The ‘Big 4’ Entry into Legal Services Industry: Threat or opportunity?

Article by Oluwabunmi Adaramola

In 1990, in the wake of the infamous Enron Scandal, the then ‘Big 5’accounting firms (EY, KPMG, PWC, Deloitte & Arthur Andersen) attempted to reformulate and re-strategise their operations and made a ‘concerned’ effort to move into the legal market. The collapse of Enron, described as ‘the fall of a Wall-street darling’, became one of the biggest and widespread financial scandals in history to date. Enron collapsed after news about its fraudulent accounting activities and ‘creative accounting tricks’ eventually led to its bankruptcy in 2001. This included concerns that the company was purposefully misclassifying and misreporting loans as actual sales. After Arthur Andersen was convicted for failure in its professional responsibilities when auditing Enron’s financial statements, the company eventually became dissolved with most of its businesses sold to the Big 4. After the collapse of Arthur Andersen, the now ‘Big 4’ firms are continuing to gain ground in the legal services industry in order to redefine the nature of services it provides. This article attempts to examine the continuing entry of the Big 4 into the legal market, regulatory concerns and the overarching question: Will private practice and large law firms lose out to the Big 4?

The legal services industry is rapidly changing, with this being attributed to the introduction of the Legal Services Act 2007. According to many legal professionals and theorists, this Act has done everything to ‘liberalise’ the legal market, making it open and easily accessible for non-lawyers and non-legal specialists. For instance, this Act has led to the rapid entry and growth of new Alternative Business Structures (ABS). Alternative Business Structures are often described as a system that allows non-lawyers to own a financial stake in a law firm. The introduction of these new schemes poses challenges to the traditional legal market, such as private practices and in-house legal departments, due to the high amount of newcomers emerging. Alternative Business Structures are now gradually expanding the range of legal services that are available to clients. ABS further provide new ways for legal work to take place, introducing advanced flexibility for lawyers in the future. Importantly, it also provides a more attractive service for clients in the legal services industry as they would likely benefit from a cheaper service.

The Big 4 has become a ‘one-stop-shop’ in the services sector, and have emerged as an ‘Alternative Legal Service Provider’, offering consultation, auditing and legal services to their clients. This is usually because of their grasp of technology as well as a diverse range of talents with excellent commercial awareness. Combining these key features, Alternative Legal Service Providers (ALSPs) are able to effectively deliver legal services in a way that is cost-efficient and best suited to their clients’ varied needs. Some commentators assert that the services of the Big 4 compete with traditional legal firms often range between regulatory and compliance services and Due Diligence for M&A purposes.

2019 has seen the growth and predominance of the Legal arms of PWC, Deloitte, KPMG and EY, with PWC Legal having the largest arm with 3,600 lawyers. This is estimated to be even more than the number of lawyers in certain international city firms. This volume is closely followed by Deloitte’s 2,400 lawyers, with EY and KPMG hiring lawyers in over 70 jurisdictions. It is estimated that the use of these alternative legal service providers became even more popular from 2017 onward, as their corporate use grew at a faster rate than predicted. Why are Alternative Legal Service providers in high demand within the corporate world for legal services? Over the years, the Big 4 have successfully been able to position themselves as general business advisers. This means not just offering consultation or auditing services, but also offering a multidisciplinary approach to provide more practical solutions for existing clients and also to attract more clients. This multidisciplinary approach is derived from the way they employ machine learning, other forms of Artificial Intelligence and digital solutions to provide legal services to clients.

This entry has raised the eyebrows of the financial regulators with a recent call for the imposition of legislation which would reduce their dominance. This would mean separating the audit roles of the Big 4 from the other services it offers in a bid to ensure that there is no monopoly in auditing and consulting (including legal consulting) services market. This is to allow them to focus on their auditing responsibility to ensure the best results, especially in the wake of the Enron scandal. This means that legal services offered by the big 4 would fall under the reputation the Big 4 already has and would be considered as a form of independent legal service provider. This decision has been met with some resistance from the industry the big 4 operates in, whilst being closely watched by the legal services industry.

Regardless of this new development within the legal services sector, traditional law firms have stepped up and seen this development as an opportunity to expand and diversify the legal services they offer to clients. Traditional Law firms still enjoy the benefit of their specialist expertise in comparison to the new entrants into the legal market. As such, they are able to provide a tailored approach to the client’s needs to provide a more tailored solution. Importantly, the revolution of technology in many industries had led traditional law firms to assess the nature of the services they provide and adopt new technologies to provide advanced solutions to clients needs. One of the most significant changes in the legal industry is the level of investment many international firms are putting into legal tech start-ups. This allows law firms to take advantage of existing technology to provide a differentiated approach to clients’ needs. Many international city firms such as Allen & Overy, Pinsent Masons and Linklaters are investing in legal tech start-ups, allowing them to attract new and more work from tech-oriented clients. Technology that was once considered a negative disruption in the legal sector have now been embraced, with many international law firms at the forefront of developments in legal technology.

Another opportunity the traditional legal market has grasped to stay ahead of ALSP and ABS competitors, is investing in a diverse pool of talents. This involves, but is not limited to, hiring  tech specialists or individuals with a technology background as well as many graduates with science backgrounds. Some law firms like Clifford Chance offer training contracts specifically for students and graduates with a technology background to ensure diversity in the way it operates as a business and offers services to clients. This allows them not only maintain the specialist expertise traditional law firms and private practices are known for, but also expand into new areas of specialism.

Overall, the entry of the Big 4 in the legal market has been received as an opportunity for growth, development and expansion within traditional private practice law firms. This has further allowed law firms to consider more innovative and creative ways of providing service to clients to equally provide a multidisciplinary approach to client’s business needs.