A Quick History Lesson into PwC: How It Rose and Conquered
PwC is one of the largest professional services companies in the world, with over $40.3 billion in revenue and more than 250,000 employees worldwide.
Lawyer Monthly hears from Fraser MacLean, a legal recruitment expert from MacLean Legal Search, an Executive Legal Search & Management Consultancy firm.
The below piece is an update on Fraser’s 2016 article titled ‘PwC Legal – Another Baker McKenzie’ which looked at the growth of PwC Legal in London since the 1990s. Here Fraser takes a detailed look at PwC’s operations, history, recruitment activity and similarities with other large legal firms. Many of the issues discussed here will also be relevant to EY, Deloitte and KPMG.
PwC’s legal arm is approaching the same size globally that Arthur Andersen’s reached in the early 2000s. They now have over 3,000 lawyers, and will soon be earning $1bn globally with £100m in the UK. They have leveraged the strong global PwC brand, offered clients new products and services based on innovation and technology, but also taken traditional work away from their law firm competitors. Most probably, there is still plenty of growth available from low hanging fruit, especially in the less developed markets, but, eventually, as Tantalus discovered, the fruit may frustratingly keep moving out of reach.
Quick History Lesson
Around 25 years ago, PwC had an international network of around 20 tied Law Firms. In the UK, work was initially via an affiliation with Arnheim & Co, which became Arnheim Tite & Lewis when Coopers and Lybrand merged with PwC in 1998. In 1999, after a lengthy and expensive rebrand, all affiliated Firms became known as Landwell. It was around this time that the term Multi-Disciplinary Practice (MDP) became the Big 4’s mantra and one of the main selling points used to try and attract lawyers to their ranks.
Things got a little messy in 2000, when several Tite & Lewis partners left to form KPMG-tied Law Firm KLegal. Later that year, Tite & Lewis left Landwell to form the legal arm for EY.
Between 2000 and 2002, there were a series of US corporate scandals culminating in the collapse of Enron, where there appeared to be collusion with their auditors to misrepresent their financials and mislead investors. Surprisingly, this was never proven and the only charges against Arthur Andersen were struck down in 2005 on appeal. However, by that stage, the Big 5 Firm had collapsed and ceased to exist, leaving the Big 4.
At that time, the Sarbanes-Oxley Act (SOX) Act was introduced in the USA, intended to increase corporate governance, improve financial transparency and reduce potential conflicts of interest between client and auditor. Section 201 prohibits accountants from providing legal services to audit clients (but not to non-audit clients). However, the biggest impact which never gets anywhere near the same press coverage as SOX, came from rule 5.4 of the ABA’s model rules on professional conduct, which prevented 1) a lawyer or law firm from sharing legal fees with a non-lawyer and 2) a lawyer from forming a partnership with a non-lawyer. This effectively put an end to the legal ambitions of the Big 4 in the USA.
In 2006, Landwell morphed into PwC Legal, continuing to operate as a separate legal entity. In March 2014, PwC was awarded an ABS licence, allowing it to take legal ownership of PwC Legal. In 2016, PwC Legal LLP disappeared and was integrated into PwC.
The MDP concept is not new to lawyers. It’s been around for almost 20 years now. For PwC, this is arguably its 3rd reincarnation.
PwC Revenue Splits
Auditing and assurance’s contribution to global revenue has been dropping year on year. In 2010, it accounted for 50%. Back then, their advisory group, split into deals advice and their strategy, management and technology consulting practices accounted for just 23% of global revenue.
In the UK, the Competition and Markets Authority (CMA) is going to investigate whether the auditing business is “competitive and resilient enough to maintain high-quality standards”. This follows on from suggestions by the Financial Reporting Council (FRC), the UK’s audit watchdog, about banning some non-audit services (NAS) and having audit-only Firms. The FRC is itself under a government review as to whether it is fit for purpose. So, there will continue to be plenty of legislative and regulatory challenges ahead.
PwC UK (includes Middle East and Channel Islands) had 915 equity partners generating pre-tax profits of £935m or 25% of annual revenue. Average distributable profit per partner was £712k with an effective tax rate of 48%.
The Top 4 Largest Law Firms by Revenue
Clearly these Big Law Firms are tiny in comparison to the Big 4, but almost all of the leading UK and US Law Firms are more productive and profitable per partner and in most cases, significantly. It is highly unlikely that they will see an active Kirkland or Latham’s partner join a PwC anytime soon, but we have already seen partners join from Bakers and DLA and this is likely to continue. Another more obvious source from the global Top 10 is Dentons.
PwC UK Legal Revenue Growth
The blue bars are estimates. PwC UK Legal was absorbed into PwC in 2016 and separate accounts are no longer available. The 2020 figure of £100m was reported in 2015 as a target.
Their forecast for 2020 of £100m will put them in the Top 50 largest UK Law Firms by revenue. It has overtaken the likes of Bevan Brittan, Farrer & Co, Forsters and Howard Kennedy. It shouldn’t take long to get past the likes of Brown Jacobson, Blake Morgan, Penningtons Manches and Shakespeare Martineau. In doing so, they must be taking work away from some, if not all, of these Firms.
