Does PwC’s strategy add up?

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Last year the financial performance of the  UK legal arm of PricewaterhouseCoopers (PwC) was stellar. Three years on from the firm securing its ABS licence in January 2014, when UK revenue stood at £35.6m, turnover at PwC Legal totalled a mighty £59.9m.

The 2016 rise was particularly noteworthy. Revenue grew by 24 per cent – up from £48.5m to almost £60m.

This puts PwC Legal securely in the upper half of the The Lawyer’s UK 200. Indeed, it would almost get it into the UK 200 top 50 based on last year’s ranking, with a turnover that is now greater than the 2015/16 revenues of the likes of Burness Paull, Farrer & Co, Howard Kennedy and Shepherd & Wedderburn.

This growth should – and, according to numerous sources does – worry its law firm rivals. But while there is no doubt that PwC’s legal business is going great guns, there are some clouds on the horizon.

Audit is suffering

In recent months signs that PwC’s substantial UK law firm auditing business may have been affected as a result of the firm’s souped-up focus on the UK legal services market have begun to emerge. Specifically, a growing number of firms say they have either moved away from using the Big Four accountant as their auditor in favour of its competitors or are considering a rethink.

The trend also raises questions about the ­viability of PwC’s longstanding Law Firms’ ­Survey, with indications that a growing number of firms are declining to provide data for a report penned by what they increasingly see as a key competitor. These firms cite concerns about sharing sensitive market information with a business that, in the past three years, has become a rival – at least in certain areas of work. The trend highlights PwC’s growing reputation as a competitor for mid-tier law firms.

As PwC has stepped up the activity of its legal arm many lawyers are viewing the professional services firm with more hostility.

Last week’s news that, while the UK Government has cut its Crown Commercial Service panel by more than 30 firms, from 48 to 17, it has handed a place on the slimmed-down roster to PwC, will do little to assuage those fears.

“All law firms, including ourselves, are nervous about PwC as a competitor,” insists one managing partner at a top 50 firm. “This is not just another law firm coming into the market, this is a multibillion-pound, successful professional services firm with incredible budgets, power, systems and approach to client management. That’s scary for traditional law firms.”

Looking at the financials it is not hard to see why firms are worried. Few can boast the 24 per cent revenue growth that PwC Legal achieved last year, when turnover increased from £48.5m to £59.9m. The firm also has the backing of the rest of its global business and can neatly package legal advice along with a number of other services, such as tax.

The firm’s rise through the ranks is having a commensurate impact on the recruitment market. In short, as well as attracting clients that would previously have given business to traditional firms, PwC Legal is also attracting their lawyers.

Notable laterals include Milbank Tweed Hadley & McCloy London partner Laetitia Costa last June as its banking and finance head and CMS Cameron McKenna partner Juan Crosby in October 2015 to head up its technology and sourcing legal practice.

On the other hand, last month PwC lost a five-strong disputes team led by partners Andy Brown and Julian Balson to Bird & Bird. In the same week its legal arm, PwC Legal, lost corporate partner Alistair Hogarth to DWF.

As the firm attracts clients to its growing offering and hires lawyers from competitors, its wider business is causing a backlash in the legal sector.

When to ditch your auditor

Numerous sources confirm that a number of mid-tier firms are either choosing to drop PwC as their auditor because of the consultancy’s activities in the legal sector or thinking twice about hiring them.

“About two years ago we were looking for new auditors and we invited PwC in to pitch for the work,” says one managing partner at a top 50 firm. “PwC should have been a shoo-in because they had been doing all our tax work. However, we decided not to appoint them because they had just poached one of our partners. There was a clear conflict.

“It’s inconceivable that we’d use a firm of auditors that was poaching partners from us.”

A number of top 50 firms have revealed that they have also dropped PwC as their auditor, or say they intend to. Many of these firms did not wish to be named due to their continuing relationship with PwC, which most often takes the form of the provision of tax advice.

