The Big Four accounting firms are moving more into the legal services market, competing with law firms on their traditional turf, according to a new report.
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Emerging markets have been a key part of the Big Four firms’ expansion in the legal services area. The report found 76 percent of their lateral hires in the legal industry since the start of 2016 have occurred in Asia and Latin America. The Big Four firms have been rebuilding their legal services businesses after retrenching in the wake of the Sarbanes-Oxley Act of 2002.
“What we’re seeing is indeed a big expansion by the Big Four into legal services,” said Nicholas Bruch, a senior analyst at ALM Intelligence. “In some areas that is a natural evolution of their existing business lines in audit work, tax, advisory or consulting. That’s obvious in places where the Big Four are providing legal services related to tax. It makes a lot of sense to begin packaging lawyers in with their tax advisors or their auditors. That’s something the Big Four have been doing for a long time, and it’s something that we’re seeing organic growth in.”
The report also found growth in areas such as labor and employment-related legal services. “The Big Four have fairly well developed services in areas related to labor and employment,” said Bruch. “They have large consulting arms. They have large immigration consulting teams, and they’ve bridged off of those strengths to provide legal services, which is a natural evolution of their existing business lines. The Big Four have particularly strong immigration teams, and are competing at the highest level with many of the labor and employment law firms, which have traditionally owned those markets.”
The report also found growth in legal services related to mergers and acquisitions from the Big Four.
“This is something that law firms are viewing as a major threat,” said Bruch. “M&A is a bread and butter service for law firms, one in which they make a fair amount of profit and revenue. The more worrying thing for law firms is they see a unique selling point in the Big Four. The Big Four are offering a sort of complete package, a merger in a box.”
Big Four firms will offer to do the advisory work upfront to identify the merger candidate and then bring in the tax professionals, along with the lawyers to do the due diligence to set up the deal, according to Bruch. They will then transact the deal, perhaps with the help of outside financial services companies, as well as do the post-merger entity cleanup typically performed by lawyers, along with the post-entity financial cleanup, traditionally performed by the accountants. They will then do the post-merger integration, which is usually done by the consultants.
“They’ll package it all into one, and that is a pretty compelling offer to CFOs, who like the idea of having one service provider who hopefully is giving them a slightly cheaper rate for these services because they’re getting all of the work,” said Bruch. “And we are seeing that kind of aggressive pricing by the Big Four. But more importantly it’s also more attractive for the CEO or business line leader. Instead of arranging with 15 or 16 different vendors, they can go to one partner who’s going to own the whole relationship and manage everything behind the scenes. That’s a very attractive deal, particularly in areas where it’s a run of the mill merger, under $500 million.”
The report didn't focus on smaller accounting firms, but it found particular growth in legal services for the Big Four outside the United States, where firms don't face restrictions from Sarbanes-Oxley. "This is the elephant in the room for the Big Four," said Bruch. "This is a global game in the legal market. The regulatory situation varies from country to country and region to region. You have situation in the United States where Sarbanes-Oxley looms large. Many lawyers thought Sarbanes-Oxley kicked the Big Four out of the legal market. That is wrong. In reality, what happened is the Big Four were kicked out of a certain range of services to their audit clients. That's an important distinction."