PwC Legal’s last full set of annual accounts were for the y/e 30th June 2016. A final set was published the following year, but PwC Legal was absorbed into PwC on 1st Oct 2016.
In 2015/2016, the average number of UK equity partners was 13. The actual average PPP was £640k with the highest profit entitlement to one of their senior partners @ £1.493m. This almost certainly means that one or several of the non-legal partners will be on something much higher and I have seen a figure of $3m (£2.3m) reported in the legal press.
Their last reported revenue was c. £70m for 2017/2018 or 1.9% of total revenue. Their Revenue per Lawyer (RPL) is c. £200,000, which is on the low side, but comparable to several mid-market Firms (see table below).
Their five main legal global practice areas are immigration law, enterprise governance and compliance, employment and labour, international business reorganisation and mid-tier M&A work. In the UK, cyber & data services, financial services, tax litigation and technology are other areas of local focus and growth.
Although legal services are contributing more every year to the overall pot (1.9% from 1.5% in 2013), it’s a reminder that lawyers are a small cog in a very big wheel. One consequence is that this makes winning internal support and investment for legal more difficult compared to other departments.
This reduced level of influence, control and importance is one of the reasons why many private practice lawyers will never consider joining these organisations.
Mid-Market UK Law Firm Financials
*This relates to the last separate set of a/cs for PwC Legal. PwC’s red figures are estimates based on market reports. The RPL and PPP data is taken from tables published by Legal Week this year. The equity ranges are taken from the legal press this year and from Legal Business tables from 2017.
PwC clearly has the resources to offer partners at these Firms and higher up the ladder a competitive package, but in recent years, they have either decided not to spend big and/or they have been unable to attract the talent that they want.
It is surprising that, of the 100 or so KWM London partners that have found new homes at Law Firms since their European arm collapsed at the end of 2016, that not one has found a home at PwC or any of the Big 4, given they are all in growth mode and need lawyers of this quality.
PwC Legal Brand Strength – Internally & Externally
The PwC accountants and consultants are market leaders and generally regarded as some of the best in their professions. Apart from their immigration lawyers, who are ranked as Tier 1 by the Legal 500, the same cannot be said across their other legal teams – yet. Data Protection and Cyber – Tier 2. Pensions – Tier 3. Employment – Tier 4. Tax Litigation and Disputes – Tier 4.
This may well change in the years ahead, but for now there remains a mismatch in quality between the professions. The legal bar therefore has to rise to catch up with the rest of the partnership.
This can be done incrementally, gradually increasing your profile and quality base in each practice area, or by taking quantum leaps bringing in market names. The ripple or the splash. The former is less risky and less expensive but much slower. Neither guarantees successful market penetration.
The quality mismatch also creates problems re: internal client referrals. Can my in-house lawyers provide my clients with the same quality of advice and service as the Law Firms that I have been referring them to for years? If I refer my clients to my in-house legal team, I will almost certainly lose out on any reciprocal referral work.
Their MDP one-stop shop concept can only really work if there is uniformity in the quality of advice offered and provided.
London Partner & Director Lateral Hires since 2016
The table below summarises PwC’s senior lateral hiring activity over the last 3 years.
In total, there are 40+ London partners and directors who are locally-qualified solicitors. Less than 10% of these were trained at PwC. That’s a very poor stat which they must be trying to address.
They continue to struggle to hire senior lawyers in the two main transactional practice areas of Banking & Corporate.
Traditional Law Firm models need healthy transactional practices to support service sectors like employment and tax. With the Big 4’s different model, the need for strength in these practices isn’t as necessary.
However, at some stage, the amount of work that these service sectors can generate will plateau and they will need to look at other, potentially much larger, revenue streams, like Banking and M&A. To date, this has not happened.
One of the main reasons Law Firms laterally hire transactional partners is to buy their book of business and client relationships, either by bringing in new clients or by strengthenng existing relationships. It’s also what determines how much they are worth financially to their Firms and in the market. Occasionally partners will be rejected by a Law Firm because their respective clients’ lists are in direct competition. There’s no point hiring a partner whose main client is Pepsi, when the Firm works for Coca-Cola.
Because of PwC’s size and extensive client portfolio, client conflict is more of an issue. A good fit would be partners who have experience of working for existing PwC clients.
If you opt for partners with no portable business and/or who are not proven business generators, then yes, there would be no conflicts and yes they would be less expensive, but they would be pretty much reliant on the internal market for their work. This would do nothing to make their lawyers more valuable in the eyes of the other professionals. And it doesn’t do much for your resale value either.
I am assuming that there are plenty of blue chip companies out there which PwC does not advise and is not conflicted with. If so, then hiring transactional partners who can bring some of these to the Firm would boost new revenue streams as well as increasing legal’s standing within the Firm.
PwC London Corporate Lateral Hires since 2016
Thomas Colmer joined PwC Legal in 2016 as a partner from Osborne Clarke and then became Director 6 months later when PwC took over. There have been no other corporate partner lateral hires since senior associates, John Amberton and Peter Workman, joined in 2015 from Baker McKenzie and KWM, respectively. The department’s gearing ratio is higher than most Law Firms with at least 5 non-partners for every partner.