Fieldfisher managing partner Michael Chissick says he understands the frustration of these firms. He believes that PwC is now a direct competitor for traditional firms.

“Once a partner is taken from us, that firm is a competitor – and you don’t send business to your competitor” Michael Chissick, Fieldfisher

“From my point of view, as a managing partner, once a partner is taken from us [that firm is] a competitor,” he argues. “And you don’t send business to your competitor.

The Law Firms’ Survey

Another way firms say they are rebelling against PwC is through their participation in its Law Firms’ Survey. This annual report tracks metrics such as headcount, average pay and revenue per lawyer. But as firms come to view PwC as a direct competitor a growing number report they are planning to refuse to participate in the survey.

“I’m not sure we will participate in the survey this year because they’re becoming more of a competitor to UK law firms,” says one chief financial officer at a top 50 firm. “I know of one or two other financial directors who, anecdotally, have similar concerns. They’re considering whether they want to participate.

The Lawyer March 2014: PwC outlines global ambitions

Flavell

The head of PwC’s legal arm, PwC Legal, has set out the firm’s ambitions to become a global top 20 legal services player within five years.

PwC Legal global legal services leader Leon Flavell told The Lawyer that the firm was targeting revenues of $1bn – doubling from 2013’s $500m across the firm’s legal offering, with particular growth earmarked for Asia and Africa.

“There’s a strong appetite among PricewaterhouseCoopers’ global network for significant investment in legal services,” said Flavell. “Our ambition is to become a leading global legal services business in terms of quality and quantity in local markets and globally.”

While PwC wants to grow its legal services business across the globe Flavell highlighted Asia and Africa as key places to develop a stronger legal capacity.

“From a personal perspective we’re keen on opportunity in Asia and Africa. This is largely to do with businesses coming out from countries such as China and Japan requiring legal services support in Europe as well as global companies looking to have help from us on the ground in many emerging markets, such as China and Indonesia,” said Flavell.

“My expectation is that we will achieve our ambition in the next three to five years.”

PwC’s legal services capacity has been growing most strongly in the UK and Europe over the past five years. The top three fee-earning jurisdictions for PwC’s legal services are Spain, where it operates as PwC Tax & Legal Services, Germany, as PwC Legal AG, and the UK.

“We have not only managed to grow our revenues significantly, but also have changed the market and client perception of the firm in these jurisdictions,” said Flavell. “I’d like to see this achievement replicated around the world.”

Flavell emphasised that PwC Legal does not compete in the space of the magic circle firms and the top Wall Street firms, with its five main practice areas globally being immigration law, enterprise governance and compliance, employment and labour law, international business reorganisation and mid-tier M&A work.

Tax litigation is also an increasingly strong business in some jurisdictions, such as the UK and Australia. In jurisdictions where the big banks are not the firm’s audit clients, such as the Netherlands, PwC Legal also takes on traditional banking and finance work.

The Lawyer September 2016: PwC UK revenue rockets by 24%

Brookes

PwC Legal saw UK turnover grow by 24 per cent last year, from £48.5m to £59.9m.

The recent financial results follow a slower year previously, when the accountancy giant’s legal arm saw revenue grow by15 per cent, from £41m. It was granted an ABS licence in January 2014, when turnover totalled £35.6m.

“We’ve seen fantastic growth this year and every single practice group grew,” PwC Legal senior partner Shirley Brookes told The Lawyer. “We’ve been padding out our practice areas by hiring below partner and director level, particularly bulking up areas such as IT, public sector and banking and finance.”

PwC Legal’s revenue exceeds KPMG’s UK figures, reported last September. KPMG’s legal business was the second of the Big Four accountants to be awarded an ABS and said its turnover was set to exceed its £10m target.

Meanwhile, Deloitte Legal and EY Legal have also been in growth mode, with Deloitte reporting global revenue of around $250m and EY aiming to double the number of
lawyers it has in the UK by the end of
2016.

