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Big 4 Gunning for Big Law

The Economist published quite the haughty article yesterday about accounting firms picking off legal work from law firms. I say “haughty” because that’s the voice I hear when I read Economist articles, but really, it’s a good read. I invite you to read it in your own silent haughty voice.

The story goes that big accounting firms are big. Big law firms are also big, but actually quite small compared to big accounting firms. In fact, collectively, the Big 4 have revenues that exceed the top 100 law firms combined. Revenue of the international networks of BDO, Grant Thornton, McGladrey, Baker Tilly, Crowe Horwath and Nexia are all larger than the largest law firm network, Baker & McKenzie.

Anyhoo, accounting firms, as you know, like to dabble in all kinds of services that aren’t really accounting in nature. And by dabble, I mean build multi-million dollar practices. Seriously, you can ring any Big 4 firm on any given day, ask them if they can perform some dog and pony show advisory service and as long as you’re not an audit client, the answer is probably, “Yep!” It’s sorta like the old Staples slogan for professional services. Or Walmart, as we once suggested.

It’s evident in their revenue growth as well. The Big 4’s advisory (aka consulting) revenues climb year after year while audit and tax mosey along at acceptable, but nominal by comparison, growth.

And recently, they have set their sights on legal work. Here’s the Economist on their stealthy building of their practices:

Having already dipped a toe into the legal business a couple of decades ago, only to retreat, the accountants have been stealthily building up legal-services divisions. These have now reached a size where they outgun most law firms: by headcount, PwC’s legal arm is the world’s tenth-biggest, and all four networks’ law divisions are in the top 40 by this measure.

Did I say stealthy? If PwC’s legal practice is the tenth largest in the world, that’s as stealthy as a bull marching band in a china shop full of cuckoo clocks.

But wait a minute, new Deloitte CEO and maker-of-lame-excuses-to-get-out-of-work Cathy Engelbert recently said that U.S. firm “[has] no plans to enter into the legal market or to compete with law firms.”  And that’s true! Although the U.S. represents “one-third of global legal spending,” law firms’ U.S. business isn’t at risk:

Those in America can afford to be complacent: the accountants’ lobbyists are too busy advancing the interests of their existing businesses to push for an opening of the legal profession. Even if they tried, America’s legislative bodies are infested with lawyers, who would surely fight back. This should ensure that the market remains protected for the foreseeable future.

So forget about the U.S. Where the Big 4 are making inroads is by providing legal work that couples with their current services in countries that allow accounting firms to own and control law firms:

The Big Four are taking a more focused approach this time. Rather than building full-service firms, they are concentrating on areas of law that complement their existing services: immigration, which sits nicely with expatriate tax work; labour, which goes with human-resources consulting; compliance; commercial contracts; and due diligence. So far they have resisted taking on the priciest law firms for high-value work on capital-markets transactions or mergers and acquisitions. They are also steering clear of non-tax litigation, which could result in them suing potential audit or consulting clients. But they are seeking to build broader practices in under-lawyered emerging markets where the international law firms do not have a presence but the accountants do.

Diabolical! Of course businesses in emerging markets need smartypants lawyers too! But who’s going to do that kind of work when there are no smartypants lawyers to be had? BIG 4 TO THE RESCUE.

Interestingly, not every accounting firm is on board with this. Grant Thornton’s UK firm has called out the Big 4 for providing legal services, citing the potential conflicts. You can’t help but think that GT is just a bit jealous that they’re missing out on all this sweet legal action; smugly taking the high road is little consolation.

Despite it being an outright farcethe other issue that will inevitably come up is that of independence. The hand wringing at the SEC and PCAOB has certainly been going on since the growing legal services of accounting firms showed up on their radar. Concerns will be expressed. Statements will be made. Platitudes about maintaining integrity will be offered. You know the story. Just thought it should be mentioned.

Ultimately, the Economist piece concludes that what we’re dealing with here is the Big 4 offering a better product at a cheaper price:

Only the likes of PwC and Deloitte can muster the capital and technology (and relatively cheap labour) to industrialise the artisanal model of legal practice that has endured so long. Businesses that spend heavily on legal advice stand to save a fortune. But law firms that are sub-scale and inefficient risk ruin. The Walmarts and Amazons of professional services are at their gates, and the legal industry’s halting pace of creative destruction is set to accelerate as a result.

Can’t say we didn’t warn you about the Walmart thing. Be afraid law firms; be very afraid.

Attack of the bean-counters [Economist]