Impact of the Big Four on the Legal Market

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 ALSPs due to the precedent that the Riverview transaction sets may usher in a wave of transactions over the coming years which will fundamentally transform this section of the legal market.

The Risk of the Big Four

The Big Four's intentions in the legal industry — 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, which this analyst has always advocated, 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, labor and employment, regulatory work, and more controversially, mergers and acquisitions. 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 announced that it would sell its non-U.S. offices to Deloitte and that its U.S. 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 U.S. presence brought even more attention. But this misses the point. The Berry 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 Berry enables Deloitte to compete more effectively. The move wasn't novel, as it is a continuation of a trend which 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 labor 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 Margin Matrix 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 labor 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 which 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 ten percent of the legal market can be shifted to a managed services model this could blow a $10 billion dollar hole in the Am Law 200's existing revenue stream. That will create significant damage to their existing business models.

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 U.S. 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 U.S. 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 U.S. 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 at [email protected] or on Twitter @NicholasBruch.