“I’ve spoken to a couple of others who have said they’re giving it a year and then they’ll review their position. There’s a genuine issue.”

This view is not limited to financial directors. The debate about whether to submit information to PwC for its survey is also raging among managing partners.

One who spoke to The Lawyer claimed that his firm’s decision not to contribute to the next survey was linked to PwC’s stated objective of growing a £100m legal business in the UK.

The survey has been an important tool over the years for PwC to cement its reputation as an auditor and tax adviser to law firms.

Chissick points out that a number of other publications that have developed in recent years that compete with PwC’s survey (full disclosure: these include The Lawyer’s UK 200 series of reports).

Chissick

“We’re still filling in their survey but they aren’t the only ones in the market doing this anymore,” says Chissick. “This is going to be an issue for them, and the Big Four going forward. It’s likely they will lose the survey as firms aren’t comfortable giving their data to competitors.”

The data in PwC’s survey is anonymised, unlike the attributed data in the UK 200. The research is conducted by PwC’s Research to Insight (r2i) business located in Belfast. The r21 team does not deal exclusively with law firms but also carries out survey-led research for financial services, utilities, and technology companies, and operates within the code of conduct set out by the Market Research Society. PwC insists that all the information provided, much of which is confidential, is treated in “complete confidence”.

Despite these assurances, any business sending commercially sensitive information to a competitor is likely to be a little nervous about who is seeing the data and what else it could be used for. When that competition is head-on, caginess is understandable.

PwC’s UK head of legal Shirley Brookes insists that all information is treated in the strictest confidence and that she is privy to none of the unpublished information.

“We’re not privy to anything,” she says. “We have hugely restrictive information-sharing rules and regulations within PwC. We don’t even allow people within legal to have access to client information if they’re not working on that particular project. There are all sorts of information standards and we all enforce them at the highest level.”

The internal struggle

Brookes claims she does not understand the reaction of some firms to the auditing practice.

“I’m not sure why law firms would worry,” says Brookes. “We’re in a completely different part of the firm. We’re not privy to any information about them. PwC has an outstanding reputation for audit services so you would hope the clients, whether they are law firms or other organisations, would want the best and most competent auditors, where integrity and quality are at the forefront of what they are delivering.

“Whether they think that there’s some sort of sharing of information – which there absolutely isn’t – I don’t know. I’m not entirely sure why they would be concerned about that.”

Brookes also argues that due to the size and scope of PwC’s businesses – it has more than 10,000 employees in the UK – there will always be a bit of the practice competing with law firms.

PwC Legal’s impressive 24 per cent revenue growth last year appears to confirm that the focus on growing its legal division is a priority. But Brookes disagrees that this growth is happening at the expense of PwC’s law firm advisory group.

“PwC is a massive business,” she adds, “so at any one time there will be bits that are hot – where we’re investing and growing rapidly – and other bits that are less so.

“Everything is cyclical. Some parts of the business might not have much growth for a few years and then suddenly you’ll see a market opportunity which has an impact.”

But while Brookes claims she does not believe PwC Legal is being prioritised at the expense of the firm’s professional services advisory group, those in the legal sector disagree.

“The team at PwC who look after the professional services area are very good but they probably only have about 20 of the top 100 firms’ audits now,” says one source in a private practice firm (in fact the firm currently audits fewer than 10). “If you look at the percentage of revenue they’re getting from those clients and other services, tax and audit services principally, compared with the £100m stated target for their UK law firm, you can see strategically where PwC’s management will place its bets.

“PwC’s management have made a strategic decision and placed their chips on the law firm. They probably expect that the rest will wither on the vine in time”

“They’ve made a strategic decision and placed their chips on the law firm. They probably expect that the rest will wither on the vine in time”

More audit work for big law firms

Despite the feeling that PwC is not investing in its professional services advisory business, the team led by partner David Snell has successfully brought over a number of top 20 UK firms to PwC for auditing work.

