The Big Four accounting behemoths have supplanted law firms in many countries, and Canada may be next on their list.
The Big Four accounting behemoths have supplanted law firms in many countries, and Canada may be next on their list.
When Conduit Law LLP founder Peter Carayiannis announced in September that his firm would leave the Deloitte fold, there was much speculation on Bay Street about whether this signaled a retreat from legal services by one of the Big Four.
In 2016, Deloitte hailed the arrival of the legal help outsource provider, noting in a press release that it would allow Deloitte to offer clients a “unique and more flexible approach to legal services” and “reflect the changing realities of the market.”
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Eighteen months later, Conduit’s abrupt departure was a shocking turnabout.
Carayiannis wouldn’t elaborate on what went wrong but simply said Conduit “can scale more rapidly as an independent firm.” Deloitte declined an interview request.
However, Carayiannis believes there is still the need for the two solitudes to work together. “Top law firms and the Big Four accounting firms do not have to fear each other.”
He says the two professions have to “realize that the client is looking for a solution and usually doesn’t care about who the actual provider is.”
His comments hint at the challenges ahead for Canadian law firms as the Big Four — KPMG, Deloitte, Ernst & Young and PricewaterhouseCoopers — ramp up their legal services globally. The Big Four now boast almost 9,000 lawyers practising law in their stables.
It is naïve to think that North America is immune to the winds of change sweeping much of the legal world. It’s more a question of when, not if.
We are entering a new era where “co-opetition” will likely become the norm. One day, law firms will compete with the Big Four for work, and the next day they will work alongside them solving clients’ business problems. The impact on referral networks among the two professions, recruiting and client services will be profound. It will challenge legal management not just at big law firms but mid-sized and regional firms that currently covet a cozy relationship with their local Big Four office. It is also opening new career paths for lawyers.
German lawyer Cornelius Grossmann, global law leader at EY, is one of the people driving that change. He heads a team of 2,100 lawyers.
In five years, EY has expanded its legal offering to 82 jurisdictions from 23. “We have generated double-digit growth for the last five years and plan to grow even more aggressively,” Grossmann says.
“The potential for growth is mostly limited by our ability to get top people to join us,” he says, noting that the market is “very competitive for good talent and we are competing with the best law firms for the same talent. It is a challenge, but we are getting there.”
It’s not just tax, insolvency and immigration that have formed the bedrock of the Big Four’s legal offering in Canada to date.
It covers bread-and-butter business law services from corporate-commercial to finance, real estate, intellectual property, employment law and M&A, supplemented where necessary with advice from other professionals in the EY service mix. “We go to market not just as lawyers but advisors,” says Grossmann, adding that clients “like the idea of a one-stop shop.”
He says the geographic expansion “is basically done.” Now, it’s filling in the bench and doing what the Big Four do so well — adding technology to the legal mix, streamlining service delivery, developing new products and services and leveraging their global brands to win business.
He says the growth opportunity is equally spread between mature and emerging markets. “Canada is a big market and we still have a small practice there.”
According to ALM Intelligence in its report “Elephants in the Room,” the law firm practice areas most susceptible to a Big Four assault include: tax, finance, labour and M&A.
In the area of M&A, the Big Four are slowly advancing.
According to Thomson Reuters M&A data, in 2013, its legal arms advised on a total of 71 deals. By 2016, that had grown to 215, tapering back to 189 last year.
But it has a long way to go. In 2017, based on deal value, Deloitte ranked 97th (53 deals worth US$20 billion), PwC Legal 115th (79 deals worth US$15.1 billion), KPMG 246th (24 deals worth US$2.6 billion) and EY 285th (21 deals worth US$1.6 billion). For comparison, top Canadian law firm Blake Cassels & Graydon LLP was 19th with 159 deals worth US$182 billion, while Fasken Martineau DuMoulin LLP was 151st with 42 deals worth US$8.6 billion.
Grossmann agrees that running mega-mergers is “part of the global elite. It will take a long time to get there.” The sweet spot in the meantime is mid-market deals.
For Grossmann, it’s about “climbing up the value chain” and landing an opportunity in an organization to show what you can do.
And they can do plenty. To call the Big Four accounting firms is a misnomer. They are large, sophisticated, professional services firms with multiple business lines. They have long had their toes in legal waters in areas such as tax and insolvency but are firmly fixed on expanding their global legal services offering.
If you’re not convinced, look at some of the recent announcements. Deloitte launched Legal Management Consulting, aimed specifically at the office of general counsel to help “improve their operating models” and “deliver faster, more effective, integrated services within the enterprise,” according to the press release. It also became the last Big Four firm to apply for an alternative business system licence to practise law in the U.K. KPMG, E&Y and PwC embarked down that path a few years ago.
PwC announced in the fall that it would open a Washington law firm to advise clients on international legal issues outside of the U.S.
