Via Financial Review : The steady advance of big four accounting firms into legal services has caused unease within the legal fraternity and incited some law firms to consider re-directing work they would normally have referred to PricewaterhouseCoopers, Deloitte, Ernst&Young and KPMG to rival firms.
“We’re serious about this,” EY’s head of legal services Howard Adams said.
“The time is right for accounting firms to re-enter the legal market.”
“It’s client driven. There is a lot of cases where legal work is so compatible with tax or transaction advisory work that clients are asking us to do it,” Mr Adams said.
A financier who works with big law and accounting firms said at least eight managing partners and chief financial officers of big law practices had voiced serious concerns about the rapid expansion of legal capability at the big four accountancy firms in discussions over the last six months.
“Top tier legal firms are starting to question whether the bulk of their work should be directed to the big four [accountancy firms] who are now starting to emerge as real competitors for mergers and acquisition and other corporate advisory work,” said the source, who spoke to The Australian Financial Review on the basis of anonymity.
“They consider it a strategic issue,” he said.
The platoon of lawyers within PwC, Deloitte, EY and KPMG is approaching the size of a decent boutique practice. What’s more, they have ambitious expansion plans and the capital to continue investing in this service line.
PwC legal services – which just recruited K&L Gates’ national head of antitrust, competition and trade regulation, Murray Deakin – has about 340 lawyers throughout Asia Pacific. About 120 of these are based in Australia, of which approximately a quarter are dedicated solely to legal work. The others are peppered throughout PwC’s other business divisions, mostly in tax.
In the last six weeks alone, PwC has hired 13 qualified lawyers to its Australian practice. Its plan is to carve out a $75 million slice of the legal services market, with a team of 20 to 25 partners by 2019. Globally, PwC aims to become one of the world’s top 20 providers of legal services.
In Asia Pacific, EY has hired 206 lawyers since January last year. Sixteen of them are based in Australia, focused purely on transaction, corporate commercial and employment law. Mr Adams said the opportunity in Asia to provide digital and intellectual property advice is immense, and he intends to add these to EY’s legal repertoire as quickly as possible.
“We’re going to market with our advisory team in health care, government, financial services, procurement and supply chain. It’s a new, more hands-on approach, to providing legal services,” Mr Adams said.
EY recently admitted a Hong Kong law practice to the EY network and expects to be open for business in HK by the end of August, after which it will target Indonesia and Malaysia. Its ultimate goal is a pan-Asia boutique law practice with hubs in every commercial centre across Asia.
KPMG Legal has an ambitious target of doubling revenue in fiscal 2016 under the leadership of David Morris, who previously co-led the Asia-Pacific corporate practice of global firm DLA Piper.
Deloitte is so far the only big four accountancy firm to limit its Australian legal division of 40 lawyers to tax litigation. However, this may change under new boss Cindy Hook.
The restriction to pure tax controversy gave rise to a raging debate under former chief executive Giam Swiegers. In Europe, Deloitte has a large legal practice and some felt it had potential to expand in Asia Pacific too.
Lead partner of Deloitte lawyers Aldrin De Zilva said the firm is “exploring a couple of different options in Australia and closely monitoring the significant changes the legal profession is going through”.
“Should they [law firms] be concerned? Yes. To what extent? It’s hard to quantify,” said one management consultant who has spent the better part of a decade advising the nation’s top professional services firms.
The big law firms are slightly nervous for two reasons: the big four are expanding beyond the traditional field of tax litigation into other services that complement their core offerings, including property and employment. And they’re attracting a higher calibre of talent than they were able to in the 90s when they last attempted a foray into legal.
PwC’s legal strategy, for example, is led by former King & Wood Mallesons managing partners Tony O’Malley and Tim Blue.
“They [the big four firms] are hiring heavy hitters, people with real credibility in the market,” one industry insider said.
The market is also at the point in the cycle where clients are showing preference for a one-stop-shop, which plays to the big four’s advantage.
Amid all this posturing, some big law firms feel the peril is being over-cooked.
Baker & McKenzie national managing partner Chris Freeland believes it will “erode work at the fringes” but won’t make a dent in the hallmark “bet the farm” corporate transaction work. Top-tier law firms will dominate that space for a long time to come.
“In the list of things keeping me awake at night it’s not in the top 10, or probably even the top 20,” Mr Freeland said.
“However, it is one of a whole lot of things occurring in the legal market – including the entry of international and alternative non-traditional players – that mean law firms need to stay on their toes,” he added.
Ashurst vice chairman Mary Padbury rejects the notion that the change in direction of the big four accountancy giants poses a threat.
She said Ashurst had seen no change in its patterns of work with the major accounting firms, with referrals moving in both directions.
“Clearly they have expertise which we need to access for our clients from time to time,” Ms Padbury said.
“If we need accounting or forensic assistance we want to be able to go to the best advice in the market so we don’t see ourselves changing our need to access what the big four can offer.”
Mr O’Malley is also playing down the impact of PwC’s ambitions on the broader legal market.
“We’re competing at the margins for work,” he said.
“In the short to medium term we pose no real threat to big law firms.”
Mr O’Malley also believes the growth of legal services won’t disrupt the referral relationship between big law and accounting firms.
“I suspect in an Australian context law firms are net gainers from that referral relationship. For them to decide to stop that would be a pretty odd call,” Mr O’Malley said.
Big four accountancy firms claim their goal is not to replicate the big national commercial law firms but rather to embed legal capacity within their existing service lines.
Either way, the strategy has seen them run foul of regulators in India where the big four have been accused of ‘surrogate practice of law’.
According to Indian news reports, PwC, EY, KPMG and Deloitte have been served notices by the Bar Council of India following a complaint by the president of the Society of Indian Law Firms that they are allegedly hiring law graduates and practising elements of law which are not allowed without registering with the Bar Council. The big four have until August 7 to file their responses.
The diversification into legal services is part of a broader investment by the big four accounting giants into new geographic regions and service lines, including technology and niche areas of management consulting, as well as initiatives to improve productivity using automation and by re-engineering their work practices.
Non-accounting services contribute more than 10 per cent of income at 70 per cent of 20 big accounting firms surveyed earlier this year by Beaton Research + Consulting. The overwhelming majority of firms expect revenue from non-accounting services to increase in the next two years.