The advent of alternative business structures has given the Big Four accountancy firms a golden opportunity to have another crack at the UK legal market. But what are they offering and how much of a threat do they pose to law firms? Caroline Thorpe reports

Should you believe the hype? It began last year with headlines such as 'The accountants are coming!' running above tales of the Big Four accountancy firms muscling in on the legal market. And they have kept on coming, fuelled by the drip drip of news about a partner hire here, a new team launching there.

We have, as the saying goes, been here before. In the mid-1990s the world's accounting giants started establishing legal arms in an effort to increase revenues after growth by merger had been exhausted. The UK was no exception: by 2001 Arthur Andersen was operating Garretts under its global Andersen Legal brand; PricewaterhouseCoopers (PwC) ran Landwell; EY – bolstered by a 1999 six-partner raid on PwC's outfit – boasted Tite & Lewis; and KPMG offered KLegal. Of the then Big Five, only Deloitte remained without a UK legal offering. Global legal headcounts were in the thousands.

In Britain the accountants mainly targeted mid-tier and regional firms. "You did find a lot of large team moves," recalls one industry observer. Garretts launched a tie-up with Dundas & Wilson (now part of CMS). The City office of legacy McGrigors rebranded as KLegal, itself the product of yet another raid on PwC's legal arm. The accountants' legal ambitions varied. Some focused on regional offices and practices that complemented their core businesses. The aim of others, such as PwC and Andersen, was to develop City practices.

Then Enron happened. The 2001 collapse of the Texan energy corporate following its systemic use of accounting fraud clobbered the Big Five's legal ambitions alongside their wider reputation. A US court convicted Andersen, Enron's auditor, of obstruction after it was discovered that staff had been ordered to destroy Enron-related documents while authorities investigated the collapsed company. The firm was banned from auditing public companies, its 28,000 headcount swallowed up through a rescue merger with Deloitte.

Andersen Legal was omitted from the Deloitte deal. Garretts, then 200-strong, was dissolved. Elsewhere, the remaining Big Four picked up some of Andersen Legal's overseas firms. But expansion would not last. Global regulators – following the lead set by the US Sarbanes-Oxley Act – rewrote the rules, placing restrictions on accountants' ability to earn non-audit fee income from their audit clients to prevent their auditor independence being compromised. Accountancy firms' legal efforts were being stymied.

By 2004 EY's five-partner UK legal arm had moved to legacy firm Lawrence Graham, PwC's Landwell (which rebranded as PwC Legal in 2006) increasingly distanced itself from its accounting parent and KLegal's global network of 3,000 lawyers had disbanded. At the time, KLegal's UK head, Nick Holt, told Legal Week: "This is the best solution to the unworkable regulatory environment that we have found ourselves in."

Bulking up

A decade on, they're trying again. This year began with UK frontrunner PwC Legal (see below) signalling its ongoing commitment to legal services by becoming the first Big Four firm to establish an alternative business structure (ABS) – allowing PwC to take direct ownership of the 250-lawyer legal outfit and with it the promise of increased investment. Indeed, this month saw the arrival of Stewart Room, formerly of Field Fisher Waterhouse, to head the firm's nascent cyber security and data practice. Recent international hires include former King & Wood Mallesons Australia head Tony O'Malley and M&A and tax head Tim Blue, brought in to spearhead legal services expansion across Asia-Pacific. PwC wants to double the number of lawyers working in the region by 2019 as part of a global strategy to increase legal services revenue to $1bn (£600m).

EY meanwhile has recruited more than 250 lawyers worldwide since January 2013, bringing its headcount to 1,100, in over 50 jurisdictions. It hopes to add 20 more countries by 2017. EY UK has been doing its bit, though has yet to establish an ABS. Recent developments suggest it may do soon. Three partners arrive this month: Philip Goodstone, formerly managing partner at Addleshaw Goddard; Matthew Kellett, ex-finance chief at Berwin Leighton Paisner; and Dan Aherne, former head of employment at Olswang. "The appointments have been made with a view to building a legal capability in the UK, subject to regulatory approval," states an EY spokesperson.

KPMG is similarly poised. It has around 1,000 lawyers in 45 countries. Of those, approximately 50 fee earners are based in its UK legal services arm, which sits in the firm's tax and pensions practice. Most are in London, but this spring KPMG hired Nick Roome, formerly a corporate partner at DLA Piper, to lead KPMG's team in the north of England. Roome makes the partner count three. "We continue to recruit to support our legal services practice," says a spokesperson.

