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Gray Rule
March 2018 | VOLUME 19, NUMBER 2
Gray Rule
Fending Off Incursions by the Big Four into the Legal Industry
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IN THIS ISSUE:
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»Skill Fade: The Ethics of Lawyer Dependence on Algorithms and Technology
»Using Expected Value Calculations and Big Data to Guide Decision-Making
»Fending Off Incursions by the Big Four into the Legal Industry
»The Opportunity for "Back Office AI" in Law Firms
»Suffolk Law School: Leading Transformation of Legal Education
»The Future of Change is Client/Law Firm Collaboration
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Fending Off Incursions by the Big Four into the Legal IndustryBy V. Mary Abraham, Knowledge Management Consultant, Above and Beyond KM, New York, NY
Big Four accounting firms' legal services offerings are here to stay, and they are making significant incursions into work that traditionally belonged to law firms. This article looks at the recent expansion of these legal services and suggests some ways in which firms may be able to stem the tide—at least for a while.

Five years ago, I published a blog post entitled "Snacking on Big Law's Crumbs." In it, I pointed out how the Big Four accounting firms were making incursions into work that had typically been the domain of law firms. For example, the accounting firms were offering advice and assistance in the following areas:

  • Compliance and Regulatory Risk Management
  • Financial Services Regulation
  • Privacy and Data Protection
  • Governance

A troubling element of these incursions was that the Big Four were not limiting themselves to conversations with COOs or CFOs. Rather, they also seemed to be engaged in fairly extensive efforts targeted at the general counsel of their clients. In recent years, many of the Big Four's client communications have shifted to focus on similar issues as law firm client communications. For example, some of their communications in 2013 included:

  • Deloitte, "The Risk Intelligent General Counsel"
  • EY, "Top Four Governance Trends of Proxy Season 2012"
  • KPMG, "Dodd-Frank and the Conflict Minerals Rule"
  • KPMG, "Global Anti-Bribery and Corruption Survey 2011"
  • PwC, "SEC Adopts Final Rule for Investment Adviser Registration"

At the time, I assumed this growth in the ambitions of the Big Four would trigger a focused conversation within law firms about how to respond to this threat to their business. Should law firms engage in pitched battles with the accounting profession? Could they assume that there was more than enough client work for everyone? Should they retaliate by offering additional services in any areas that span accounting and law? Or should they simply cede the field?

While there was some commentary at the time of my post, there was not enough frank conversation about the likely outcome of these initial incursions. And then it became obvious that the Big Four had something much bigger in mind.

In July 2014, The American Lawyer picked up the trail in their article, "Accounting Firms Make New Foray into Legal Services." They then followed this up in a May 2015 story in which they reported that EY Legal was launching in London with the help of "12 lawyers from Baker & McKenzie and Weil, Gotshal & Manges." Admittedly, this was possible because British regulators granted EY an alternative business structure license, something that is not available in any US jurisdiction except Washington, D.C., and Washington State.

In June 2015, Lawyers Weekly published an article in Australia entitled, "Big Four player poses new threat to law firms." The subtitle of that article was telling: "KPMG is growing its legal arm beyond tax, threatening to become a major player in the legal services market." The article then quoted the head of KPMG's tax controversy team, Jeremy Geale: "The firm is very focused on growth... KPMG today is not an accounting firm, we are a professional services firm."

A key part of their growth strategy involved expanding the range of legal services they offered: "KPMG Legal initially will focus on developing its corporate, employment and property practices. It also plans to pick up offshore work via referrals from its European practices and from foreign corporates looking to enter the Australian market." Further, they hired David Morris, the joint head of corporate (Asia Pacific) at DLA Piper, to lead their legal services team.

While this was a stunning escalation, it was not the first. Lawyers Weekly reported a previous expansion push by PwC in the Australian market in that same article: "In August 2014, former King & Wood Mallesons managing partners Tony O'Malley and Tim Blue joined PwC to build what it termed as a "premium multi-competency legal practice globally", targeting annual legal services revenue in Australia of more than $100 million."

These events were harbingers of a significant market change. In jurisdiction after jurisdiction, regulatory authorities and even some professional organizations started dismantling the high walls that previously protected the legal profession from outside competition. With the spread of alternative business structures, non-lawyers have proven happy to take advantage of client pressure to create organizations that can deliver legal services in a more business-like manner than many law firms. Further, these new businesses have access to more diverse sources of financial support than traditional law firms.

It should not have surprised anyone to see the September 2017 stories in The American Lawyer ("PwC to Launch US Law Firm as Big Four Expand Legal Offerings") and in the New York Times ("PwC, the Accounting Giant, Will Open a Law Firm in the U.S").

