The Big Four bogeyman has haunted the U.S. legal market for years.
Like any good horror movie villain, it’s shrouded in mystery. We don’t know when it’s coming, or exactly what will go down, but we know that a four-headed monster of Deloitte, EY, KPMG and PwC is coming after all of the legal work. And it might get really gory.
This is not the forum to unpack the web of ethics rules that currently prohibit accounting firms from practicing U.S. law. (Although it’s worth noting that as of January, Arizona allows nonlawyers to co-own law firms and legal service operations, theoretically paving a possibility for the Big Four to set up shop. Similar measures are reportedly under consideration in Utah, California and elsewhere.)
Instead, let’s look at the very likely scenario that within the next decade, the Big Four gets unleashed. What does that actually mean for your practice?
A Larger Trend
To be sure, the Big Four already dominate accounting. According to Audit Analytics, together they audit 497 of the S&P 500. They audit 49.2 percent of all public companies.
Their expansion into the legal market gained momentum in the 1990s, when – with the addition of the former Arthur Andersen – the Big Five fought for the ability to provide legal services in markets worldwide.
Then came the accounting scandals of 2001, which effectively ended Arthur Andersen. As a result, the U.S. enacted the Sarbanes-Oxley Act, prohibiting audit firms from providing certain non-audit services to their clients.
With the U.S. off the table, the Big Four grew legal services elsewhere. By 2011, according to Law & Social Inquiry, PwC offered legal services in 124 countries; Deloitte, 97; KPMG, 73; and EY, 29.
By 2017, PwC was the world’s sixth-largest legal services provider by headcount.
And by 2019, together they averaged more than 2,200 lawyers.
The momentum hasn’t stopped: In August 2020, KPMG said it could double legal revenues over the next five years. That same month, EY said it planned to double its legal managed services revenues over the next 12 months.
The laws and ethical rules for the U.S. market are complicated and diverse, but as Arizona shows, they’re far from permanent protection.
The Motivation
Speaking to the College of Law Practice Management Futures Conference, Ron Friedmann listed the Big Four (sorry) reasons the Big Four will can capture law firm clients:
- A multidisciplinary approach. As Friedmann notes, many “legal problems” are business problems, and accounting firms are more adept at assembling teams comprised of experts in diverse fields.
- Cost-effective but/and innovative. Decades of audit price pressure forced the Big Four to rethink their service models; they made significant investment in technology, project management, process management and knowledge management. This infrastructure garners higher quality output at a lower cost.
- Deeper relationships with the entire C-suite. Large accounting firms typically have a higher profile within an organization, cultivating relationships with the COO, CEO, CFO and CLO or general counsel….not just the Legal Department.
- Reduction or elimination of regulatory barriers. Friedmann notes that over time, the bar regulations that apply to high-end business-to-business work tend to accommodate corporate interests. The smart money is on rule changes that favor the Big Four.
Moreover, the Big Four does a significant portion of its work at a flat fee. Imagine a CFO or CEO trying to solve a problem with a legal component. Why not just have the accounting firm draw up an addendum to the scope of work it’s already handling at a fixed rate?
What’s Vulnerable
Or, more specifically, who is vulnerable?
The most prestigious corporate law firms are likely to be fine; general counsel still like the “boardroom cover” of a Skadden.
Niche law firms in premium spaces, such as litigation or intellectual property, likely to be fine; accounting firms cannot replicate a trial record.
And the national (and international) firms that already focus on value and innovation – such as the employment firms that embrace legal tech – are likely to be fine; they already offer efficiency and ubiquity, like the Big Four.
The most vulnerable firms are non-differentiated middle-of-the-pack firms. They lack the prestige to survive boardroom scrutiny. They lack the specialization that high-stakes matters demand. And they cannot compete on value proposition with more nimble, modern players.
What This Means for You
Is your work likely to be eaten by E&Y or devoured by Deloitte?
Consider these risk factors:
- Projects that are reoccurring. This work is worth an initial investment into the kind of process improvement that Big Four is adept at providing.
- Projects that are low-stakes or largely driven by a uniform process. This kind of decision-tree work lends itself to a more systematic approach than the comprehensive methods of a traditional law firm.
- Projects that generate from outside the Legal Department. CFOs and COOs already place considerable trust in the Big Four for sensitive and important projects – and well-established relationships on speed dial.
While we don’t know exactly when or how the Big Four will arrive in the U.S. legal market, you can start to play offense now.
You can fight the Big Four by fighting like the Big Four:
- Cultivate relationships outside the Legal Department. Offer value throughout the C-suite. The Big Four is masterful at providing value-added programming far beyond the confines of traditional accounting. For example, KPMG provides “CFO Real Insights,” a program that shares research, analysis and events for the finance function. On another level altogether, Deloitte offers a “Chief Executive Program” that offers, among other things, a “transition lab” to help new CEOs, COOs and business unit heads plan for success in their first year; a board effectiveness lab; and board placement assistance. How loyal to an organization would you be after they helped you thrive in a new role and fill your board?
- Break it down. Make a list of your most process-driven work. Truly break it down step by step: If A then B or C, if C, then D or E. Resist the urge to say it’s impossible; if Turbo Tax can automate the tax code for the federal government and all 50 states, you can decision-tree at least some of your legal projects. After this exercise, what could be automated? (Neota Logic’s case studies offer some ideas.) What could be streamlined or improved into a proprietary process?
Or you can avoid the fight altogether, and you need not be Cravath to do it.
As I mentioned, the arrival of the Big Four is not likely to threaten established niche firms. Successfully marketing a niche firm takes ruthless commitment to do one thing well. But the firms brave enough to focus their firepower on one discipline, industry or market – and to cultivate excellence within it – could go unscathed altogether.
Like any good horror movie monster, the best way to defeat this simmering threat is to outsmart it: The Big Four machines run on scale and repeatable processes; quality niche work is purposely specific.
If you are a generalist looking at the triple threat of insourcing, legal tech and the Big Four, perhaps it is time to be afraid, be very afraid. For the specialists and the niche firms, I’d encourage you to be the monster instead.