Deloitte alone lacks UK ambitions. Despite media reports to the contrary following comments made by the new global head of Deloitte Legal earlier this year, a UK spokesperson is emphatic: "We have taken a conscious decision not to expand our presence in the UK legal services market at this time." The global picture better matches its rivals: Deloitte Legal is hiring from Hasselt, Belgium, to Hyderabad, India.

Momentum is building. And there are reasons to believe that, 10 years after their last legal push, the accountants may now have more staying power. Regulations on law firm ownership are becoming friendlier and more familiar, changing business models better accommodate legal services and, as ever, the need to grow revenues remains. So can these, and the type of legal services the accountants intend to provide, ensure that this time things will be different? 

New landscape

According to Peter James, head of regulatory policy at the Institute of Chartered Accountants in England and Wales and a former PwC director, the introduction of ABSs was a game changer. Until the Solicitors Regulation Authority issued its first ABS licences in 2012, "the 'closed shop rules' that applied [to organisations providing legal advice that weren't law firms] meant accountancy firms couldn't work dynamically because they had to be treated as second-class citizens", says James. "ABS now allows parity."

"ABS is very significant," agrees James Bullock (pictured below), head of litigation and compliance at Pinsent Masons and a former KLegal partner. "Leaving Enron aside, one of the big challenges in those days was the inability to share fees – so the tied legal practices were always left feeling a bit like poor relations – which gave rise to a certain amount of tension. ABS should go a long way to enable them to be much more integrated." 

Shirley Brookes, PwC Legal senior partner, says converting to an ABS was "a no-brainer", and she would welcome her Big Four rivals following suit: "It will only be a good thing for us. The more ABSs there are, and the more clients look to the accountancy firms for legal services… What we're offering doesn't seem too different any more if it gets clients thinking 'I've got more choice.'"

And what clients those are. In the UK alone the Big Four audit 99 of the FTSE 100 constituents, and 236 of the FTSE 250 (see table). In theory this line-up limits their ability to provide legal services, since post-Enron regulations such as Sarbanes-Oxley prevent them from selling non-audit services to audit clients, to avoid compromising their independence as auditors. The accountants, however, have adjusted their business models to increase their capacity for non-audit work for non-audit clients. For example, Financial Reporting Council data shows that, between 2009 and 2013, the Big Four grew UK income from non-audit clients from 60% to 66% of total fees. Over the same period their audit clients provided a reduced proportion of audit fees (24% down to 22% of total fees) and non-audit fees (16% down to 12%). They are, in effect, increasingly providing non-audit services to everyone else's audit clients.

"The Big Four have been developing their non-audit businesses where those [restrictive] regulations don't apply," confirms Tony Williams, principal at Jomati Consultants and one-time worldwide managing partner of Andersen Legal. "These are big organisations. They have a level of access with the major corporates, predominantly through the chief financial officer… It's clear that they are reassessing the market with renewed rigour and vigour. I don't think law firms quite realise the clout and resources that the Big Four have."

Certainly their means outgun anything the law firms can offer (see tables). Williams predicts the accountants will use these to offer 'one-stop shop' legal services. "The key will be where they can offer a completely integrated offering; for example tax, finance and corporate advice." 

But Williams adds: "They may be much more cautious about litigation." 

This certainly reflects PwC's model to date (see below), including Brookes' admission that litigation, which PwC Legal does offer, can occasionally present conflict issues. "Do you really want to be suing an important client of PwC? Probably not."

EY also highlights its multi-disciplinary credentials. "For example, we offer transaction law capabilities in connection with transaction advisory services and transaction tax services," says a spokesperson, adding that the developing UK practice "would complement EY's existing service offerings". Conversely KPMG only handles advisory matters, though in the past two years it has expanded beyond its traditional tax litigation work to connected areas, including corporate and commercial, immigration and employment law.

Navigating the pitfalls

The Big Four must tread carefully when managing relations between their legal arm and other divisions. "Last time round this was a real challenge, in part because of the ban on fee sharing," recalls Bullock. "There is a potential tension in that law firms are in essence 'advocating' a position for their clients (even when giving non-contentious advice), while at their core Big Four firms are still culturally auditors that have to present a measure of independence to the financial markets." 

One industry observer questions the Big Four's current cross-selling capabilities. "The accountancy firms are exponentially larger than even the biggest law firms and as such less nimble; they do not yet appear to be cross-selling to the extent they should be able to. Once they do, they will present real competition to law firms."

