Not long ago, at a leading global law firm’s partner conference, professor Laura Empson faced a question. The author of “Leading Professionals: Power, Politics, and Prima Donnas” was on hand to share her expertise on structure and strategy in professional service firms. One of the partners in the room wanted to know if she’d ever dealt with a law firm that was wrestling with a particular matter.
“No,” responded Empson, who teaches at Cass Business School in London and is a senior research fellow at Harvard Law School, “but I worked with a Big Four firm, and this is how they dealt with the issue.”
Her explanation failed to impress.
“Laura, the day I start taking lessons from Big Four firms is the day I resign,” the partner asserted, prompting guffaws from the floor.
But for leaders, rank-and-file partners and everyone else in the law firm ecosystem, the Big Four shouldn’t be a laughing matter. They are serious about selling legal services, and clients are listening.
That lesson should be clear from an October report by U.K. consultancy Acritas. For the first time, PwC, Deloitte, EY and KPMG seized four of the top five spots on its list of global alternative brands, in a survey of general counsel at heavyweight international businesses.
The impressive performance is the result of a concerted push by these firms to rebuild global legal practices—after pulling the plug on an earlier effort to do so following 2002’s Sarbanes-Oxley Act in the United States. That piece of legislation and similar regulatory reforms elsewhere in the world sought to limit the ability of these accounting firms to deliver nonauditing services to their audit clients.
The rules, however, don’t preclude each firm from offering these services—an increasingly profitable segment of their multibillion-dollar businesses—to the vast majority of companies around the world that don’t fit into that category.
As early as 2015, a little over a decade after being declared dead by most pundits, these firms’ legal networks had “come out of the shadows,” according to Harvard Law researchers David Wilkins and Maria Esteban Ferrer. Recent headlines have made their steady march into the sunlight even harder to ignore. The Big Four have been hiring top talent around the world, notably in East Asia. A new category of licenses has allowed them to bolster their legal presence in Britain. Closer to home, PwC trumpeted an alliance with U.S. immigration law pacesetter Fragomen in September, a year after announcing the launch in September 2017 of a U.S. law firm, ILC Legal, to help American clients on international matters. Deloitte in July sealed an affiliation agreement with U.S. immigration law firm Berry Appleman & Leiden, while acquiring its international operations. EY, for its part, took over Riverview Law, the alternative legal services provider backed financially by DLA Piper, in August.
Immigration practices and high-volume, technology-aided work—the sort handled by Riverview—aren’t core profit-drivers for most top global law firms, and that may be luring leaders into a continued sense of security, a feeling that beyond the headlines they have little to fear. Even with the Big Four firms crowing that they are close to putting lawyers in as many as 100 countries, the assumption is that clients will always prize traditional law firms for the biggest deals and the most consequential litigation.
Dentons global chairman Joe Andrew says that line of thinking is a mistake.
“Big accounting firms going into law is a Trojan horse. They are some of big law firms’ best clients. They partner with us in serving some of our best clients. We are some of their best clients,” he says. “They may not start not competing directly with big law firms for high-value work, but the history of innovation tells us that with their expertise in processing, their scale, their relationships with our best clients and their familiarity with technology, they will continue to go upstream until they are some of the largest and best law firms in the business.”
A young U.S. partner who has cycled through three international firms in recent years is alarmed. A friend of his, a tax lawyer, recently left his partnership for KPMG, and the partner could see the Big Four firms setting up a funds formation practice—his own specialty—with ease.
“In another five years, what I’m now doing, I won’t be doing. The classic fund formation group of a firm with 10 people won’t exist. I think M&A is a natural step from that,” he says. “I am fully prepared that they will be a competitor, and they will crush me if they wish.”
But he hears little from management.
“We parade around and say we’re fighting back. We claim we can do transfer pricing cheaper than KPMG and Deloitte,” he says, referring to the process of pricing transactions between commonly controlled enterprises. “Frankly, there’s a lot of competition on the corporate side—firm vs. firm. There’s minimal talk about the accounting firms and even less talk about technology. I’ve been at three firms in the past three years. I can tell you none are really thinking about it.”
His story illustrates what Dentons CEO Elliott Portnoy calls the “myth of legal exceptionalism”—the belief that the work lawyers in large global firms handle is so specialized that an accounting firm could never compete. The same myth also perpetuates itself via the resistance to applying technology to legal issues, even as this becomes a subject of growing discussion and an area of strength for Big Four interlopers.