So why law and what’s the attraction? Money. The global accounting business, which the Big Four dominate, generates about US$500 billion annually, and annual growth between 2012 and 2017 was only 3.4 per cent, according to research firm IBISWorld.
Contrast that to law. In a seminal paper studying the Big Four’s growth in law, Harvard Law School professors David B. Wilkins and Maria J. Esteban Ferrer note that “the Big Four have always been attracted by the size and profitability of the legal market relative to the decline in their core audit business.” They write in “The Implementation of Law into Global Business Solutions: The Rise, Transformation, and Potential Future of the Big Four Accountancy Networks in the Global Legal Services Market” that the growth in legal services between 2005 and 2014 was 72 per cent to US$618 billion, almost three times the value of the audit market.
That period coincided with what the authors say was the Big Four’s re-emergence into law following the Enron crisis and the demise of Arthur Andersen, which spawned a global flurry of new laws and, ironically, an increase in demand for legal services and compliance advice on which the Big Four sought to capitalize. Moreover, legal services spending is forecast to hit US$726 billion by 2019.
What’s most attractive, though, is the legal market’s fragmentation. No single firm dominates the way the Big Four dominate accounting and auditing. Effectively, law is a mom-and-pop industry ripe for consolidation, and the Big Four see an opportunity.
How are they doing? That’s hard to say since they don’t break out financial figures for legal services. It probably falls under advisory services, which is driving growth at all the Big Four firms.
Thomson Reuter’s Legal Executive Institute estimates revenues of the Big Four’s legal services units at US$900 million. Factor in the legal work completed by their traditional tax and insolvency groups and the number is much higher.
In a March 2015 interview, PwC Legal head Leon Flavell told Business Insider that his firm wanted to hit $1 billion in law-related revenues by 2020.
The main difference between a traditional law firm and the Big Four is the depth and breadth of what the Big Four can offer, Grossmann says.
“We have data and access to industry insights that are incomparable to what a law firm can do.”
Then there is the branding. Lisa Hart Shepherd, CEO of brand intelligence firm Acritas, says that, in Europe and parts of Asia, the Big Four “come up as a law firm brand, not just an alternative to mainstream legal services.”
Clients are comfortable using the Big Four for other services, which means their legal arms “automatically come in with a brand presence. They are known and there is a level of trust. Something that law firms are not appreciating is how easily it will be for [the Big Four] to transition over,” she warns.
More importantly, general counsel are watching developments with interest. Fred Headon, assistant general counsel, labour and employment at Air Canada in Montreal, says the Big Four are a “force to be reckoned with,” noting that most in-house lawyers have been exposed to their services and understand how they work and what they can do for an organization. Law firms, he says, may have to re-adjust their “bespoke lens” to compete.
Harry Andersen, vice president, legal and general counsel at Pembina Pipeline Corporation, says that the Big Four’s North American legal strategy appears focused on tax and related services. He is worried for law firms should that change.
“If [the Big Four] were interested in getting some of the right people to lead their team, they could make a very big impact. They could bring a level of commoditization and cost savings that I don’t think law firms are going to be able to do.”
That’s because law firms, he says, “do not have the infrastructure and, more importantly, neither do they have the leadership or capability to do what accounting firms are capable of doing in terms of providing fiscally prudent consulting services to businesses.”
Rob Landry, head of global HR at Magna International and former chief operating officer at Gowling WLG Canada, is worried that law firms do not take the Big Four threat seriously and are too complacent.
He says many in the profession believe that the Big Four will stick to tax and immigration and nibble at the edge of M&A and due diligence work.
“I do not believe that for a second. Big Law is so insular when they think [about] competitors [and] other big law firms. They have blinders on.”
Raising the Big Four’s legal services strategy with lawyers generates a wide range of opinion.
Some firms say they are borrowing from the Big Four’s playbook and developing a broader range of business services that go beyond traditional law.
Kevin Coon, managing partner of the Toronto office of global law firm Baker & McKenzie, says the Big Four are “serious competitors” and law firms can learn from them.
For example, “the use of non-lawyer timekeepers has exploded,” he says, as his firm adds complementary professionals, such as economists, privacy experts and information governance professionals.
In June, Baker McKenzie opened The Whitespace Legal Collab in Toronto to allow for greater collaboration between its lawyers and leaders in business, academia and not-for-profits with a view to the global challenges facing business, law and technology.
Coon says the practice of law is changing. It’s no longer about simply doing a legal risk assessment. It’s about helping clients manage their brand and reputational risk on a global level.
“We have those skills and the ability to provide that type of advice, but it takes a shift in mindset,” he says, noting that “the practice of law in five years is going to be dramatically different than today.”