In the past three years Clifford Chance and Herbert Smith Freehills have stopped using Deloitte for their auditing work and moved to PwC. In total, Deloitte acts for nine of the top 20 firms while PwC is believed to act for six.

Although PwC is tightening its grip on the largest firms this is thought to be because these firms do not view the accountant as a serious competitor. Managing partners further down the food chain, particularly those in the mid-tier of the market, seem less happy.

“PwC Legal is not after the magic circle’s lunch at the moment,” says Chissick. “They’re focusing on the mid-tier. It’s difficult to come into the London market saying – we want to do the mega-deals, the international deals. Magic circle partners also tend not to move very often. If you come into the mid-tier market there are lots of lateral hires and a lot of movement.”

“They will develop a half-billion-pound law firm in the UK – and then go after the big firms”

Should PwC start competing with the bigger firms it also risks upsetting some of its big clients. But PwC is a huge beast. Reaching its £100m target for UK legal services revenue may not take long. And after that, it could start going after the bigger fish.

“I think it’s short-sighted of the top 10 firms, as I think eventually the Big Four will come after them,” says one managing partner. “They will develop a half-billion-pound law firm in the UK – and then go after the big firms.”

Who audits the top law firms?

In 2013 The Lawyer analysed all the LLP accounts at those firms in the UK 200 that had converted, to find out who audits the country’s largest law firms.

Deloitte dominated the top end of the market, with 20 of the UK top 30 firms being clients. In total, 40 of the 162 LLP firms in that year’s UK 200 were Deloitte clients.

Only four firms in the top 30 were clients of PwC: Allen & Overy, DLA Piper, legacy Eversheds and Simmons & Simmons.

Across all 162 firms PwC’s market share extended to just eight, although all those eight featured in the top 50. That year its other clients were: Burges Salmon, Geldards, Ince & Co and Watson Farley & Williams.

According to the most recent set of LLPs for this group of firms, the following are now their auditors:

Allen & Overy: PwC (Kate Wolstenholme)

Burges Salmon: Deloitte

DLA Piper: PwC (David Snell)

Eversheds: PwC (Kate Wolstenholme)

Geldards: PwC (Mark Ellis)

Ince & Co: KPMG (Jonathan Brown)

Simmons & Simmons: PwC (Kate Wolstenholme)

Watson Farley & Williams: PwC (David Thurkettle)

GE deal shows how advice model is changing

Last week PwC confirmed that it had struck a five-year deal with GE to provide tax services to the company using more than 600 of its own tax team.

Under the terms of the deal around half of GE’s tax team will join PwC. The professional services business already has the largest tax practice in the world, with a global network of 41,000 professionals operating in 157 countries. According to Bloomberg’s Big Law Business, this deal confirms the changes taking place in the professional services market, underlined by the Big Four’s shift into the provision of legal services.

“It’s the evolution of the professional service firm model,” said David Wilkins, a Harvard Law professor who is conducting research into the Big Four, in the Bloomberg report. “It’s just one more example of the rapid blurring of the boundaries between what used to be thought of as separate and distinct professional services.”

Tax deal is an example of the increasingly blurred boundaries between professional services

In a statement, PwC says it believes that with the GE deal it has “identified an opportunity that recognises the future needs of a rapidly changing marketplace”.

PwC vice-chairman and managing partner Mark Mendola said the arrangement would enable PwC to continue providing its clients with the best tax services in an increasingly volatile and uncertain environment.

“Integrating GE’s talent with PwC’s broad capabilities will allow us to deliver the tax function of the future in an increasingly digitally enabled tax world,” added Mendola.

The new team will sit within PwC Tax and will provide managed services not only to GE but also to other PwC clients. The five-year, renewable agreement will be effective from 1 April.

Additional reporting by Jonathon Manning

The post Does PwC’s strategy add up? appeared first on The Lawyer | Legal News and Jobs | Advancing the business of law.



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