They add that the accountants are some way from winning the choicest mandates. "The investment banks would never consider having the legal arm of a Big Four firm on a large takeover of a public company, like an AstraZeneca-type deal," they argue. "They just don't have the big M&A names that would be acceptable to the large banks. They just wouldn't be of the required calibre, unless they did a merger – that's feasible and it would be transformational for their reputation."

Bullock adds: "Where the Big Four have their best shot at this is with the more 'commoditised' legal work – which often fits well as an adjunct to more general or business consulting advice – so it is an easy sell. The challenge is that ABS providers such as Clutch, Kroll, Exigent and Genus Law have well-developed offerings and have embedded strong client relationships, so they face some stiff competition – as well as from established law firms."

The Big Four are, though, well-positioned to compete on price, says Leanne Robson, of search firm Fox Rodney. "The accountancy firms are absolute experts at using the low cost-base model, which is what many UK law firms have only recently become focused on. The low-end work can be done very effectively from the provinces. The Big Four tend to have operations in regional centres."

While Robson adds the accountants "are unlikely to be competing for local work in these areas", Brookes suggests PwC, at least, is building "proper regional practices" stocked with lawyers "born and bred in those areas – people who know the local market… and are well known in the area". 

Either way, the UK legal market is just one piece of the puzzle for the Big Four. "I don't think the UK legal market will be the core of the strategy," says Syed Nasser, managing director of search firm Stephen Bell Legal. "ABSs may make it slightly easier from a [UK] regulatory standpoint, but it's more a global strategy that's led them back to legal and emerging markets will be the target."

One initial brake on the Big Four's progress, at least in the UK, could be lawyers wary of working for accountants. "The memory of what happened [post-Enron] is still very much in mind across the City, but especially among lawyers because of all the litigation that came with it," says Nasser. 

Williams acknowledges the cynicism, but suggests a rethink: "Some people are saying 'we've heard all this before'. But I think what's important to recognise is that these are big, powerful and quite aggressive organisations and, while it's not necessarily a matter to panic about, it's another competitor in what is already a very competitive mix." Time to believe the hype?

Case study: PwC Legal

There is no disputing which of the Big Four accountancy firms has maintained the greatest commitment to the UK legal market to date. PricewaterhouseCoopers' legal pedigree dates back to 1996 when legacy Price Waterhouse took on Hammonds lawyer Chris Arnheim to launch Arnheim & Co. In doing so it became one of just two Big Six firms (as was), alongside the now-defunct Arthur Andersen, to forge ties with a legal firm.

The following year saw accountancy firm Coopers & Lybrand launch Tite & Lewis, run by two ex-Stephenson Harwood partners. With the creation of the merged firm PwC in 1998, legal arm Arnheim Tite & Lewis was born.

The ensuing years delivered defections, name changes (Landwell, anyone?) and post-Enron turmoil. Yet PwC is the only major accountancy firm to have maintained continuous legal service throughout.

Today, PwC Legal has 250 UK lawyers, and wants more. Currently it is the only Big Four firm to run its legal arm as an alternative business structure (ABS). With its rivals now tentatively reviving their UK legal offerings, what can the market stalwart's approach reveal about what the Big Four have to offer?

"Our clients are massively diverse," says Shirley Brookes, senior partner at PwC Legal. "We'll do big international projects for FTSE 100 companies and a lot of general counsel advisory work for large, privately owned businesses, as well as work for start-ups.

"We nearly always go with some sort of joined-up offer with PwC, so our people are encouraged to build networks with different teams there.  A couple of months ago we did an analysis of where our work comes from. At the moment about 55% comes from direct engagements with clients."  

Corporate, immigration, litigation and governance and compliance are the busiest practice areas, explains Brookes. The organisation now intends to develop four smaller practices: IT, real estate, employment and pensions. "Our pensions business has doubled in the last 18 months so that's something we're very keen to invest in," she adds. In addition PwC Legal has asked recruiters Fox Rodney Search to find a corporate partner to help develop its existing reorganisations practice, and this month hired McDermott Will & Emery City corporate partner Mark Crofskey.

When recruiting, Brookes says the sell is "the power of the PwC brand. The opportunities if you want to grow your business and get into a particular client space are immense. We're not rigid when it comes to recruitment. For example, in London, yes we've got ex-magic circle people here, but also some come from very small practices. It's more around the individuals and the fit for us."