A very legal coup: the accountancy giants

By 2018 The Lawyer UK 200 is likely to have a new member of its £100m+ revenue club, and it won’t be a law firm.

PwC is targeting this benchmark aggressively. Indeed, it is already well on the way to achieving it. And its growth trajectory, both in the UK and internationally, underlines the fact that both size and resources matter.

By the end of its current financial year on 30 June the UK legal arm of the world’s largest accounting firm will have a UK turnover of around £50m. Profits will also be up by double digits. And headcount will have grown in a similarly fast-track manner.

Two years after that PwC expects its UK legal services revenue to have hit £100m. By then, globally, it should be well on track to being one of the world’s top 20 legal services providers, with a revenue of around $1bn and the accountant’s stated aim by 2019.

Worried?

The continuation earlier this month of PwC’s campaign to recruit leading UK lawyers shows it has no intention of slowing down its growth in the UK. The latest senior lawyers to jump ship from a traditional law firm were DLA Piper pensions specialist David Farmer and Osborne Clarke corporate lawyer Thomas Colmer, who joined this month.

Of course PwC is not alone. EY, which launched a legal services ABS last March, is also in growth mode and has also brought in new talent this month. Richard Goold, co-chair of tech at Wragge Lawrence Graham & Co, also joined this month to help kick-start the nascent firm’s fintech practice.

Meanwhile KPMG’s legal services team, which is structured as a fully integrated multi-disciplinary practice rather than an associated ABS, is also growing.

While neither of these two have the scale yet of PwC, what is obvious is that these three deep-pocketed professional services giants are serious about developing their legal services arms in the UK and around the world.

What also seems apparent is that they have tapped into both a need on the part of clients and a desire on the part of traditional law firm lawyers to offer something bigger, broader and potentially better. What’s more, they are just getting started.

PwC and the benefits of MDP

In January 2014, PwC’s legal arm, PwC Legal was granted an ABS licence. Since then, growth has accelerated. At the 30 June 2013 financial year-end turnover stood at £35.1m, rising to £35.6m in 2014.

Fast-forward a year and revenue for the UK legal arm had increased by 15 per cent to £41m for 2014/15. This June the firm is on target for a £50m turnover, an 18 per cent rise, while a £100m turnover is targeted for 2018. Profits, while not disclosed, are also understood to have risen by double-digit percentage points during the current year.

Senior partner Shirley Brookes says this growth has partly been driven by an uptick in the M&A markets as well as the firm broadening its service offerings into areas such as financial services. In fact, financial services has been marked out as a particular growth area for PwC Legal, with the ABS currently in the market for what Brookes describes as “a big-hitting” lawyer to kick-start this practice.

The current practice groups include several of the usual areas such as corporate, employment and real estate. It doesn’t handle commercial litigation to avoid suing PwC clients, which currently consists primarily of FTSE 100 and Fortune 500 companies and, particularly for immigration work, global banks, but it is currently working on building up referral relationships with law firms that will sue clients.

It also has some less typical practice areas, at least in terms of traditional legal services that, according to Brookes, play to PwC’s strengths.

“Big-ticket immigration work, governance and compliance, and cyber are the main ones,” she says. “And the key to all of these practice areas is the integration with PwC, the multi-disciplinary practices (MDP) element. That’s also a big part of the sales pitch with potential laterals. Our lawyers always try to go out with the full MDP offering which to them means they’re not competing directly with the big law firms because they don’t have these capabilities.”

“Financial services is a particular growth area and we’re currently in the market for
‘a big hitting’ lawyer to
kick-start this practice”

The sales pitch for potential laterals is pretty simple, says Brookes. Most partner candidates are looking to do something different as well as build a practice, she says. They like the integration with accountants, cyber specialists or forensics and so on because they can offer all this as a one-stop-shop to their clients.

Clearly this idea is nothing new, and indeed PwC Legal has been around for years prior to securing its ABS (see timeline, page 22). But maybe the world has changed and clients are now looking for something different from last time? As Brookes puts it, these days buyers are simply looking to get the job done, regardless of the shape of the provider, while the ABS gave PwC Legal a shot in the arm in terms of profile.

A common theme among all three of the Big Four providers is the extent to which they are targeting growth not just in London but also in the regions. PwC currently has Birmingham and Manchester in particular in its sights.

“In the UK we have a total headcount of more than 300 and 34 partners,” says Brookes. “The fee-earners are mainly in London but we have smaller teams in Manchester, Birmingham and Belfast. This year growing Birmingham and Manchester in particular will be the focus.”

Total headcount should be around 21 per cent up this year including the partners PwC has hired over the past 15 months from the likes of DLA Piper, Osborne Clarke, Fieldfisher, CMS, King & Wood Mallesons and Stephenson Harwood. Since July last year it has hired eight partners.

Further back, in October 2014 Addleshaw Goddard corporate partner Neal Shepherd joined PwC in Manchester with a remit to grow the coverage in the regions. Other major hires that year included McDermott Will & Emery London corporate partner Mark Crofskey, who joined the M&A team in September, and former Fieldfisher data privacy and security partner Stewart Room, who joined in August the same year.

