Big Four: tech advances enabled the accounting firms to offer cheaper and broader legal services © FT montage

“Be afraid,” American Lawyer warned its readers in 2014. “The Big Four are coming.”

The magazine was proclaiming a new era for legal services. That year, three of the world’s largest accounting firms, PwC, EY and KPMG, had won alternative business structure (ABS) licences, which allowed UK businesses to provide legal advice and acquire law firms.

Since then, the Big Four’s legal divisions have grown rapidly. PwC has nearly 3,500 lawyers worldwide, which would make it a top 10 law firm by headcount.

Deloitte, which gained its ABS licence in 2018, has grown to about 2,500 lawyers. Last month, it acquired Kemp Little, a British law firm, more than doubling its lawyer headcount in the UK. That takeover was the latest sign that the encroachment by accountants into the territory of traditional law firms shows no sign of slowing.

“Clients don't want to get more expensive lawyers in, they want more and better value for money,” says Michael Castle, managing partner for Deloitte Legal in the UK and Europe. “The Kemp Little deal reflects the way legal services are likely to be delivered in the future”.

Latham & Watkins: elite law firm revenues still dwarf those of the Big Four for legal services © Andrew Kelly/Reuters

An ‘anticlimax’ so far

Yet, despite bullish predictions, the legal league tables are so far largely unchanged. In 2016, PwC earned $500m from legal services, while Deloitte made $250m — a fraction of its $39bn overall revenues that year. The accounting firms have since stopped disclosing revenues from purely legal work, although it is likely they still have a long way to go before they compete with the leading law firms.

Last year two UK “magic circle” firms, Clifford Chance and Allen & Overy, recorded revenues of more than £1.6bn, while elite US firm Latham & Watkins made $3.8bn.

“It has been an anticlimax,” says one legal sector trends expert, who provides financial services to law and accounting firms (he declines to be named). “The Big Four have significant financial resources. They should be formidable competitors to traditional legal suppliers. So far, the reality has looked quite different.”

Michael Chissick, managing partner of mid-tier firm Fieldfisher, says: “I have always thought the Big Four are a threat to traditional firms like ours but so far they are still a relatively small part of the market.” 

Fieldfisher launched Condor, its low-cost alternative legal services provider, in 2017 in an attempt to rival the accountants on process-heavy services such as data management and technology. However, when pitching for work, Mr Chissick says, “we still don’t come across them that much”.

The Big Four have been primed to benefit from the two largest drivers of change in the legal market: cost concerns among corporate clients who need more legal advice at cheaper prices, and increasingly capable technology. 

Law firms are under pressure as more work is automated, which drives down the cost of repetitive tasks such as document searches. The accounting firms’ global scale, big budgets and years of experience providing complex advisory, tax and audit services put them in a leading position to provide technological solutions at lower fees.

“We can look at how we build teams around the use of technology as we are relatively new entrants to the market,” says Nick Roome, head of KPMG’s legal unit in the UK.

Change has been slow, in part because of the complexities of conflicts of interest in a multidisciplinary firm that also carries out statutory audit work.

Deloitte, PwC, KPMG and EY have faced political and regulatory intervention over their oligopolistic power in recent years, after a string of corporate collapses and accounting scandals. Regulators have cracked down on the risk of conflicts. In broad terms, no audit client can receive any legal advice.

PwC: earned $500m from legal services in 2016, when the Big Four still disclosed revenues from purely legal work © Tolga Akmen , for the FT

“The prospect of managing conflicts is problematic for growing scale,” says Mr Roome. “It makes the raw fundamentals of buying a law firm and expecting to just transition everything, including its client base, a challenge.”

But with changes to audit regulation in the UK and Europe, which could force separation of the Big Four’s audit practices from their consulting divisions, there is a greater potential for legal expansion.

Global league table by 2025

Richard Susskind, author of Tomorrow’s Lawyers, a study of the future of the legal profession, says that since the 2001 Enron audit scandal, “the bottom line is that it is not easy for the Big Four firms to do a major acquisition, so growth will be more incremental.” He adds, however: “If audit breaks off, then the Big Four are off to the races.”

Prof Susskind also cautions against any remaining complacency at traditional law firms. “Change happens less quickly than people anticipate,” he says. “Did I expect major changes by 2020? No. But by 2025, I expect the Big Four to be on the global league table of leading law firms.”

“In a world turned upside down by Covid [and] by tech, in a world where clients are becoming more discerning and demanding, a strategy of complacency is entirely wrong.”

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