Accountants In The Legal Market By Michael Chambers And Richard Parnham - Center for Professional Responsibility

ACCOUNTANTS
IN THE LEGAL MARKET

Has the strategy failed?

 

Five years have passed since the first of the Big Six started an English Iaw firm,
enough time for clients to assess this development.
Our survey shows that clients prefer their lawyers
to be independent.

 

BY MICHAEL CHAMBERS AND RICHARD PARNHAM

"I see no logic in the merger of law and accounting firms. There are no obvious synergies between most legal work and most accounting or consulting work."

"The accountants seem to be the ones driving the mergers. As an accountant myself I don't trust them."

Two Finance Directors of FTSE 250 PLCs

The legal profession feared the worst five years ago when Arthur Andersen launched Garrett & Co. Commentators predicted that the Big Six, with their muscle, and their international sway, would quickly achieve a dominant position. These fears, not entirely faded, have certainly diminished.

In the regions Garretts have grown fast, but in London their progress has been restricted. Recognising this, Andersens tried to acquire Simmons & Simmons. They failed, and now they plan to absorb smaller niche practices. The going is clearly rougher than they expected.

* * * * *

Before they set their law firm up in 1993, Arthur Andersen researched the market. What they found was encouraging. Most clients - two-thirds - were open-minded about the prospect of accountants having associated law firms. Only ten per cent were against, and the rest, about a quarter, were positively in favour. Other surveys carried by Coopers & Lybrand and Price Waterhouse showed a similar picture.

Clients have had several years to assess the move into the legal market by these accounting firms. What do they think?

To find out whether their views have changed, Commercial Lawyer carried out a survey of the heads of legal in the top 350 listed companies. The results were staggering. An overwhelming majority - 88 per cent - were hostile to the combined law/accountancy firm (see box). Of the remaining 12 per cent, ten percent were neutral and only two per cent were in favour.

Knowing the earlier accountants surveys, we began to doubt our own research. Perhaps heads of legal, being lawyers, were more hostile to accountants than other clients. To check this, we sent the same questionnaire to finance directors in the top 330. To our surprise, their replies showed exactly the same spread of opinion. Again, the overwhelming majority - 85 percent - were hostile to the combined legal- accountancy firm; three percent were in favour; and twelve percent were neutral. There was nothing wrong with our sample.

Nothing was wrong, either, with the numbers that responded: 129, a good response according to professional market researchers.

The only other objection that could be made - and Garretts' managing partner, Julia Chain, actually made it - was that you might expect more of those who were against accountancy-law firms to reply. Those in favour, feeling less strongly about the issue, wouldn't bother.

This objection collapses, however, when you see that more neutrals replied than those in favour. If the above reasoning holds good - that those who feel strongly are more likely to respond - the least likely to reply would be those who didn't care much either way - the neutrals. That more neutrals responded than those in favour (thirteen as against three) can only mean that those in favour are a small minority.

We asked respondents to give their reasons. The heads of legal who voted against, who preferred law firms to be independent, had two main reasons. One was the desire to instruct specialist lawyers on their merits: the >horses for courses' argument. The other was their preference for a law firm which was truly independent, which could give objective advice free of any allegiances. Typical comments are reproduced in the accompanying box.

Their third main reason was conflicts of interest, and the common belief that Chinese walls don't work. Among their other reasons mere the following: no obvious benefits to the client, no synergy between lawyers and accountants, high fees charged by accountants for their consultancy services, the better quality of lawyers in independent law firms, and the fear that the Big Six (and now possibly Big Four) were becoming too large and would exercise a dominant position in the marketplace.

Finance directors expressed similar views. They put the value of independence first, followed by the desire to choose from a range of specialist firms. Next, they cited the lack of synergy, the absence of any perceived benefit to the client. Then came the conflict of interest problem, which worried them less than it did the heads of legal.

Only three respondents came down in favour of combined law/accountancy firms. Their individual comments, therefore, can be reproduced here.

Compared with the reasons given by those against, theirs are more particular, more limited. One said: "Can review tax and commercial implications simultaneously." Another would use one "where the task is simple, or where the expertise, both financial and legal, is truly within one firm" The third said: "Should produce more efficient and coordinated advisers; reduce costs; and improve advisers' business focus."

Those who were neutral said that they would use a "one-stop-shop" if it saved time and was cheaper, but they emphasised quality as a precondition. "Quality of advice is paramount," said one.

