Is EY really competing against law firms?

The march of the Big Four accounting firms into the business of legal services has taken another significant step forward with the acquisition by EY, also known as Ernst & Young, of the Legal Managed Services business belonging to Thomson Reuters, the big information services company.

“We’re just beginning,” said Cornelius Grossmann, EY’s Global Law Leader of the acquisition in an interview. “We continue to look for acquisitions as we really want to grow this business.”

EY’s latest acquisition was established in 2004 as Pangea3. The startup rode the boom of outsourcing corporate back-office tasks to India, where there were plenty of English-speaking law graduates who could accomplish document-related tasks like eDiscovery and compliance reviews at a fraction of the cost of conventional law firms in places like New York or Toronto. It was sold to Thomson Reuters in 2010.

Legal Managed Services has 1,000 employees and eight offices with operations still concentrated in India. The purchase, terms of which have not been disclosed, follows the acquisition last year by EY of Riverview Law, a UK-based firm that provides services for in-house legal departments including contract management as well as labour and intellectual property services.

The Big Four (PricewaterhouseCoopers, Deloitte, KPMG and EY) are more than just accounting firms. These global behemoths offer a broad range of audit, taxation, consulting, risk management, actuarial and legal services. EY itself reported US$34.8-billion in revenues last year and has no fewer than 270,000 employees, including 2,400 lawyers in 84 countries.

All four firms have been expanding their legal advisory businesses in recent years, depending on the regulatory environment. In a place like Singapore, EY can act like a standard law firm but in the U.S., the Sarbanes-Oxley Act enacted after the Enron scandal in the early 2000s as well as state rules ban accounting firms from offering legal advisory services.

In Canada, where the rules are less restrictive than in the U.S., EY Law LLC has more than 100 lawyers in seven cities across the country, specializing in tax and immigration law as well as a limited amount of merger and acquisition services. EY Law is a partnership owned by its lawyers but it is affiliated with Ernst & Young. The other Big Four accounting firms also have law firm affiliates in Canada.

For EY, the latest acquisition is part a two-pronged approach. It plans to continue offering conventional legal services like EY Law in Canada and to buy out existing law firms, in jurisdictions where it’s permitted. But it also plans to expand its presence as an alternative legal services provider – or ALSP.

A recent report from Thomson Reuters Legal Institute on ALSPs said that revenues for these firms were expected to grow at a compound annual growth rate of 12.9 per cent annually, with the Big Four the fastest-growing segment of the business. A survey conducted in conjunction with the report said that 23 per cent of large law firms said they competed for and lost business to the Big Four over the past year.

Grossmann, who’s based in Berlin, Germany, said the Legal Managed Services contracts with corporate clients to do lots of the repetitive tasks that are too time-consuming and low-skilled to pay high-priced legal talent in New York or Toronto to do.

He gave as an example the need to replace the Libor (London Interbank Offer Rate), a benchmark for short-term interest rates, with another interest rate in the thousands of contracts a large company may be party to. Rather than get that work done with costly high-paid corporate employees or outside legal staff, EY’s newly-acquired business can carry out those services at significant savings.

“We try to help clients with bulk assignments, where they don’t have the capacity or the technology or don’t want to pay hourly rates for US and Canadian law firms to get things done when you don’t need highly sophisticated lawyers,” Grossmann said.

Richard Tromans, a London-based consultant to legal firms, said that to save money, large corporations are looking at alternatives to traditional large firms and their billable hour model. These include bringing more legal work in house, using technology and turning to outsourcing firms like EY’s newly-acquired business to do more repetitive tasks.

“The market is shifting,” Tromans said in an interview. “There is more competition and there are more choices. There are more ways of getting things done.”

Jordan Furlong, an Ottawa-based legal consultant, said that the Big Four don’t really want to displace law firms. “They’re fighting each other and other entrants. They just see legal services as one of the things that clients need.”

Though EY wants to expand both its conventional legal business and its alternative legal services, EY’s Grossmann insists existing law firms shouldn’t feel threatened. “We are not really competing with traditional law firms. We’re not in litigation at all and that is a core business of traditional law firms. And we’re not in the U.S. at all.”

Furlong said that at the end of the day, law firms may end up doing less of the repetitive work involved in routine contracts and compliance and end up specializing. “Lawyers are going to end up doing that which is best suited to lawyers: advocacy, representation and advanced legal advice.”