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The Big 4 Are Putting Down Roots in the Legal Sector

May 12, 2015, 2:18 PM

Editor’s Note: The author of this post is a partner at the Australian-based Beaton Capital, a law firm and professional consultancy.

By Warren Riddell, of Beaton Capital

Can the Big 4 succeed in law this time?

Any coyness about the Big 4 returning to law has been lifted. They are all at it again – at least outside the United States. So what has changed? Or will it all end in tears and as it did more than a decade ago?

[Image “Warren Riddell data table” (src=https://bol.bna.com/wp-content/uploads/2015/05/Warren-Riddell-data-table3.png)]

Scan the press and you’ll find PwC making the statement they aim to be in the world’s top 20 law firms by size, EY indicating law is an important factor within their strategy to be a $50 billion business, Deloitte steaming on, and KPMG recently declaring their strategic focus for law would be aligned to tax.

The legal services market is different this time round

Firstly, the market for legal services has irreversibly changed. The secular shifts in the market should not be confused with surfing the inevitable business cycle. The most profound change is in the power and behavior of the client.

We have seen a shift from a sellers’ to a buyers’ market typified by the following: the rising power of the general counsel, the shock to buying patterns caused by the financial crisis, the international business law firms (IBLs) that are opening up the global market and are very often competing on price, and the start of the disintermediation of legal services by LPOs and the alternative business models like Axiom. All these are fragmenting the bond of ‘relationship’ between traditional firms and their clients. As a result, clients now recognize they have both realistic choices and can mix-and-match service providers, playing to the favor of the Big 4.

Second, the frenzy for lateral hiring is a destructive process that weakens partners’ relationships with their clients. My colleague George Beaton addressed this in his blog on free-agency, which can be found here. The very fact that a partner believes he or she can collateralize client relationships to bargain a better deal in a different firm inevitably means power will shift from the partner to the client. It also implies the transportability of clients, so clients themselves realize that they are not tied to any particular partner or firm. The ‘lateral’ phenomenon is further opening clients’ eyes to the choices they have.

Third, the pool of legal talent is providing the resources to allow the alternatives (aka substitutes) to flourish. Yes, the leading law firms are still picking the top talent, but there remains sufficient top talent who are prepared to work under different rules, be it within a client, with a labor hire firm or with a new model specialist ‘NewLaw’ firm. None of these NewLaw models (anywhere in the world) appear to have any problem in hiring strong and competitively experienced lawyers. And in this new market, the Big 4 have been actively hiring lawyers from established law firms to expand their legal practices.

Asian market in play

Then there is the Asian market. Word has it that most international law firms are still struggling to make a profit in Asia as they try to apply a western business model and fail. But law firms cannot afford to not be in Asia – its importance to the global community is undeniable. This is where Big 4 law will almost certainly steal a march on traditional law firms. They have navigated these markets with considerable success for many years, they have the business model to make it work and they have the scale to be meaningfully present.

Disintermediation along the value chain

Lastly, disintermediation of traditional BigLaw business model firms is happening at many points in the continuum that constitutes the value chain in legal services. This includes legal research for matters using AI, discovery for litigation using LPO, arbitraging labor rates using offshore providers (captive or independent), accessing top talent on a just-in-time basis using firms like Axiom or Lawyers on Demand in the U.K., or using global specialists such as litigation-only firms like Quinn Emmanuel or deep sectoral specialists, or firms that empower clients to outsource legal services like Riverview Law.

The Big 4 have matured too

Where does this leave the Big 4? They are resourceful and generally run by businessmen and businesswomen who have already established a track record of growth and success, and are trusted by their clients. The Big 4 have already re-invented themselves to capitalize on labor rate arbitrage with centers in Asia.

Over the past decade they have grown far beyond the service offerings they had at the end of the last century, they understand how to balance investment and growth with brand permission, recent moves into high-end strategy, specialist technologies and aspects of consulting engineering appear to have been successful. The Big 4 command a place advising the ‘C suite’ on interrelated complex business issues and insights, and now it appears those ‘C suite’ clients have granted them permission to offer legal services too.

Can the Big 4 succeed in law this time?

Critically from a globalizing perspective, the Big 4 have now established international profit sharing, and cost and pricing structures that underpin their globalizing business models, which allows for coordinated international investment on a scale that leaves law firms well in their wake. Importantly, many international law firms are still wrestling with an effective international business model. And until they get this right they will be at a competitive disadvantage to the Big 4 – particularly the IBLs and large generalist national law firms, who are most vulnerable to the rise of Big 4 law.

But will the law of diminishing returns kick in sometime – how big can the Big 4 become before that very benefit becomes a negative? How will the expanding issues of conflict be resolved and will another crisis of confidence of the professions bring it all tumbling down just as it did in 2002 culminating with the Sarbanes-Oxley Act. The Big 4 now have political muscle, they have matured over the past dozen years or so and have been deft at managing political and bureaucratic criticism and pressure, be it within the E.U. or the U.S.A. It seems unlikely they would be taking this path if they foresaw an insurmountable regulatory barrier.

Will it end in tears again?

So how will this end? Some 15 years ago the Big 5, as they were then, thought they could buy their way into law by hiring laterals on guaranteed drawings and that the clients would come. Was it really successful? Well it depends on the metrics you choose to use, but most of the Big 5 had not recovered their investment by the time the shutters came down. And in many jurisdictions the blue ribbon clients had remained loyal to strong local branded law firms. This time the Big 4 have an opportunity to be part of the generally accepted disruption that is transforming legal services – they smell blood and changed client sentiment. So will they capitalize on this opportunity and create true differentiation and client related smarts and be part of the NewLaw wave, or will they merely be another BigLaw alternative providing multi-disciplinary services to their large clients?

This time they are here to stay, but don’t hold your breath waiting for anything really new.

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