According to the New York Times report,

The [PwC] law firm, ILC Legal, will advise clients on international matters such as corporate restructuring. Its lawyers will act as special legal consultants, rather than fully licensed United States lawyers, allowing them to provide counsel on foreign law but not United States law.

ILC Legal, nonetheless, aims to vie with big law firms as a one-stop shop offering multinational companies access to other PwC services, including tax consulting and its network of 3,200 lawyers spread across 90 countries. The firms in that network operate separately but follow the same standards and practices under the PwC brand name.... ILC Legal hopes to attract multinational companies seeking counsel in areas like digital security and data protection, dispute resolution, international corporate structuring, and mergers and acquisitions.... It will operate like a traditional law firm, soliciting clients and billing them directly for services.

In its analysis of the situation, Accounting Today stated its conclusion in its headline: "Big Four increasingly competing with law firms." That article opened by citing a report from ALM intelligence that found that "69 percent of the leaders of law firms who were surveyed reported the legal arms of the Big Four as a major threat. Big Four firms...average 2,200 lawyers in 72 countries, putting them on a level of the major law firms such as Jones Day, CMS, and Clifford Chance." In other words, they have the ability to offer a wide range of legal services, and their ability likely exceeds that of most law firms in the United States.

Clearly, slamming the door shut on alternative business structures at the American Bar Association (ABA) meetings in 2000 and 2002 was a delaying tactic that could not stem the tide. Unfortunately, the ABA's 2016 Report on the Future of Legal Services in the United States makes clear in its two following findings that the legal profession has not used the resulting extra time to meaningfully improve its services and market position:

  1. The traditional law practice business model constrains innovations that would provide greater access to, and enhance the delivery of, legal services.
  2. The legal profession's resistance to change hinders additional innovations.
So how should law firms respond?

Consolidate Client Relationships

Law has always been a relationship business, especially on the higher end of legal services delivery. If you are not willing to compete on price, you better be competing on extraordinary levels of client satisfaction. However, you will not know what your clients really want unless you really know your clients. This means that lawyers at all levels within the firm must improve their abilities to establish and consolidate client relationships.

Become More Proactive

As law firms double down on client relationships, they also need to double down on their ability to learn. While this seems straightforward, the ABA Report noted that a 2016 study had found the following disturbing pattern of behavior: "At least since the onset of the recession in 2008, law firm clients have increasingly demanded more efficiency, predictability, and cost effectiveness in the delivery of the legal services they purchase. In the main, however, law firms have been slow to respond to these demands, often addressing specific problems when raised by their clients but failing to become proactive in implementing the changes needed to genuinely meet their clients' overall concerns."

Embrace Discomfort

If a firm is serious about fending off incursions from the Big Four, it will have to be equally serious about "implementing the changes needed to genuinely meet their clients' overall concerns." The obvious challenge here is that implementing change is rarely easy and almost always uncomfortable. That said, while change rarely goes unremarked, it also does not need to be gut-wrenching and excruciating every time. To avoid this, firms should take advantage of proven practices that help mitigate the discomfort and resistance associated with change. Change is not an amateur sport; it requires professional expertise. Firms should seek advisers with a solid track record to help them implement the necessary changes in the most humane way possible.

Study the Big Four's Playbook

The Big Four have proven remarkably successful in their expansion into legal services. How did they do it? And what lessons can law firms learn from the experience of the Big Four? These are questions every law firm should examine (If you do not know where to begin, start with this overview by David B. Wilkins and Maria J. Esteban Ferrer, "The Rise, Transformation, and Potential Future of the Big 4 Accountancy Networks in the Global Legal Services Market."). While I am not suggesting that lawyers make a reciprocal push into accounting and auditing, it would be worth considering if there are contiguous areas in which lawyers could add real value. For example, could external lawyers be present when business decisions are made? Or when legal problems are averted. Or when new business opportunities are uncovered. This is quite different from being on the other end of a request to answer a limited legal question. And in that difference law firms will find a wealth of market opportunities.

To be honest, we should have planned for this as soon as it became apparent that the Big Four had reached the natural limits of growth in their traditional domains and would need to enter new areas. We should have known that legal services would be a logical extension. There may be some forward-thinking firms with wise leadership that have been tackling these issues diligently and are, therefore, well positioned to meet the challenge of the Big Four. However, the ABA report suggests this is not the case—at least not on a basis widespread enough to help the entire industry. Consequently, when it comes to fending off incursions from the Big Four, at this point it is every law firm for itself.

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