Clearly size is intended to be a differentiator for PwC. Another factor when it comes to standing out from traditional law firms is leverage. PwC’s corporate group has 55 fee-earners including 11 partners. In employment there are three partners and 16 other fee-earners, while in immigration there are just two partners to 110 additional fee-earners.

“This is all about making sure we’re putting the right level of fee-earner on the right bit of work,” says Brookes.

EY and lateral hires

EY has also been busy making a noise, partly driven by some big laterals, in the UK legal market.

It was granted an ABS licence in December 2014. But even before that date the accountancy giant was targeting building a hefty UK legal services presence.

It sent waves through the profession when former Berwin Leighton Paisner (BLP) finance chief Matthew Kellett joined as head of financial services in April 2014 followed in June by Freshfields Bruckhaus Deringer global people partner ­Richard Norbruis, appointed as global transaction law head.

Then Addleshaw Goddard corporate managing partner Philip Goodstone joined as legal services business head in September 2014 while EY appointed former Olswang employment head Daniel Aherne as employment law chief.

Additional hires to the financial services team at EY included financial services partner Steven Francis from Baker & McKenzie and former Weil Gotshal & Manges head of private funds regulation James Gee.

The firm also announced in 2015 that it would establish a ‘legal transaction’ team in Manchester when former Addleshaw Goddard managing partner Paul Devitt along with fellow corporate partner Richard Thomas join this year.

As with its peers in the accountancy sector, EY Law aims to give existing clients access to a range of legal services. And like PwC, it is making no secret of its ambitions.

As far back as December 2014, EY global law leader Cornelius Grossmann told The Lawyer, “having a presence within the UK legal market is an important step as we continue to grow globally. The granting of an ABS will complement EY’s already established multidisciplinary law offering as we expand our network internationally”.

“We want to offer a much broader range of services than private practice”

To that end EY has created legal teams in ­Mexico, Costa Rica, Singapore, China, Vietnam, Australia and New Zealand and intends to have a presence in more than 80 jurisdictions by 2017.

Back in the UK the laterals continued this month. On 8 February EY announced the appointment of Richard Goold, the co-chair of tech at Wragge Lawrence Graham & Co and previously head of the firm’s US sales team, as a partner to lead and grow a legal tech team and continue to support the firm’s wider tech and fintech ­practice.

The business already had rock-solid technology credentials in the form of Matthew Whalley, BLP’s former head of risk and the man most closely associated with that firm’s development and use of artificial intelligence-type products, notably RAVN Systems’ ACE product which uses so-called real estate practice-related “contract robots”.

Kellett and Whalley, who joined last month, worked together at BLP, which means the former was very aware of the latter’s skill set before he joined EY. Specifically Kellett says Whalley will be working with EY’s Forensic Investigations and Disputes division, which has its own technology, to develop a legal risk platform.

“The platform here is different,” says Kellett. “Yes, we have some traditional legal services. In financial services and banking clients are certainly concerned about legal issues but also about mapping the universe of legal risks. Matt’s here to build a legal risk platform to help clients deal with those risks.”

Goodstone says the reason why a growing number of senior lawyers at major law firms are attracted to the likes of EY is clear. And it is a reason that is becoming something of an MDP mantra.

“We’re looking to build a fully integrated professional services team,” he says, “and we think that is advantageous to the client. We want to offer a much broader range of services than private practice.”

Indeed, according to Goodstone, EY’s ambitions are unmatched by any of its rivals.

“Our mission? To be the most integrated provider of legal services. We’re on the same floor, we go to market together, we don’t brand ourselves as EY Law. We’re EY.

EY’s current core areas include corporate, technology, M&A, employment and commercial. It is also looking to build a competition practice, with hires in this area expected imminently.

“Also we’re looking to build a long-term, sustainable business and careers. It’s not a separate business. All of us are part of EY. We’re in a growth phase. The practices will develop over time but the focus is on bulking out the multi-disciplinary practices and how we deliver them.”

Goodstone says that a range of areas such as EY’s structure, career trajectories, training and recruitment policies all support this integration of its offering.

“Unless there’s a regulatory reason why we can’t do it, we’ll do it,” adds Goodstone.

KPMG’s integration route

KPMG’s approach to the delivery of legal services, while clearly similar, is also different from that of PwC and EY.

KPMG was awarded an ABS licence on 1 October 2014, which enables it to operate as a multi-disciplinary practice. The SRA licence applies to KPMG LLP (as opposed to a separate legal business), which enables it to deliver an expanded range of focused and integrated legal services to clients, complementary to its existing business. Importantly, it also means that partners and staff working in legal services are partners of and/or employed by KPMG LLP.

In other words this means that the client offering is entirely integrated into KPMG as opposed to being offered via a separate legal business that is owned by the main firm via an ABS, which is then licenced and regulated by the SRA, as in the case of PwC and EY. From KPMG’s perspective this structure is an indication that the key word “integration” is even more central to it plans than at PwC or EY.