* * * * *

We showed these results to the managing partner of Garretts and to the two new law/accountancy firms, Arnheim & Co (Price Waterhouse) and Tite & Lewis (Coopers & Lybrand).

Garretts' Julia Chain, as we've seen, said that people tend to reply if they want to be negative. She pointed out that we'd only got a 25 per cent response, and suggested that "the other 75 per cent may have been positive." She felt that the comments indicated "a fear of the unknown." Of all the heads of legal who replied, "I would guess that less than one per cent use our services, and less than one per cent know what they're talking about. They just have these worries." She would like to talk to them and would welcome telephone calls. "They will only know if they like our service if they listen to what we have to offer."

Tite & Lewis were set up just over a year ago. Mark Lewis accepted our survey results, but said that his experience was different. He found that clients were happy to take advice from a firm associated with Coopers & Lybrand. "One reason is convenience; another is that we, as lawyers, have been too self-important in thinking it really makes a difference to clients who their lawyers are. For certain types of work, of course, there are only three to five firms you would go to if you were a multinational. But otherwise, clients are looking for convenience, and provided they're happy with the quality of the service they get, it doesn't much matter,"

If there is any resistance to the "one-stop shop," it comes from the mid-sized companies and institutions, especially at the bottom end. "The larger they are," he says, "the more relaxed they seem to be."

The most upbeat reaction to our survey came from Arnheim & Co, established by Price Waterhouse two years ago. Their strategy is to concentrate on the London market where they work as part of a combined team with other PW professionals.

Chris Arnheim explains: "We're working alongside PW's management consultants, IT consultants, corporate financiers, actuaries, HR consultants. This is what makes us unique." He also emphasises quality. "We recruit people from Slaughters, Linklaters, Clifford Chance, and we find it much easier to market such people to leading clients."

Basing themselves in London is also important. "We're very different from Garretts," he says. "If you get branded as a competitor of the regional firms, then how do you go upmarket and get people to think of you as a competitor of Allen & Overy or Linklaters?"

Mr Arnheim was happy to have his firm described as a niche firm, the niche being transactions and projects requiring the services of a combined team of lawyers and other business consultancies. How big this niche actually is would become apparent. He hopes to grow from their present 35 lawyers to around 300 or 400. Size, however, is not the main ambition. "If it's not 300 or 400, but only 150,1 don't think we're really going to mind.''

* * * * *

How do these responses compare with the actual experience of the accountancy-law firms during the past few years? The largest and longest running firm, and the one with the most ambitious of the Big Six behind it, is Garretts. For more information about its progress we spoke to the various solicitors who had themselves worked for Garretts and moved on. They all preferred to talk 'off-the-record.'

On the positive side, they referred to Arthur Andersen's considerable resources and know-how. "They're good at running international networks and managing professional services as a business,'' was one comment. "They're way ahead of any law firm. Lawyers can learn a lot from the way they organise themselves and the way they market their services." This is what attracts law firms like Dundas & Wilson to join the Andersen network.

The Andersen name is also seen as an attraction. Certainly Arthur Andersen people assume it has huge appeal. And clearly it has, especially for lesser-known firms. Garrett & Co, a totally unknown name when it started, could hardly have grown so fast without the Andersen association. But the name has not had quite the appeal expected, and the failure to lure any major City firms into their arms has disappointed the Andersen management.

On the negative side, several difficulties are inherent in a law-accountancy combine. One is the different cultures prevailing in the two professions. Accountancy, especially audit work with its routine standardised tasks, requires systems, procedures, and large teams. This in turn demands supervision, middle management and the creation of hierarchies. Fee-earners greatly outnumber equity partners. Most legal work, by contrast, doesn't lend itself to this approach. Law firms encourage more autonomy.

Within Arthur Andersen, this difference is accentuated by the Andersen culture (see Conrmercial Lawyer, issue 16: 'Andersens Unveiled'). Since its early days in Chicago, the firm has grown organically, creating a powerful ethos of its own. Its outstanding success has reinforced its self-sufficiency and its pride in the Andersen traditions. To work for the firm is to become an Andersen per~ son, an "android: and to believe your ways are best. You're not minded to let some local law firm tell you that for their business their ways are better. You intend, if you can, to create a law firm in your own image.

Several ex-Garretts lawyers mentioned that Andersens have rigid ways of doing things, that they sometimes felt the touch of a management straightjacket. Also, being part of such a large organisation they rarely knew what was happening. Recent approaches to City law firms, for instance, were conducted primarily by Arthur Andersen executives. A merger would have had enormous impact on Garretts, but it felt as if the whole thing was being done over their heads.

