The ‘Big Four’ accountants are proving “intense competition” for mid-tier law firms and “quietly” taking the more commoditised work away from them, the head of legal services at RBS has said, predicting that the accountants will move on to compete with bigger firms.
However, he also described the mid-tier’s resurgence over recent years as “little short of spectacular”.
In his annual review of the legal market, James Tsolakis, head of legal services, large corporate and sectors at RBS, said that “liberalisation of the legal market has taken a massive step forward across the board”.
KPMG, PwC and EY all now have alternative business structure (ABS) licences. PwC, he noted, posted legal services revenues of £41m this year, and has outlined ambitious growth plans for its legal division.
Mr Tsolakis wrote: “This undoubtedly raises the stakes for established firms as they seek to protect existing market share and invest in the cutting-edge technology required to compete. With much legal work becoming increasingly process-driven, these accountants have an instant appeal to today’s cost-conscious clients, who value efficiency, standardisation (where appropriate) and a move away from expensive hourly rates.
“Accountancy firms have excellent technology and cheaper cost centres… For now, their strategy is to eschew full-service capability and the trophy hires of rainmaking partners from established firms. Instead, they are focusing on legal areas that complement their own practices, such as compliance, due diligence, employment, immigration and tax.
“The smart money, nonetheless, is on the accountants going head-to-head with the established legal order over lucrative capital markets and transactional activity once they have taken sufficient market share from the mid-tier.”
Add into the mix other entities with ABS status – such as listed law firm Gateley plc and the legal arms of household-name companies such as BT and Direct Line – and Mr Tsolakis said the threat of well-capitalised entities competing for the best talent, work, technology and know-how “becomes more acute”.
He continued: “The upshot of all of this upheaval is that legal work has become disaggregated, with significantly bolstered in-house teams acting as de facto project managers to a host of legal and resource providers, with the traditional law firm just one constituent part – albeit, in many cases, the one doing the most complex, more profitable work.”
Mr Tsolakis recorded that while the big firms have recovered well from the recession, they have not performed as well as expected, which he attributed to exchange rate problems, global pricing pressures, “an economic shakedown in China”, significant unrest in the Eurozone and Middle East, “and intense competition for headline corporate and regulatory mandates from their booming US rivals”.
By contrast, while the middle tier of firms, in the years preceding the economic crisis in 2008, was in difficulties, “the resurgence of many firms in this grouping has been little short of spectacular”.
Mr Tsolakis said: “There can be no doubt that the high number of mergers and significant lateral hiring in this area of the market has helped focus some of the incumbents strategically, and this is now translating into the numbers.
“Economies of scale, pricing, vastly improved financial management, and increased profitability to attract lateral partners and expand geographically are all benefits that can emerge from the right law firm combination. Booming real estate, litigation and deal markets have also helped drive more profitable revenue growth, while those that have embraced the outsourcing of commoditised legal work are finding it easier to get the rates they want for more sophisticated advice.”
But the competition is intensifying and it was not clear how much “this year’s impressive financial results [were] due to an improved economic environment and how much [were] due to having the right strategy”.
Mr Tsolakis said: “The result of this competition will be continuing pressure on rates and fees, exacerbated by a market in which – despite improving market conditions – there is an oversupply of lawyers for the work available.
“The continuing trend toward unbundling legal instructions will continue, further eroding the margins previously available. Technology-driven specialist firms executing lower-cost, higher-volume repetitive work will continue to grow and disrupt the traditional market. All this is compounded by the emergence of non-legal firms using ABS licensing as a route to market.
“However, market participants are responding positively to these challenges, with progressive strategies and the emergence of innovative structures and business models.”