No one needs to tell the leadership of large US-based law firms that demand for their services has been flat for a decade. According to a study by Georgetown University and Thomson Reuters, lawyers are billing nearly 13 fewer hours per month than they were before the 2008 recession.
Industry experts generally attribute the shift to a changing legal landscape that is less attorney-driven and more centered around client needs and expectations, including the need to reduce costs, as some of the decline can be attributed to companies moving more legal work in-house. Advances in legal technology and greater access to information also play a part, breaking the lock lawyers once had on legal information.
Alternatives to traditional legal services
Another competitive threat facing large firms is coming from nontraditional or alternative legal service providers, on several fronts. Chief among these are the usual suspects of legal process outsourcers (LPOs) like Integreon, along with legal industry suppliers like Thomson Reuters and new companies like Axiom.
Founded in 2000, Axiom has reported revenue of $300 million, which is about the equivalent of an AmLaw 150 firm. This legal services provider recently spun-off two business units and submitted a draft registration statement to the US Securities and Exchange Commission for an IPO. Axiom has over 1,300 lawyers on staff over three continents and an impressive client list that includes Coca-Cola, PayPal and BT Group.
Big Law versus Big Four
But the next competitive battlefield may see “Big Law” facing off with the “Big Four”—the major global accounting firms of Deloitte & Touche, PwC, Ernst & Young and KPMG. These companies have been rapidly growing their legal market share, primarily outside the United States, promoting the holistic and multidisciplinary approach they offer clients.
The major accounting firms have emerged from tight government regulations and scrutiny imposed in the wake of the Enron / Arthur Andersen scandal and Sarbanes-Oxley legislation of the early 2000s, which restricted them from providing legal services to audit clients. They are not, however, prevented from offering legal and other services to non-audit clients, and it’s the non-audit side that’s growing. As reported in the Wall Street Journal, the Big Four grew revenue by more than 10% in 2018, thanks mostly to their continued shift toward more lucrative consulting services over core auditing work.
Not your father’s accounting firm
Over the past decade, the Big Four have grown their legal business beyond tax law to make gains in global immigration law, mergers & acquisitions, labor and employment law and finance and regulatory compliance, mostly with clients outside the United States.
Each of the Big Four currently has revenues up to 12 times higher than the highest-grossing law firms, while employing an extensive professional workforce. As reported in Legal Business Online,
“KPMG boasts more than 2,300 legal professionals across 76 jurisdictions, Deloitte upwards of 2,400 in more than 80 countries, EY has a legal headcount of around 2,200 in 80 countries, while PwC has more than 3,600 lawyers in 98 countries.”
PwC’s legal product has supplanted Thomson Reuters as the “strongest alternative legal brand,” as measured by the Acritas Global Alternative Legal Brand Index. PwC has even launched its own Washington DC-based law firm, ILC Legal, providing non-US legal services to multinational companies through foreign-trained attorneys. Indeed, Acritas reports that each of the Big Four has grown its legal brand, with Deloitte Legal in third place, followed by EY and KPMG Legal. Deloitte Legal is focusing on employment law and workplace services.
Deloitte has chosen the route of partnerships, forming alliances with US immigration firm Berry Appleman & Leiden and more recently, to beef up its capabilities to address employment issues, with Epstein Becker Green.
E&Y just made a huge play that demonstrates their commitment to the legal market—the firm announced on June 1, 2019 that it has acquired Pangea3, one of the largest LPOs in the world.
KPMG Legal Services grew revenue by 30% in 2018 as reported by Bloomberg Law. The group expects future activity to come partly from high-growth markets like China, with expanded law offerings to Hong Kong through its new affiliated legal practice, SF Lawyers.
What the Big Four offer that traditional law firms don’t
- A multidisciplinary approach, combining the law with other services to address problems beyond
traditional legal perspectives.
- An edge in technology, chiefly artificial intelligence, automation and information management.
- Globally recognized, well-respected brands and secure, long-established C-suite relationships.
These and other factors have captured the attention not only of clients but talent as well, enabling them to attract top lawyers from US firms.
Protection from US legal regulations
The Big Four accounting firms have begun their outreach in international markets with less restrictive practice rules. For instance, the United Kingdom and Australia are among nations that have alternative business structure (ABS) schemes that allow for non-lawyers to own and share profits in law firms. Consequently, the Big Four have each secured an ABS license that allows them to own and manage entities that engage in regulated practice activities, including the practice of law, in the UK and beyond. In the most recent fiscal year, PwC’s UK legal operation raked in nearly $92 million, up from over $63 million in 2015.
In the United States, state bar regulations prevent them from offering traditional legal services. The American Bar Association’s Model Rules of Professional Conduct, which have been adopted by most US jurisdictions, proscribe attorneys from sharing fees or partnering with non-lawyers in a multidisciplinary business enterprise that provides legal services and even bar firms from having outside investors. As a result, law firms have not had to compete as directly with the Big Four in US markets.
It could be argued that the same ABA rules designed to protect the practice of law have put law firms at a disadvantage, handicapping their ability to compete in today’s global environment because they can’t offer a “one-stop shop” of professional services. The ease of working with one provider for legal and accounting needs appeals to some companies.
Law firm leaders have complained that accounting firms skirt the ABA rules by claiming that they don’t actually practice law in the United States, but instead offer tax and other “services” and “litigation support,” thereby avoiding bar scrutiny.
The Big Four are also siphoning legal talent, as they continue to grow their legal staff through new hires and also lateral hires. While Big Law employs more lawyers in total, the Big Four have lawyers operating in a greater number of countries worldwide.
Responding to legal service competitive challenges
An ALM Intelligence report found that most law firms surveyed see the Big Four as a major threat. Most law firm leaders know that competition from accounting firms and other alternative providers is the new normal, but the key will be how they rise to the challenge.
The most forward-looking firms are showing a willingness to move some of their fee-based services to a more efficient and less-costly “productized” and branded offerings. Some major firms are offering specialized services to highly targeted market segments. Yet according to the GU/Thomson report, most firms are still relying on “old-school” measures like staff downsizing, reducing the number of equity partners, cost-cutting and imposing small fee increases. It comes down to a question of how long they will be able to compete under an increasingly anachronistic business model, albeit a streamlined one.
Some believe that bar rules limiting fee—and governance-sharing at US law firms will need to be overhauled for the profession to compete and even survive in light of changed market expectations, but so far, the ABA has rejected any efforts to ease these restrictions or allow outside investment in law firms. Some lawyers warn that relaxing these rules would compromise the independence and ethical integrity of the profession, with questionable benefits to legal consumers.
But critics of traditional firms argue that by continuing to focus strictly on what they have always provided in a changed business climate where law, business and technology are increasingly overlapping and merging, they risk being left behind.