“We want to wrap legal around what KPMG does,” says KPMG partner Gary Harley, who has been tasked with spearheading the business. “We’re not looking to create an independent law firm that goes head-to-head with other firms. Because of the regulatory changes we now have the ability to have a genuine, fully integrated MDP. We are all integrated, all of our partners are partners in the LLP. Our [UK chairman and] senior partner Simon Collins has spoken about us all being one firm and bringing together the functions. Ultimately that means that the strategy in legal is the same as in the whole business.”

Harley says the sales pitch to potential laterals is equally attractive as at his rivals.

“We’re building out so we tell people that this is their opportunity to join what is effectively a start-up but one that is part of a multibillion-dollar business. And you can be at the vanguard of that. I think it appeals to great lawyers looking for something different, the culture is extremely entrepreneurial and fresh.”

“We want to wrap legal around what KPMG does”

Harley also argues that the fact new joiners will be able to offer their clients a broader range of services than at their current firm is not necessarily the reason for coming on board.

“I think it’s more the excitement, the chance to leverage a truly global brand and the very diverse portfolio of business that KPMG handles,” confirms Harley. “We’re genuinely not looking sideways in terms of comparing ourselves to law firms. We’re part of KPMG. We’re not building out a law firm here but building an integrated business.”

In term of the UK legal work KPMG currently handles, its main areas include corporate and commercial, employment and immigration. Then there is tax litigation, one of its biggest and best-known areas. Indeed, KPMG has one of the largest tax litigation practices in the City, with 26 fee-earners covering indirect, corporate and private client taxation matters.

Harley describes this as a “natural addition” to KPMG’s tax advisory business and one that is likely to continue growing.

In terms of the practice overall the plan is to “invest deeper rather than broader”.

“You need bench strength and capability if you’re going to wrap legal around other services,” says Harley. “You’ll be more profitable if you have a narrow waterfront.”

That said, KPMG’s growth plans are no less dramatic than its rivals’. Hartley says turnover grew by 40 per cent in the first year, exceeded its £10m target and is currently looking for a similar rate of growth in the current year.

In terms of profitability Harley prefers not to go into too much detail but says the financials were “earnings enhancing” from day one and “hit the metrics we’d expect from a KPMG service line, adding that the “cost of sale was reduced because we have been leveraging the KPMG brand and service offerings”.

And as for partner/fee-earner leverage, Harley says this tends to be along accounting model lines, with areas such as immigration in particular being process and technology-enabled.

Like its two closest rivals KPMG is also building a national practice, and a regional roll-out is already pencilled in. The firm currently has a 15-lawyer team in Manchester working under former DLA Piper partner Nick Roome, who joined KPMG in May last year. The aim is to duplicate that in regional centres across the UK through lateral hires.

KPMG has 22 domestic offices outside London, including bases in Birmingham, Bristol, Leeds and Liverpool and is home to around 88 fee-earners and four partners.

“We’re looking to build a nationwide capability, which means breaking into new cities while continuing to invest in London too,” confirms Harley. “A hub in the south is the obvious gap, so that could be somewhere like Bristol or Reading, possibly in the next 12 months.”

Irrepressible force

In March 2014 PwC Legal global legal services leader Leon Flavell told The Lawyer that the firm was targeting global revenues of $1bn by 2019. If successful, the firm will be one of the top 20 global legal players.

If that doesn’t get you thinking then try this. At a recent roundtable chaired by Adam Smith, Esq’s Bruce MacEwen on the topic of the rise of the Big Four, and specifically whether their approach to legal services would ever reach the shores of the US, an audience member who worked for one of the Big Four volunteered a number of tidbits.

While these arguments were all focused on the question of whether the accountants would, as the saying goes, ever break the States, they serve as a proxy for these global businesses’ ambition and chances of succeeding.

The audience member, who preferred to remain anonymous, pointed out that the firm they worked for was far more global and in far more cities and countries than the most far-flung law firm. In addition it was already in, or has an immediate entrée to, essentially every Fortune 1000 company, through one or more of the doors of audit, tax, and consulting.

Its brand could hardly be more widely recognised, and as a corporation, it not only had the luxury of being able to invest retained earnings, but could also reward its top performers with stock options and not just current ordinary income.

The kicker, or as MacEwen puts it on his blog, the “most fascinating and powerful” argument of all came last: “When we decide to target an industry – be it technology in San Jose, or autos in Detroit – we can assign 10,000 professionals for an entire year to build up process maps, workflow diagrams, analytic tools, and so forth, and to build a deep and rich resource in thought leadership; this is not viewed as extraneous or peripheral in the least, but is in fact a standard part of one’s career path. These professionals are then plunged back into client relations in the targeted vertical.”

Put simply, at least as far as this insider is concerned, the rise of the accountants is only a matter of time, a position with which MacEwen wholeheartedly agrees: “I believe it is inevitably in the cards not just thanks to the dynamics of markets – ‘don’t fight the tape’ is an old Wall Street mantra – but it embeds the identical logical notion that markets will have their way.”