The Big Four | Summer 2019
‘I have never instructed a Big Four firm on a legal matter,’ says one UK general counsel of a large multinational. ‘The accountants’ legal offering is not something I’m close to,’ concedes Tesco GC Adrian Morris. The respective legal chiefs at The Royal Bank of Scotland (RBS) and Lloyds Banking Group strike a similar note: ‘We don’t currently use any of them,’ says Michael Shaw, while Kate Cheetham notes: ‘Our use of these offerings is quite limited.’
Canvassing 20 GCs for this piece – including ten from the FTSE 100 – found only four had used the Big Four’s legal services.
And despite the Big Four making numerous hires, acquisitions and announcements recently in the wake of Legal Services Act liberalisation, many GCs are not utilising them, often citing a ‘lack of visibility’ or understanding of their wares. There remains a huge discrepancy between the group’s high profile and breathless commentary typically lauding their rise and the current reception from the kind of GCs they need to win over to achieve their ambitions.
There is usually willingness to try, however, or at least intrigue. Many GCs can envisage a Big Four proposition – consulting services with a legal slant, a one-stop shop for low-risk work with a heavy tax element – that matches the claimed ambitions of the Big Four.
But the message has largely yet to resonate with most of the figures buying legal services at the largest UK companies. Tellingly, none of the accounting firms provided client names or case studies for this piece. Big Four legal groups can all quote large numbers of lawyers in their legal networks, ranging between 2,200 (EY) and 3,600 at the largest (PwC), yet many of these are spread across varying patchworks of firms around the world. It does not translate into a credible strategy for key ‘hub’ markets like the US, UK or Hong Kong. And, of course, the accountants have tried for more than 20 years to crack law with mixed results, with the initial assault being effectively torpedoed by the fallout from the collapse of Enron, which took its auditor Andersen down with it in 2002.
The In-House Lawyer interviewed GCs and legal leaders at the Big Four to assess how progress could be made this time. ‘When I arrived, EY had deep relationships with all its clients, but the reality was that the least developed was with the GC’s office,’ concedes EY UK law leader Matthew Kellett. ‘We’ve spent an enormous amount of time developing those. We’ve won some big projects with household names, but we’ve also kissed a lot of frogs.’
One blue-chip client which is taking a close look at the accountants’ legal offerings is BT, unsurprising given its progressive reputation: alternative providers make up four of its top ten external providers by legal spend.
They are yet to use any of the accounting firms, but BT group GC for technology and transformation Chris Fowler says they have been considering them because of their prevalence within the wider business.
‘You can’t not meet and talk to them. They’re with the head of HR or the CFO all the time. I know the account managers at EY and PwC as well as our law firm account managers.’
Fowler points to EY’s recent spate of acquisitions as evidence of its ambition. For Fowler, the challenge for the Big Four is which sectors they break into first and what services they target. He also believes their pricing is more rigid than law firms. Yet he can see a potentially lucrative space for the group to implement systems – if they are helping a business with its enterprise-wide finance system, for instance, then it could add legal services alongside that.
‘You’re probably not going to the Big Four if you want something completely extraordinary, but for something you can do repeatedly or as managed legal services, they’ve got an interesting proposition. They’re not going to eat law firms, they’re going to try to grab different segments of business.’
Pearson chief legal officer Bjarne Tellmann is also open to the group in principle, although he has not used the Big Four for legal, largely because of regulatory barriers in the US.
‘The big opportunity for them in the short-term, particularly to gain a foothold in the US, will be to offer a more broadly-diversified range of consultancy services that are targeted to legal departments, focusing on efficiency, technology and innovation. It is one that, given their other business lines, they really should own: there is movement. They could and should be doing more.’
One leading FTSE 100 GC has used the Big Four for a handful of matters: a litigation matter; advice on a compliance programme; and for contract management. The GC similarly sees an obvious fit, building capability in volume work areas, and expects they will do it well. ‘They can make comments to the finance department, such as, “How efficient do you think your legal department is?” It’s a canny play,’ the GC comments. ‘We’ve had situations where the finance team wanted to make sure we were extracting value out of various contracts and instead of going to a law firm to do the analysis, they went to one of the Big Four. They did it perfectly well.’
Amanda Hamilton-Stanley, the group GC of French wines and spirits company Pernod Ricard, has used the accounting firms for legal services but says it is rare. Often this is for tax-related matters because of the simplicity of using one firm for everything.
‘Using the Big Four for large corporate projects is an obvious growth area,’ she says. ‘If you’ve got everyone in the same firm, theoretically that should reduce the challenges around communication and be more cost-efficient. I would be expecting some cost synergies as a consequence.’
Other advantages for the Big Four in corporate restructuring work, GCs say, are the global networks each boast – providing a consistency attractive to large multinationals.
