There has been much talk in the past year that the Big Four were sniffing around the alternative legal services provider (ALSP) market looking for an acquisition, and many legal market watchers have predicted at least one Big Four-led acquisition into the ALSP space in 2018.

That wait is now over, after EY announced the acquisition of Riverview Law, the fixed fee-focused ALSP launched in 2012 with the backing of DLA Piper.

Legal market watchers could be forgiven for thinking the attention that this deal has received is much ado about nothing. Riverview Law, after all, is significantly smaller than many of the most well-known ALSPs. While financial details on the company were not disclosed, Riverview Law is rumoured to have earned £5m-£10m in annual revenue last year.

EY's acquisition of Riverview has the potential to shake up the alternative legal services market

While that number is just a rumour, we know from the firm's Company House filings that it has about 100 employees. That bit of knowledge, combined with knowledge gleaned from previous public filings, gives the revenue rumours some credibility. Compared with Axiom, which is expected to earn $360m this year, and Elevate, which earned approximately $40m last year, Riverview looks small.

Scoffing at the deal in this manner, however, misses the point. Some deals are important because of their size. Others are important because they are accelerators – they increase the pace of change in an industry or in a segment of an industry. EY's acquisition of Riverview could be seen in this light. Below is a quick analysis of how the acquisition may impact different sections of the legal market.

Alternative legal services providers: an evolving market

EY's acquisition of Riverview has the potential to shake up the ALSP market in two important ways. First, it may help facilitate increased acquisitions within the space. Many of the most prominent ALSPs are a decade or more old. Some of their founders, like Elevate's Liam Brown, have publicly stated that they want to remain independent. For the others, their founders and early investors are likely looking for exit strategies.

It has been rumoured that several prominent ALSPs have been 'for sale' for some time, with the word on the street indicating that differences with valuations are holding up sales. If this is true, the Riverview acquisition may help establish a baseline benchmark multiplier in the ALSP market. Once the firm's sale price is known – and it will be known – it will help reinforce the revenue and profit multiples which are used to inform valuations. This should help make the market more efficient and, potentially, usher in more sales.

There is a second, potentially more important, reason why the Riverview acquisition is important in this space. Managers of existing ALSPs now face the daunting task of competing with a Big Four player. EY will be a fierce competitor for several reasons. Its size – at $31bn in revenue and 250,000 employees worldwide – is certainly important. Its client base and strong capabilities in process management will also be key. But most important is their brand.

By hiring an 'alternative' provider, law departments are taking two risks

Trust is incredibly important in the legal services market – even in the lower value areas in which ALSPs compete. Law departments, as the leading purchasers of legal services, are fundamentally in the business of risk mitigation. While the cost of service is important, so is the credibility of the vendor, and this is particularly true for ALSPs. By hiring an 'alternative' provider, law departments are taking two risks – first, that this new 'alternative' approach can work, and second, that the ALSP in question is the right vendor in the space.

EY's strong brand equity and familiarity, coupled with existing relationships with clients, make it much better placed to make this argument to corporate leaders than Axiom, Elevate, UnitedLex or any of the other leading ALSPs. The Big Four have the unique benefit of being seen as a safe pair of hands. This will be a key competitive advantage.

When you combine these two forces, the Riverview acquisition looks like it may be an accelerator of consolidation in the ALSP space. The increased competitive pressure on ALSPs due to the continued expansion of the Big Four, combined with the increasing ease of selling an ALSP due to the precedent that the Riverview transaction sets, may usher in a wave of transactions during the coming years, which will fundamentally transform this section of the legal market.

The threat of the Big Four for law firms

The Big Four's intentions in the legal sector – and by extension, their threat to law firms – have never been entirely clear. Two broad theories exist on the issue. The first is that the Big Four would develop a law firm-like offering and compete directly with the biggest firms. The second theory, is that the Big Four would focus, at least for the time being, on two areas within the legal industry.

First, they would focus on legal services where there is a natural overlap between their existing services in accounting and consulting. This includes legal services related to tax, employment, regulatory work and, more controversially, M&A. The second area they would focus on, according to this theory, was on a managed legal services offering. Two events in 2018 suggest this second theory is the more probable path of the Big Four.

In June, immigration law firm Berry Appleman & Leiden (BAL) announced that it would sell its non-US offices to Deloitte and that its US offices would enter into an alliance with the firm. The fact that Big Four were acquiring a law firm ensured that this move got significant attention. The fact that the law firm had a significant US presence brought even more attention.

But this misses the point. The BAL acquisition should not be seen as the 'acquisition of a law firm by the Big Four'. Instead, it should be seen as an expansion of the Big Four's already strong position in immigration law, in addition to the strong alignment of immigration needs globally across their respective client bases. PwC has held a strong position in the immigration law space for some time, and the acquisition of BAL enables Deloitte to compete more effectively. The move wasn't novel, as it is a continuation of a trend that has been gathering steam. The Big Four are expanding into legal services where there is a natural overlap with their existing services in accounting and consulting. Immigration law, which has strong overlaps with the Big Four's employment consulting arms, is just one example of this.

EY's Riverview Law acquisition is similar. The Big Four have been expanding into managed legal services for some time now. For evidence of this, take a look at Deloitte's MarginMatrix service. This service, which was developed through a collaboration with Allen & Overy, simplifies the regulatory burden associated with derivatives trading by leveraging technology. Another example is Deloitte's purchase of ATD Legal, one of the few providers of managed document review services in Canada. PwC's GE deal is yet another example. The Riverview acquisition provides even more proof that the Big Four are targeting the managed legal services space.

So what does this mean for law firms? At first glance, it may be good news. The Big Four, at least for now, appears to be targeting a fairly narrow section of the legal services market. Their expansion into legal services related to their core offering in accounting and consulting creates limited risk for most law firms. Most firms do not live and die by their tax and employment practices (they are, however, among the most cross-sold practices by firms). The Big Four's expansion in these areas will create significant pain for some firms, but most will be able to manage this new threat.

The threat of a managed legal services offering is harder to assess. Most of the services that fall into the managed legal services section of the market are lower in value. Does that mean law firm leaders should ignore the Big Four's expansion in this area? No. An important question to ask is how much revenue is at stake for large law firms if the Big Four are able to develop a robust managed services offering in this space. Is 10% of a law firm's revenue stream at stake? Is it 25% or 50%? The honest answer to this question is that no one knows quite yet. Managed legal services are in their infancy. It is not clear what types of services can be delivered through this structured approach. Law firms should be concerned about this uncertainty. If 10% of the legal market can be shifted to a managed services model, this could blow a $10bn hole in the Am Law 200's existing revenue stream. That will create significant damage to their existing business models.

The Big Four: the big question still looms

Many legal market watchers were convinced we would see a Big Four-led acquisition in the ALSP space in 2018. In hindsight, Riverview was the obvious choice. This is true for several reasons. First, Riverview's size makes it a good candidate for an early acquisition.

Perhaps more importantly, Riverview is not based in the US. The legal arms of the Big Four are largely focused on Europe and Asia. Their fear of regulatory scrutiny has made them hesitant to expand too quickly into the US market. Acquiring Axiom, for example, would, almost certainly, raise regulatory questions. The Riverview acquisition sidesteps this issue.

This means the biggest question for the Big Four remains unanswered – when will they enter the US market (note the use of 'when' rather than 'if')?

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Nicholas Bruch is a senior analyst at ALM Legal Intelligence. His experience includes advising law firms and law departments in developing and developed markets on issues related to strategy, business development, market intelligence, and operations. He can be reached by Email, Twitter, or LinkedIn.