This blindness could be rooted in a firm’s position in the marketplace. At the moment, looking globally, the legal wings of the accounting firms are focused on their existing areas of strength, not only tax and transfer pricing but also cybersecurity, immigration and global mobility and investigations, for example.
“A law firm leader who believes that it ends there isn’t watching the talent recruitment efforts that these firms are doing,” Portnoy says. “They’re not just hiring folks who do that; they’re building up on litigators, transactional lawyers and regulatory experts.”
Let’s take a look at what these Big Four firms are saying about their own legal ambitions.
Cornelius Grossmann, the Switzerland-based global law leader for EY, says the firm aspires to grow rapidly into the market. While already offering legal services in 80 countries, “we make a point that we don’t want to be a global law firm. I think that’s what sets us apart—we’re not focused on a law stand-alone business. We’re focused on going to market together with our colleagues.”
The firm also intends to apply technology to legal matters wherever possible. Its August acquisition of Riverview is part of that story.
Grossmann says recruiting is EY’s biggest obstacle to rapid growth, but he points to recent hires from top firms around the world, such as Latham & Watkins, Freshfields Bruckhaus Deringer and German powerhouse Hengeler Mueller. The firm hires attorneys directly out of universities but needs to attract even more.
“Our attorneys get to work in global multidisciplinary teams. They’re not being cast away in offices on isolated legal teams,” he says. “That’s the value proposition we can bring to market.”
The firm is prioritizing three areas of legal work: transactions, workplace transformation and digital transformation. The latter corresponds to data privacy and security work, while workplace transformation overlaps with labor and employment. And with transactions, Grossmann professes to be comfortable with the midmarket.
“The big-ticket deals are the property of the global elite, and we’re comfortable with that,” he says. That doesn’t mean the firm sits them out. It’s involved at the start, in due diligence, and afterward, in post-merger integration.
KPMG also wants to grow its corporate work, but the firm, which has the fewest legal professionals among the Big Four, is looking to use its work in global entity management to get its foot in the door. Essentially, by demonstrating its ability to keep multinational corporations in compliance with regulations and laws across dozens of jurisdictions, it can gain the necessary trust to land more lucrative transactional work.
“We’re not trying to be a law firm, and we’re not trying to copy the approach of a law firm,” says Jürg Birri, KPMG’s global lead of legal services. “Rather, we’re taking an integrated global approach, where we are able to work seamlessly with existing KPMG clients who are looking for local and multijurisdictional counsel.”
At the same time, the firm’s national units do resemble law firms in the way they compete for top talent and for work. In Germany, KPMG Law managing director Mathias Oberndörfer says the novelty of the legal brand and the room it offers for growth are powerful draws. He adds the 10-year goal for KPMG is to be among the top 10 firms in the country, both for reputation and net sales. The German firm will get there by offering both bespoke services at the top of the market and technology-aided volume work akin to that handled by other alternative legal service providers.
Piet Hein Meeter, global leader of Deloitte Legal, says the transformation in the five years since he went from the firm’s Dutch legal practice to its top international role has been remarkable. At the time, his father, also a lawyer, told him what the firm was doing wasn’t real law. “That’s on the back of your audit practice,” his father said.
“Now, it’s a completely different feel,” Meeter says, pointing to Deloitte’s legal operations in 83 jurisdictions and its aim to crack 90 by the end of the year and 100 by 2020.
The goal, he adds, is to provide clients the traditional suite of corporate and litigation work, enriched with the organization’s strengths in technology and process and connected to its other offerings.
“Building another midmarket, midsize law firm in a world that is already quite fragmented wouldn’t bring too much to the table,” he says. “In conversations with general counsel and COOs, there’s a real ask for reviewing their challenges and issues, not just on a legal basis but bringing in solutions with a wider lens involving consulting, tax and project management in 50 to 60 countries. That will be hard to deliver for the traditional law firms.”
Navigating different regulatory regimes is a challenge. Meeter estimates he spends 25 percent of his time talking to regulators to determine how Deloitte must organize its law firm in relation to its accounting operations. But while the U.S. presents particular obstacles, he says there are two ways in the door. One is through collaborations with American firms, like the recent arrangement with BAL; Deloitte is looking at additional opportunities. The second is selling international legal work to U.S. multinationals through colleagues in tax and accounting. It’s an approach also acknowledged by Grossmann at EY. And PwC, which did not make a representative available for this story, has opened a law firm in Washington specifically to advise clients on international matters.