An obvious complication, however, is the audit relationships the Big Four have with most multinational companies. Legislation provides for mandatory re-tendering of auditors after ten years and allows a maximum tenure of 20 years in the UK. It is difficult to build long-term legal relationships in this context.
Moreover, the background music on audit regulation in recent years has threatened that the group may face even tougher restrictions in the years ahead, hugely complicating any cross-selling strategy. In April, for example, the Competition and Markets Authority recommended a package of reforms, including splitting of audit from consultancy services and moves to make it easier for smaller accountancy rivals to compete for work from the UK’s largest companies. ‘It may not be fatal, but it’s certainly a factor,’ notes one FTSE 100 GC.
Furthermore, many of the GCs contacted for this article remained unclear on the legal capabilities of the Big Four. One FTSE 100 GC believes they will need to make many more splashy team acquisitions to jolt people’s awareness. ‘But it would be tough. Historically, they haven’t really had a star culture and they would have to adapt to bring in these well-known teams.’
Rolls-Royce GC Mark Gregory, who has not instructed any of the Big Four, says they are trying to grow around a sales pitch of ‘we can do everything’. Yet complicating the picture for the Big Four is that many law firms are building out consulting arms and complementary business lines at the same time, including their own tech-assisted volume divisions.
Gregory says that GCs are increasingly looking for more than just lawyers, however, with roles expanding to cover risk and governance, assurance and audit.
‘The power of the Big Four is that they’ve done consulting for years, so to do that with a legal bent could be a one-stop shop,’ he says. ‘That could be a selling point, I’m just not seeing it at the moment.’
None of the surveyed GCs mentioned using the Big Four for marquee work, but most can see a sizeable niche emerging if they can stand as a one-stop shop proposition, or at least very broad providers of services. Even here they now face more competition from alternative providers such as Elevate and Axiom, with one FTSE 100 GC believing Elevate’s recent acquisition spree and Axiom’s planned IPO was in direct retaliation to the Big Four. ‘[The Big Four] are clearly carving out capabilities in what looks like mostly volume work areas and my expectation is that they will do it very well. It’s a bit beyond nascent, but not very far.’
Looking at the multitude of headlines the Big Four has generated over the past year or so helps to build a picture of what ‘beyond nascent’ looks like. EY has made the biggest splash courtesy of its Riverview Law and Pangea3 acquisitions, while earlier this year Deloitte unveiled Allen & Overy banking veteran Michael Castle as its UK head of legal following a four-month hunt (see box). KPMG, for its part, made a large team hire of 145 lawyers from French law firm Fidal to launch a new legal consulting service. PwC, meanwhile, extended its presence in the US through a partnership with immigration specialist Fragomen last September.
Senior figures from the group cite ambitions akin to the market gap GCs perceive, but concede the journey is just beginning – Kellett describes it as ‘basecamp’.
‘We’re targeting work that sits alongside work EY is already doing,’ Kellett says. ‘We often get instructions from another part of the organisation. If GCs go to a law firm for advice on a new regulation they’ve then got to work out how to operationalise that advice, but if you come to us, you get the legal work and practical input in a single product.’
KPMG UK legal head Nick Roome says nearly all of the work it does with clients involves multiple KPMG service lines. He believes there is a big difference in today’s approach compared to when the accounting firms tried to break into law in the late 1990s, in that regulations have relaxed to allow law firms to operate within a multi-disciplinary environment, rather than standalone entities.
Deloitte used an external agency to conduct market research with nearly 400 in-house lawyers. Its global legal services leader, Piet Hein Meeter, says this identified a demand for more flexibility, diversity, agility and different pricing models from legal service providers.
‘In-house communities are getting much smarter around what you can buy,’ he says. ‘There’s more available in the marketplace. We want to integrate legal services where they make sense, for instance legal with risk advisory or tax advice or on a project, such as GDPR.’
Each stress the importance of their global footprints and reputation for implementing technological solutions, although Meeter concedes that finding the right people and ensuring a ‘common quality’ around the globe presents a challenge. Consulting legal teams on their design and operation is a growth area too.
And yet, the Big Four are rarely making it onto new external legal adviser panel arrangements at companies. The accountants argue their offering is still developing, while panel arrangements tend to run in cycles of at least three years, meaning the recent opportunities to land on mainstream panels have been few.
Meeter says at least ten multinationals have recently created alternative provider legal panels, however, which creates an opportunity for the Big Four: ‘There is a relatively small group of those providers compared to traditional law firms.’
Furthermore, while each is keen to talk up how much they are doing building GC relationships, the reality is that an easier way to secure work comes through other avenues where the firm has stronger relationships.
