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Big 4 versus Big Law – how they match up in the fight for clients
With the Big 4 accounting firms clearly stating their intention to re-enter the legal market in Australia and elsewhere, Joel Barolsky examines the strategic match-up between the Big 4 and Big Law to assess who has the edge.
#1 Relationships
In the main, Big Law firms have long-standing and deep relationships with key buyers of legal services; that is, general counsel, in-house lawyers and regulatory compliance managers. The Big 4 are generally well entrenched with directors (especially non-executive directors), the C-suite, finance and risk managers.
At a simplistic level one could conclude that the lawyers will win the battle for pure legal work, while the accountants will get the lion’s share of tax, compliance, risk, forensics and investigations work. The likely outcome is probably dependent on who will win the corporate battle for managing risk and compliance. In some large Australian financial institutions, the chief risk officer is becoming a more senior role than the general counsel. In some big mining operations, the lawyers are having less say in managing critical risk issues such as safety. If the in-house lawyers are demoted or moved sideways, the Big 4 will have a field day. If they don’t, the accountants will need to offer something really special to wedge established Big Law relationships.
#2 Brand
PwC’s brand is augmented by having offices in 157 countries, employing more than 225,000 people and recording annual fees of just under AUD$50 billion. It is obvious that the PwC brand can open almost any door and get buyers to take notice of any new offer. A similar story goes for KPMG, Deloitte and EY.
Despite this brand strength, it has not been plain sailing for the Big 4 in all business service markets. In the global management consulting market, for example, McKinsey, BCG and Bain – known colloquially as MBB or The Big Three – are still thriving. They generally command a price premium over the Big 4 and top MBA graduates strongly prefer these strategy specialists for a career in consulting.
After decades of organic investment, PwC had to resort to paying top dollar to buy Booz & Company to make serious inroads into the high-value segment. Interestingly, PwC settled on Strategy& for its consulting business brand. It appears that PwC thought its own brand was a net negative in fighting the likes of McKinsey.
While the Big 4 have been able to grow their share of operational, run-the-company work, they have struggled somewhat in the bet-the-company, high-stakes strategic work. I predict a similar story in legal.
#3 Buyer preferences
The essence of the Big 4 value proposition is offering a one-stop shop: buy all your business advisory services from us and there will be lower transactions costs, a deeper understanding of your needs, more integrated advice, higher levels of service consistency, better coordination and greater convenience.
For some buyers this is a very compelling proposition, for others it’s not. Those in the latter category prefer ‘horses for courses’, especially when it comes to reputation-sensitive matters. They back themselves to pick out tried and tested specialists, rather than relying on one firm to wheel out all their colleagues. They feel it’s easier to hold a specific firm accountable (and sue-able) for their advice when it’s more discrete.
The strategic question to ask, therefore, is what is the relative segment size of one-stops versus horses? In my opinion, the horses win by a length or two.
#4 Conflicts
The Big 4 are just that. Four! This will inevitably put major limits on their penetration of the legal market. I was shown some recent analysis that listed the number of different law firms and freelancers engaged by the ASX50. The list had more than 300 names on it. I can’t vouch for the precision of this research, but intuitively it feels right.
One of the key reasons for this fragmentation is conflicts. Most legal clients are particularly sensitive to the same advisors being involved, directly or peripherally, on both sides of a transaction or a dispute. The threshold test of perceived conflict in legal matters is much higher than, say, helping competing companies implement an enterprise software system.
Similarly, it is likely that some divisions within the Big 4, such as corporate advisory, insolvency and consulting, will try to limit the growth of their legal teams for fear of disenfranchising their major external law firm referrers.
#5 Technology
The ability to identify, develop and implement the right process, collaborative and cognitive technology is fast becoming a critical success factor. With pockets 12 to 14 times deeper than the world’s biggest law firms, the Big 4 have some clear strategic advantages. They can outspend in R&D, acquire more promising start-ups, take bigger risks and deploy winning apps in far more places.
Some Big 4 practice areas such as audit and basic tax compliance have been commoditised for some time now. These firms have learned a great deal about how to design workflows, use technology and blend lower-cost offshore resources to do this work profitably. They are likely to be much better than Big Law at applying this know-how to commoditised areas of legal process work.
Notwithstanding these scale and experience disadvantages, Big Law firm have a few tricks up their sleeves. First, they are very profitable and potentially could be willing to sacrifice some short-term earnings for longer-term survival (note: ‘could’ doesn’t mean ‘will’). Second, advances in processing power, mobile and cloud-based systems may mean smaller firms can access market-leading systems without the risks associated with large-scale application development. And third, a $500 million firm is potentially more agile and market responsive than one of $40 billion (note: ‘potentially’ doesn’t mean ‘actually’).
#6 Recruitment and retention
For the Big 4 to make serious inroads into legal, quickly, they will need to poach some heavy-hitters from heavy-hitting firms. For some, this is a very attractive proposition. This is what a rainmaker in this camp might weigh up in considering the move …
“Being part of a Big 4 multi-disciplinary team means I can access a much wider range of business problems, work at more senior levels in client organisations and collaborate with specialists from outside the law. It’s much more rewarding work and the career prospects are far greater, especially for a partner. I’m in!”
Alternatively, others might be thinking …
“Going to a Big 4 means joining a new club. This new club is a lot, lot bigger and I will have even fewer decision rights. It will pander less to my specific needs given it already has dozens of heavy hitters. The new club will ask me to fit into their service style and product ‘packaging’. And what’s more, it’s run by bean-counters. Nah! I’d rather stay.”
In conclusion
My best guess is that the Big 4, in Australia at least, will not seek to become full-service legal firms, but rather have a suite of legal capability to support their corporate transactions, consulting, tax and advisory work. For conflict reasons, they will not attempt to develop in-house commercial litigation capability.
The major implications if the Big 4 go in this direction are:
- Big Law will maintain its dominance in corporate law, commercial litigation, banking, funds and real estate;
- competition for clients and top talent will be intense in niche and complementary practice areas such as employment, tax, insolvency and environment;
- there will be a major battle in the quasi-legal growth areas such as risk, cybersecurity, compliance, forensics and investigations. I predict the Big 4 will win the lion’s share given their C-suite relationships, scale, technology and brand advantages;
- the re-entry of the Big 4 in legal will grow the overall market for legal services. By complementing the Big 4’s multi-disciplinary teams they will demonstrate the importance of having lawyers involved in all elements and in all stages of strategic projects. Ironically this may, over the long-term, benefit everyone.
Joel Barolsky is the founder and managing director of Barolsky Advisors, a management consulting firm focused on strategy for professional service firms. He is also a Senior Fellow of the University of Melbourne Law School and inventor of the Price High or Low app.