Beth Wilson knows the Big Four well. Prior to joining Dentons Canada as CEO last July, she was managing partner of KPMG Canada. She says the Big Four are good at technology implementation and streamlining processes, which makes legal services ripe for overhaul.
“The firms that are going to be most impacted are mid-sized regional and national law firms for the simple reason [that] they don’t have the global platforms that so many clients want.”
She says her firm has the scale to invest in technology and attract the best talent to develop the delivery models that will drive the legal business into the future.
Dentons developed Nextlaw Labs in 2015 to spur innovation and technological change and incubate ideas for new products and processes to transform legal services delivery. They have since launched various Nextlaw initiatives, including a global public affairs network and an in-house strategic consulting service comprising 50 former general counsel.
Shawn McReynolds, managing partner at Davies Ward Phillips & Vineberg LLP, is taking more of a wait-and-see attitude. “I am watching,” says McReynolds, whose firm has a large tax and M&A focus so its lawyers often rub shoulders with the Big Four.
“The real issue is what are they going to do outside the tax space” in Canada, he says. “We have not seen them taking steps to do what they did in the 1990s,” when multi-disciplinary partnerships were the rage. Nor have they done what they did in Europe, which is strategically commit themselves to full-service practices.
McReynolds notes that they are “big organizations that we deal with on a constant basis.” Sometimes, they are on the same side; sometimes, they are not. “The big issue is are they competitors for talent? Are they going to seek to hire away from law firms? That is more likely to cause ill feeling.”
The best training ground in North America remains law firms, he says, and the Big Four would have to persuade “people who are successful and at the top of their game” to jump ship. He doesn’t see that happening any time soon.
Peter Lukasiewicz, CEO of Gowling WLG (Canada) LLP, says that, at the moment, “we don’t see them as competitors,” noting that his firm has a “strong business relationship with them. They refer work to us and we end up working together on projects.”
He doesn’t think you can “draw a straight line” between Canada and what’s happening overseas.
It’s the referral link that everyone is concerned about and what will happen if the Big Four open the legal taps more fully in Canada, where B.C. and Ontario allow multi-disciplinary partnerships.
Lukasiewicz says “these firms enjoy strong relationships with law firms across Canada. I am sure that goes into their business planning.”
However, it’s worth noting that the Big Four faced similar concerns when moving into Europe and Asia, and that didn’t stop them. Now, they are preparing an assault on the U.K.
David Leonard, CEO of McCarthy Tétrault LLP, says “it’s a very complicated relationship” that law firms have with the Big Four.
“On one hand, they are a client and on the other, we partner and collaborate to deliver to our mutual client. In other ways, we compete with them.”
Leonard thinks this “co-opetition” model will become the new normal for legal services.
However, law firms have to get better at developing new products and services if they expect to compete with the Big Four, he says.
Law firms must also sharpen their elbows and stop ceding ground in areas of what is seen as semi-legal or commodity work.
For example, his firm acquired e-discovery firm Wortzmans last year to provide clients an end-to-end document review solution.
As well, law firms need to be more aggressive. One client recently hired a Big Four to review the legal function, Leonard says. The first reaction was that it made sense, but after thinking about it, the legal team went back to the general counsel and made the case that McCarthys should be part of the review. “We’re lawyers. It’s within the scope of what we are doing. We shouldn’t just simply say, ‘Accounting firms are doing that and we should back off,’” he says.
Where this complicated relationship between the Big Four and law firms goes in North America remains to be seen. The wild card is the U.S., which seems defiant to lowering restrictions around the practice of law. If that domino topples, and there is no sign it will, then all bets are off.
In the meantime, the Big Four continue to chip away, and that should concern law firms, says Landry. He notes that the Big Four have been expanding their legal services since the 1980s and encountered some failures along the road. However, he says, “You learn from your mistakes and sooner or later, you are going to succeed.”
Big Four By The Numbers
Deloitte
Revenues: US$38.8 billion
Employees: 263,900
Notable fact: In 2017, Deloitte added 70,000 new professionals, the equivalent of hiring one person every eight minutes.
Legal network: 1,800 lawyers; 69 jurisdictions
Global legal services: corporate, compliance, reorganizations, mergers, anti-trust, private equity, tax, contracts, insolvency, real estate, intellectual property, litigation, estates and trusts, employment, labour, immigration, pension
Canada legal services: tax law and tax litigation
PWC
Revenues: US$37.7 billion
Employees: 236,000
Notable fact: Revenues rose seven per cent in 2017, including 14 per cent in central and eastern Europe.
Legal network: 2,500 lawyers; 85 jurisdictions
Global legal services: entity governance and compliance, immigration, M&A, employment, restructuring, anti-trust, banking and finance, cybersecurity, energy, financial services regulation, information technology, intellectual property, private client, real estate, public law, tax litigation and white collar crime
Canada legal services: immigration, tax
E&Y
Revenues: US$31.4 billion
Employees: 247,600
Notable fact: E&Y uses more than 1,100 robotic
processes to support its business and clients.