Roome comments: ‘Given that we operate in such a large multi-disciplinary environment, our routes into opportunities are far broader than you would typically see in a law firm, which means we often see things at different stages in a project cycle.’
He also believes the Big Four have a more convincing story when it comes to diversity and inclusion – an area some GCs view as a competitive advantage for the accountants.
Roome notes that KPMG is seeing an increasing number of requests to participate in panel tenders, but concedes many GCs do not yet understand how the accountants might fit: ‘A lot tend to approach panels the same way they’ve historically done, but we offer something that’s different. We’re not just going to step into the shoes of your panel law firm because that’s missing the point. We’re not going to be right for everything, but for certain projects we believe we’ve got a compelling proposition.’
A huge leap
Gregory at Rolls-Royce sees a market ripe for change, but notes this has not historically come quickly in law: ‘All of us in private practice, alternative providers, legal education, technology and in industry need to recognise we’re part of the same ecosystem, and there are inefficiencies. Models are changing and if people don’t then we’re going to find the disruptors come in.’
There is a market gap the GCs can see and the Big Four believe they can fill, but the two sides are not marrying up. Few GCs see much changing in the next few years – referring to the oft-cited criticism that the Big Four have been threatening legal disruption for decades without delivering.
Interestingly, despite the Big Four’s well-honed reputation for aggressive marketing, the consensus view is that the group have been surprisingly low profile in pitching GCs directly. One problem for the accountancy-linked firms is that the last ten years have seen GCs steadily erode the dominance of chief financial officers, weakening the ability of the Big Four to leverage their key contacts. Larger and more sophisticated in-house teams, particularly those with stricter contractual panels, are moreover harder to break into, even on the basis of strong C-suite contacts.
Could outsourcing entire legal functions be a means to break the impasse? Multiple GCs drew parallels between outsourced audit functions and the obvious pitch to offer the equivalent for corporate legal departments.
‘You could imagine they might start taking out the in-house legal teams,’ one FTSE 100 GC comments. ‘A lot of internal audit functions are about the same size as an internal legal function. It’s not a huge leap of imagination to say: “If you can outsource audit, why don’t you outsource your internal law function to a firm that you trust?” If you’re a finance function, you trust the Big Four.’
Deloitte’s Meeter says the firm is already talking to a couple of clients about just that, while Roome at KPMG concedes the opportunity, while downplaying any imminence.
But just because the case can be made it does not mean it will happen. Despite the frequent claims of ‘more for less’ pressure on GCs, in-house headcounts and budgets have broadly increased in recent years, while insourcing has proved one of the most effective means of saving money. Furthermore, few GCs are ready to instruct a provider that means gutting their own legal team. And even if there will be growing pressure for large companies to outsource more of their legal team, it is far from clear that it is the Big Four, rather than a law firm or alternative provider, that would benefit.
Other barriers facing the Big Four are myriad levels of potential conflicts given high degrees of industry consolidation, their unwillingness to pursue litigation for fear of antagonising existing clients and the fact that they are heavily restricted from the US legal market. The hard truth for the Big Four is that, as compelling as a one-stop pitch is, their very models stop them getting anywhere near that proposition in reality.
BT’s Fowler is unsure whether the Big Four will ever be successful but believes their relationship with the C-suite means it is unwise to ignore them: ‘You’ve got to at least have the conversation, because to not explore it when every other person in the organisation is seems short-sighted.’
But such formidable assets alone will not be enough. More than two decades into the Big Four’s advance, the legal industry is not going to simply fall for the group’s brand and global scale. They will have to earn it.
Behind the headlines – Recent Big Four moves in law
- Deloitte Legal announces a non-exclusive alliance with US law firm Epstein Becker Green to provide employment law and workforce management services to clients.
- PwC launches a ten-week legal tech incubator programme called Scale LawTech, based in London.
- EY announces agreement to buy the managed legal services business of Thomson Reuters, Pangea3. The acquisition will add more than 1,000 legal professionals across eight service delivery lines and is expected to complete in the second quarter of 2019.
- KPMG hires a 145-lawyer team from French law firm Fidal and launches a new legal consulting service in the country. The tax-focused team includes 26 partners and KPMG says it plans to eventually grow its headcount to more than 400.
- Deloitte hires Allen & Overy banking partner Michael Castle to lead its UK legal arm, after more than two decades at the Magic Circle firm.
- PwC extends its presence in the US through a partnership with immigration specialist Fragomen, which will see the two entities jointly market their respective immigration services in the US.
- EY acquires Riverview Law for an undisclosed sum. After launching in 2012, Riverview’s turnover had risen from about £200,000 to what analysts estimate is more than £10m. DLA Piper offloaded its remaining 14% stake as part of the deal.
- Deloitte becomes the last of the Big Four to enter the UK legal market, applying for an alternative business structure.