The quality of their lateral hires remains inferior to those in other product areas.
Around half of their corporate lawyers trained at PwC, so the quality of their training will be as important as the quality of their lateral hires. Further, the development of an associate can be strongly influenced by 1) the quality of the partners they work with and 2) the quality of the work that they do.
Surprisingly, given the above, they are now listed by the Legal 500 as a Tier 1 Firm for M&A deals up to £50m, competing against the likes of Charles Russell Speechleys, Fladgates and RPC.
EY London Corporate Hires since 2016
Two observations: 1) EY has been more active in hiring senior lawyers (albeit from a smaller base) and 2) their lateral hires are clearly sourced from a better group of Law Firms. Money will have been a factor, but this is principally down to the various parties and people who make up the recruitment team (internally and externally).
London Partner Seniority
Getting the right balance of experience and youth is important and not that easy to get right. A bell curve is the ideal shape to aim for.
The seniority mix, which for several years was top heavy, now looks to have the right balance. This is partly down to a small number of internal promotions (less than 10% of their partners are PwC trainees), but more down to junior lateral hires and the reduction of senior partners. Too many senior partners in the overall mix can be 1) expensive, 2) a deterrent to the junior partners and associates and 3) lead to succession problems.
Ongoing Similarities with Baker McKenzie
- A global one-stop shop client offering. Bakers were the first Law Firm to offer this to clients and used to be known as the McDonald’s of the legal profession for having an office in every major city. This was an expensive strategy which helped increase their global market share but at a cost to their profitability. PwC already has offices in most of the major cities and so scaling up their global legal offering should be achievable at a lower cost, relatively.
- Strong in the same product areas – Disputes, Employment, HR, Pensions, Tax and Technology.
- Mixed quality of lawyers across geographic lines and product areas.
- A large internal referral market. The difference being that, with Bakers, it’s lawyers referring work to lawyers in different jurisdictions and with PwC, it’s also business teams referring work to their lawyers.
- Exiting partners do not have any significant portable business
- Unable to attract the highest quality lawyers.
- Far less productive and profitable per lawyer than many national and global legal competitors.
Baker McKenzie London was, and probably still is, a net receiver of work through their internal market. This has resulted in a lot of their transactional partners working more as service partners. As portable business is one of the most sought after assets by Law Firms when laterally hiring partners, this has often put those BM partners at a disadvantage in the market. I suspect the same will apply to the transactional partners at PwC, the few that there are. PwC’s three corporate partner exits since 2015 have moved to Baker McKenzie, DWF and Thomas Cooper.
Lawyers, when considering their next career move, should try and factor into their decision making whether they will be more or less marketable when that next career move comes to an end.
Conflicts of Interest, Audit Misconduct and Fraud
As the Big 4 get bigger, providing more and more clients with an ever-growing variety of business services, the potential for internal conflict obviously increases. As NAS contribute more and more to the money pot, the importance and arguably the quality of audit decreases. Both scenarios are leading to bigger and bigger fines and threats of new legislation.
Conflicts of Interest, Audit Misconduct and Fraud
- Expanded their New Law client offering by hiring two partners from Radiant Law in 2017. New Law services include Law Department Transformation (LDT), Contract Review & Remediation (CRM and Managed Legal Services (MLS).
- Introduced Flexible Legal Resources (FLR) in 2017 which will provide temporary lawyers for clients’ in-house teams during busy periods. PwC will have pool of lawyers who will act as self-employed contractors or freelancers.
- Opened a new office called ILC Legal LLP in Washington. At present only two US jurisdictions – the District of Columbia and Washington state – allow firms to include non-lawyer owners under limited circumstances. The office cannot offer local law advice but will provide its non-audit US clients with foreign legal advice, as well as providing referrals to the firm’s global network. Washington state law allows international lawyers to be licensed as special legal consultants.
- Formed a strategic alliance with US immigration Law Firm Fragomen despite, unusually, being direct competitors across several jurisdictions. I assume that this is an agreement focused on Fragomen advising PwC referrals on US-law as well as recommending PwC to its clients for non-immigration work (both in the US and globally). It’s also one way of accessing the US legal market whilst SOX still applies. It follows on from Deloitte’s strategic alliance with US immigration Law Firm, Berry Appleman & Leiden.
Despite various setbacks of the past 20 years, PwC’s legal services growth continues apace and is unlikely to slow down anytime soon. They are now a Top 50 Firm in the UK and heading towards a Top 5 Firm globally by number of lawyers.
Law Firms are obviously responding, and it would be safe to assume that getting themselves higher up the league tables will become more difficult and more expensive, if that is where they want to go.
Where they end up and how quickly will be a function of the legislative and regulatory landscape. For example, a loosening of the state bar rules on lawyers’ professional independence by some US states could be a game changer for growth in North America. On the flip side, another Enron scandal or a move to audit-only Firms will, once again, restrict the growth of MDPs.
MacLean Legal Search
Executive Legal Search & Management Consultant
Tel: 0208 568 2381
Mobile: 07951 156 445