A logical union

By Mike Jones, Managing Director, Intrinsic Values

Could lawyers and accountants work under the same roof in the new world being created by the UK’s Legal Services Act?

When I joined Ernst & Young’s associated law firm Tite & Lewis in 2000, the advisory landscape presented a very different picture to the one we see today. Putting aside the macroeconomic environment, all of the ‘big five’ accountancy firms were gunning for growth on whatever platform they could justify.

Amongst their lofty ambitions was the desire to grab a hefty slice of the lucrative legal services market. In fact, most of them had already started their ascent of that particular mountain (e.g. KLegal at KPMG and PwC with Landwell, as well as Tite & Lewis previously).

Their thinking was that clients of all shapes and sizes would benefit enormously from the joined-up thinking and working of an integrated accounting and legal service offering. They planned to dominate certain aspects of the legal market by utilising the combined might of their then huge budgets and vast client banks.

It was not without its challenges, but the logic seemed sound. Progress was being made, but then the Arthur Andersen collapse and subsequent enforcement of the Sarbanes-Oxley Act in the US in 2002 and the Companies Act in 2005 changed everything. For firms wanting to retain auditing as a central part of their business, all non-auditing services were suddenly put in jeopardy as tighter independence rules took hold. The associated law firms were the first to bite the bullet – Tite & Lewis merged with UK firm Lawrence Graham in 2004.

I understand the decision-making. The ‘big four’ as they now are still generate the vast bulk of their recurring revenues and around 50% of total annual income from audit-related services. Why would you risk killing the goose that lays the golden egg?

Showing ambition

That said, a multi-disciplinary approach to professional services is still a desirable option for many clients and it remains a huge opportunity. The question is, can the accountancy firms tackle this whilst retaining their interest in auditing? They seem to be able to build advisory practices, but the law may still a step too far.

Perhaps it’s time for the tail to wag the dog. In light of the opening up of the whole legal services market in 2011, a brave law firm might just fancy taking a shot at this from the other perspective.

Unhindered by a need to protect audit fees, one of the magic-circle firms could easily acquire or build a plethora of non-audit accounting services to complement its legal offerings and provide a one-stop shop approach for clients. The whole legal market is awash with discussions and debates on alternative business structures, most of which seem fixated on fairly conservative changes. Wouldn’t it be interesting to see one of the big firms showing some real ambition?

Why would a law firm be interested in acquiring or building a range of non-legal services? The obvious answer is to grow client revenues of course, but for me it goes beyond that.

Firstly, by extending the breadth of services available to clients, the successful firms will establish a far stronger relationship with their key clients, thereby providing greater protection against the threat of competition.

Secondly, the type of services they could offer would give firms a far greater insight into the commercial drivers of their clients’ businesses. Innovative firms would be in a strong position to develop true trusted-adviser relationships with strategic decision-makers and broaden the commercial acumen of the entire practice.

Thirdly, the broader relationship platform would provide a fantastic opportunity to make genuine inroads to the holy grail of law firm business development challenges: cross-selling.

Every firm would love to improve its cross-selling ability. Most try to tackle the issue from a partner skills perspective, but it’s rarely that simple. More often you can trace the root cause of the problem to the strength and depth of the client relationship and partners’ willingness
to test that relationship. When I think back to my Tite & Lewis days, there is no doubt in my mind that the provision of non-legal services played a huge part in developing and improving our cross-sales capabilities.

So come on law firms, let’s collectively grasp the nettle and take the initiative here. We have a real opportunity to become the dominant advisory force in British business, perhaps akin in some ways to the hugely powerful status enjoyed by so many US firms. Let’s look beyond law and offer our clients a wider commercial proposition. He who dares…