Editors' Blog

Big four integration has legs for legal

Posted 9/05/2008 by Alex Novarese

For years law firms have justified operating in networks or within firms branded as a single entity by using separate partnerships by pointing to the big four accountants. The argument goes that the audit giants operate what are seen to be single entities without bothering with full integration of finances, management and liabilities.

This argument has been particularly in evidence at DLA Piper, which bristles at those that argue it is basically a transatlantic merger that didn’t happen. Likewise, CMS Cameron McKenna, having become more bullish about its international network, has explicitly sought to fashion CMS as a Deloitte-style organisation, offering total European coverage.

But how convincing is this line of argument? To a certain extent, the big four have avoided integration because of regulatory hurdles regarding their core audit businesses. Likewise, concerns regarding audit liabilities have seen large accounting firms use separate partnerships to contain risk. As such, avoiding integration was to a great extent about expediency - not because it was an ideal model to run a global professional services giant.

By common consent this patchwork model also comes with its downside, as accounting firms have been plagued with variable service and poor quality-control, issues that have also dogged international law firms. Such problems have been seen even in major markets like Japan, where PricewaterhouseCoopers last year split from its local member firm.

It is also true that accountancy at the top end has far fewer competitors than in the legal sector, so the big four don’t have to worry about competing with fully-integrated rivals that can punch in their weight division. No such protection applies in law, where you have firms of the calibre of Freshfields, Sullivan & Cromwell and Cleary Gottlieb Steen & Hamilton stalking the top end of the international legal market.

But perhaps the biggest problem with big four justification is that the big four is slowly moving away from it themselves. The clearest indication yet of this trend comes from Ernst & Young, which last month announced a major shake-up that will see the firm merge its European partnerships and “integrate” a further 42 countries into a single unit.

The logic is that the 3,330-partner giant can reflect the business needs of its top international clients and that audit liabilities have become manageable as accountants have grown more sophisticated at cross-border risk control.

The proposals, which are due for a vote later this month, have been seen as a challenge to Ernst & Young’s big four rivals and the expectation is that they will be looking to usher in more meaningful integration. Indeed, KPMG and Deloitte have made more modest moves in that direction already, having respectively merged their German and UK practices and UK and Swiss operations in 2006.

To keep this in context, accountancy-watchers are somewhat sceptical of the extent of this integration and it seems on current indications that Ernst & Young’s move is a way short of a fully-fledged single partnership. But the tide is clearly moving in the direction of the integrated global model.

Given the influence that the accountants have had on the internalisation of the legal profession, it seems hard to see how this can’t increase the pressure on law firms to follow suit.

alex.novarese@legalweek.com