These indirect strategies are a response to regulations that keep organizations owned and controlled by nonlawyers—like the Big Four—from providing legal services in the States.
Apart from that reality, Grossmann notes that the U.S. market is not so different from the roughly 70 jurisdictions where EY competes. But as long as regulators—most often state bar officials—stand in the way, the firm is holding off.
No one from the Big Four will admit it, but that could change.
“We all know the history is that trade restrictions will break down over time,” Dentons’ Portnoy says.
Furthermore, the definition of “legal services” introduces a gray area. James Jones, a senior fellow at the Center for the Study of the Legal Profession at Georgetown University Law Center, says that if one or more of the accounting firms wanted to dive into fund formation or M&A, they would likely be able to get away with it.
“The right way to ask the question would be to say: ‘Does this activity, if performed by a nonlawyer, qualify as the unauthorized practice of law?’” he explains. Nonlawyers—CPAs, for example—draft documents all the time. Just because certain lawyers specialize in the area doesn’t mean that they’re providing a legal service, as long as they’re not issuing a legal opinion when doing so.
“If the accounting firm was out there actively advertising they would provide legal advice and draft the documents, they could get themselves in trouble via their marketing,” Jones says. “If what they were holding themselves out to do was simply formation of funds and they just said, ‘We have these guys on staff,’ you would find some bar to come after you in some state to prove it was unauthorized practice of law, but I think the cases would be, in the main, on the side of the accounting firms.”
And Jones notes that they’ve already been aggressive in pursuing tax work in the U.S., hiring lawyers away from law firms to practice tax law—“although they don’t call it that,” he says.
The two recent tie-ups with U.S.-based immigration firms also illustrate the Big Four firms’ interest in the market, which sees roughly as much money spent on legal services as the rest of the world combined.
Hogan Lovells CEO Stephen Immelt isn’t relying on regulatory barriers to keep the Big Four out, particularly those surrounding unauthorized practice of law.
“The D.C. bar rules, as I understand it, provide some latitude as far as a structure for doing it,” he says. “There will be some jurisdictions that are more hostile than others.”
Should the Big Four opt to confront these restrictions head-on, they have the resources to do so.
“The Big Four each invest more each year in technology, training and new products than the revenue of large law firms. They have quite a large war chest,” says Jomati Consultants principal Tony Williams, who led Arthur Andersen’s legal arm two decades ago after serving as global managing partner of Clifford Chance. If the Big Four wanted to place a bet on a court victory against U.S. regulators, the fees for top-notch litigators would be a drop in the bucket.
Lawyers’ increasing collaboration with the big accounting firms presents another challenge for law firms.
In M&A work, the Big Four are involved both pre- and post-merger. In big-ticket litigation, firms hire them for forensic accounting and other forms of economic analysis. The growing array of services in their portfolio presents for lawyers what Empson calls the “specter of disintermediation.”
“The risk is that if they really get their act together, they could do to lawyers what has happened to architects in the construction industry,” she says. “They could wind up becoming a barrier between the lawyer and the end client.”
The analog is a complex transaction where, rather than working directly with the client, the lawyers wind up working with the project manager. That’s a step toward diminished work—or even getting entirely squeezed out of the relationship.
“Inside the general counsel’s office, the question is, ‘Why do we need these law firms, when it can be done cheaper by a one-stop shop?’” Dentons’ Andrew says.
It works the other way, too. When firms assign out work to vendors like the Big Four, the client has no control over them. For Matthew Fawcett, general counsel at Fortune 500 cloud services company NetApp, that’s a concern.
“I always prefer my partners, my providers, to be accountable to me,” he says.
Fawcett already uses big accounting firms for quasi legal work like “subsidiary management”—ensuring the company’s units around the world are in compliance with local laws. But as they increase their scope, he expects they will become appealing options precisely because of their ability to deliver a comprehensive suite of services. Both litigation and M&A, with their unpredictable timing and costs, are areas where the scale and efficiency of a single provider trump the cost efficiencies that sometimes come from disaggregation.
“Law firms will have to think of themselves in a more differentiated way in order to keep capturing this work,” he says.
But are they doing so? The American Lawyer approached a range of international law firms to gauge their level of concern. Predictably, those leaders who responded were neither cowering with fear at the imminent implosion of their businesses nor glibly asserting they had never considered the Big Four as rivals and never would. Instead, the common thread was an awareness of the growing ambitions of the Big Four balanced with a conviction that the market—even as it tightens—has room for everyone.