Legal network: 2,100 lawyers; 82 jurisdictions
Global legal services: corporate, labour and employment, transaction law, digital law
Canada legal services: tax, business immigration, business law
KPMG
Revenues: US$26.40 billion
Employees: 197,263
Notable fact: KPMG grew its advisory revenue by
six per cent in 2017, including 15-per-cent growth in Asia Pacific.
Legal network: 2,200 lawyers;
53 jurisdictions
Global legal services: corporate, M&A, securities, technology, tax advisory and dispute, workplace and employment, real estate
Canada legal services: tax, immigration
Life inside the Big Four
As the Big Four expand their legal services offerings, it presents new opportunities for lawyers. In 2012, immigration lawyer Howard Greenberg made a calculated business decision to forgo independence and bring his immigration law firm, Greenberg Turner, into the KPMG fold.
He hasn’t looked back.
Greenberg, national practice leader – immigration at KPMG Law, says it was apparent to him that the future success of a cross-border immigration practice hinged on the ability to leverage global resources.
“There are limits as to how successful and how much expertise you can provide to multi-national corporate clients without access to resources worldwide.”
He considered both global law firms and other Big Four practices and concluded that “the accounting firms with their tax depth, related advisory services and [global] reach appeared to me to be the future solution.”
Now when Greenberg gets a call from a client, it usually involves multiple jurisdictions, and while it might start with an immigration question, invariably, other issues arise that impact the ability to make an immigration move.
“You have to look at issues in a much more comprehensive way,” he says, noting that the Big Four environment is “agile” and it is all about delivering a range of advisory services and adapting to meet future needs.
“We are implementing new ways of looking at the business with the assistance of our professional counterparts worldwide.”
He identifies three benefits to a Big Four environment that have made his group a better provider of legal services.
First is investment in technology. Greenberg Turner had its own IT department that had developed some custom solutions. “We brought it to an organization that recognized the value of it, and we built on it” — which would have been a costly undertaking for a standalone firm.
Second is marketing and know-how. Greenberg notes that the “opportunities to market to and address the concerns of corporations is significantly wider from a professional firm platform than it is from a local firm platform.”
Because it is a multi-disciplinary environment, the ability to tap other services internally to solve a client problem brings efficiencies to the table.
Third is the entrepreneurial nature of a global professional services firm and the willingness to pursue things such as alliances. In January, KPMG Canada’s legal arm entered into an innovative marketing alliance with Immidart Technologies LLP, which helps companies automate their immigration processes. KPMG Law LLP will provide legal services that support Immidart’s cross-border mobility solutions. Greenberg is looking at other similar arrangements.
He warns, though, that joining a Big Four firm isn’t for everyone. They are large, complex organizations and Greenberg likens it to getting married. “You don’t just marry your spouse; you get their family, too. For people who like big families, it’s attractive. For people who feel overwhelmed by them, steer clear.”
The biggest difference between Greenberg’s independent practice and being at KPMG is that he “spends an unusually larger period of time thinking.”
There was also an unexpected benefit to the environment. “I think we became better global business people” and clients benefit from that, he says.
How one law firm is fighting back
If you want to see the impact that the Big Four is having on law firms, look to Australia, where they are actively engaged in practising law beyond tax and insolvency.
Tony Harrington, CEO of law firm MinterEllison, says lawyers need to understand the Big Four are not building law firms. They are weaving legal services into their broader professional services tapestry to find holistic solutions to clients’ complex problems. “Law is not something that is separate and distinct.”
Harrington would know. He is a former global managing partner, strategy and transformation at PwC, and sat on PwCs global executive leadership team. He joined MinterEllison in 2014 to help the firm adjust to the shifting competitive landscape.
Lawyers have legal acumen, while the Big Four stress financial acumen, he notes. The legal profession “really should own the risk space. Governance, risk and oversight are becoming more and more the norm.”
Harrington persuaded the partners to realign the firm around four client-facing themes to help clients:
• grow;
• develop and manage their assets and infrastructure;
• strengthen and defend their business models, and
• optimize their businesses.
Lawyers had to shift focus from touting their individual fields of expertise to providing creative and distinctive end-to-end business solutions.
The firm developed what it calls “Empower,” a performance culture program to develop its people. It segmented its client base, fast-tracked promotions and reshaped its partner income model.
Since Harrington’s arrival, the firm has grown its revenue by 40 per cent, and it is forecasting 20-per-cent growth in 2018. The firm is on track to become the largest in Australia.
“There is enormous opportunity in [law] firms to drive sustainable, client-focused, profitable growth,” says Harrington, who will step down in June when his term expires. “It’s just a matter of having an open mind to that concept of what clients need.”