationally and internationally.
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