“The starting point for us, really, is that if you look at our U.S. and global tax practice, we’ve been competing with the Big Four ever since I started 30 years ago,” says Baker McKenzie’s Paul Rawlinson, currently on leave from his role as global chair of the firm. He agrees that the Big Four are undoubtedly looking to expand into traditional legal offerings, highlighting complex international restructurings that require lawyers in 40 to 50 jurisdictions.
“There are two parts to this: legal and consulting,” he explains. “They’re moving into the former, and we’ve moved into the latter.”
Likewise, the leaders of global employment boutique Littler Mendelson see direct competition when it comes to advising companies on structuring employment arrangements. But they don’t expect a clash over the firm’s other core work on disputes, collective bargaining and labor relations matters.
“I’m confident that there is going to be overlap on [consulting on] structure, not on collective bargaining and litigation. We’re selling localized services; they’re selling from corporate down rather than from localized up,” says Littler co-president and co-managing director Jeremy Roth. “I don’t think they’re going to become law firms, nor are we trying to become full-service consultancy firms.”
Roth also tips his cap to the Big Four and the other global consultancy firms, saying their mastery of client service should be an example to his and other law firms.
“It’s fabulous to have good competitors and, to the extent that we do compete, that will make us better,” he says. “But we’re not particularly concerned about our business model being disrupted at its core.”
Higher up on the value chain, with a focus on cross-border disputes and transactions, Hogan Lovells’ Immelt also acknowledges the Big Four’s ambitions.
“They are large organizations, significantly larger than any law firm today,” he says. “They’ve got capital to invest. They’re good at tech. They have multiple points of entry into clients—sometimes even upstream from where the general counsel gets involved.
“I don’t see that we’re losing significant assignments to them at this point, but they clearly see the legal business as being attractive. You have to respect them.”
But Immelt anticipates the realities of talent acquisition will act as a bulwark that protects his firm’s market share. That’s the reason, he says, that “most law firms that occupy the space we’re in are not running around in circles waiting for the sky to fall in.”
Immelt’s experience managing attorneys tells him that the best of the bunch want to work with other lawyers in an environment where they can develop professionally, as lawyers. The Big Four can’t provide that, he argues.
“Perhaps over the next 25 years, the next generation of lawyers will feel differently,” he says. “But, in the short run, it will be harder to pull talent out of the law firm.”
To hear the Big Four themselves tell it, they have plenty to offer lawyers looking to take a different path.
“You get into a field where you play alongside other professions. You have consultants, you have auditors, you get to look at client issues from different perspectives. You have exposure to different people that obviously makes it very interesting,” KPMG’s Oberndörfer says. And there’s the growth—with the organization’s German firm growing at 30 percent over the last year, “the chances to advance are very good.”
That doesn’t even mention the firms’ existing revenue streams. “That was the pitch to my buddy,” the young Big Law funds partner says. “‘We have infinite pockets.’ Fifty million dollars to KPMG is a rounding error.”
This financial strength doesn’t paper over some issues facing the Big Four. British regulators are raising alarms about whether they unfairly dominate the market and are raising the specter of breaking up their audit and consulting arms. Australia’s Labor Party in August asked the country’s regulators for a similar inquest. The craftsmen erecting this Trojan horse might have some other concerns on their minds.
“The big problem that the Big Four are facing—why they face calls to split up—is that they are perceived to have moved too far away from a professional mindset to a business mindset,” Empson says. “They’re now under such relentless pressure to grow their business and super-please the client with the range of their service operations that it gets in the way of their professional responsibility to provide assurances through their audits and root out inappropriate behavior.”
That should be a warning to any law firm that might feel it can compete with the Big Four by becoming more like them. Technology-enabled platforms, exemplary client service and global scale may all be admirable goals, but there also are merits to a strategy that plays to legal exceptionalism in a market swelling with new entrants.
Immelt sure thinks so.
“The best protection here is to continue to give clients the right level of legal problem-solving and the right level of engagement,” he says. Only that will ultimately prevent them from “moving to something that’s unproven to protect their organizations from their biggest legal risks or to execute on their biggest transactions.”
If he’s wrong, the consequences won’t be as dire as the sack of Troy, where “blood ran in torrents, drenched was all the earth,” as the epic Greek poet Quintus of Smyrna described the scene. But all the same, no one in Big Law should be sleeping on the threat, lest they wake up to find their walled city overrun.