Then there is the profit motive. Today, of course, all law firms need to be commercially successful, but lawyers still have pride in their profession. Few of them are in it just for the money.

The big multi-disciplinary firms take a different view. Increased profits are their overriding motivation. The law, like management consultancy, is just another professional service industry, another of their 'business lines.' It appeals to them because the practice of commercial law is profitable, it fits into their multi-professional services strategy, and it gives rise to opportunities for cross-selling. "To them," says one ex-Garretts lawyer,"the law is another add-on service. Naturally, the law firms look at it very differently."

The abortive negotiations with Simmons & Simmons were instructive. As last month's Commercial Lawyer relates, the discussions lasted almost a year, with meetings involving Alberto Terol, Arthur Andersen's world\vide head of legal, and Nick Prentice, UK head of tax who oversees the UK legal operations. At various stages, Jim Wadia, head of Arthur Andersen and a qualified English barrister, himself intervened in the negotiations. A number of Simmons & Simmons partners became reluctant to join Andersens when they discovered that their clients opposed the move. There was also resistance to the small number of equity partners that Andersens would allow in the new firm.

Another reason some Simmons partners turned against Andersens was the confused messages they were getting. Different Andersen executives painted different visions of the future. Simmons partners had expected Andersens to be more consistent, more clear-sighted. Diverse vie\vs from the various levels of the bureaucracy did not inspire confidence.

This accords with complaints from lawyers within the Andersen network about a lack of openness, a lack of involvement in decision-making.

* * * * *

Two years ago, in February 1996 (Issue 5), we published a survey of the Big Six's intentions regarding the legal market: 'Accountants on the March.' Their strategies were being finalized. Andersens' lead seemed worth following. Garretts had made an impressive start, and Julia Chain was in bullish mood. It was only a matter of time, she said, before accountants would dominate international legal services.

Our review concluded with the comment that "the accountants are moving into legal services by capturing the low-value niches." As a caveat we added that "they have yet to show they can attract the best lawyers."

Today, there's a feeling that the pendulum is swinging against them. The tightening job-market makes it harder to attract - and to keep - first-class lawyers. The failure to get Simmons & Simmons, and the open split within Andersens Worldwide, has dented the triumphant Andersens image. And there is widespread dislike of the mega-mergers now being proposed within the Big Six.

Our survey shows that clients won't come to their rescue. But it also shows that they do see a role - albeit a limited one - for the accountants' law firms. Those in favour said they would use them where the task was relatively simple (e.g. overseas company formations) and where both financial and legal input was needed (e.g. employee benefits, tax planning). These are among the core areas in which Garretts specialise.

Arnheim & Co have identified a niche, as we've seen, where they can join PW's combined teams of business consultants.

But this role falls short of the grand visions which motivated the accountants at the outset. They will press on, and with their resources and their determination there's no doubt they will grow. They will expand their international networks. However, our comment two years ago, that they haven't attracted the best lawyers, still stands. Perhaps they'll have to wait until the next recession, and a downturn in partners' profits, to capture the quality la\v firms they need.

* * * * *

There is a fundamental weakness in the accountants' strategy. It is not a response to client demand. Neither is it being pushed by the law firms. It comes solely from the accountants themselves, in their effort to build multi-professional conglomerates. So far, this effort has produced impressive results. But is it still in tune with today's market?

The 1960s was the golden age for industrial conglomerates, aggregates of unrelated businesses with no inherent synergies. That age is dead, and the conglomerates have been dismembered. 'Focus on core strengths,' is the watchword now. Perhaps the same watchword applies to the professions. Perhaps Andersen Consulting is right in trying to cut loose from the conglomerate that is Andersen Worldwide.

 

 

RESULTS OF THE SURVEY

 

 

For

Against

Neutral

Total

Heads of Legal

2

84

9

95

Finance Directors

1

29

4

34

Total

3

113

13

129

 

 

THOSE AGAINST (Heads of Legal and Finance directors in FTSE 350 companies

REASONS GIVEN

Specialisation

"I've found that combined firms don't have the expert knowledge."

"I want the freedom to choose the best accountants' firm and the best solicitors' firm."

AIndividual quality of lawyers is more important than a 'one-stop-shop' service."

"We prefer firms with real specialist expertise rather than engage an MDP simply for ease of communication"

Independence

"I agree with the SEC. Listed companies may have problems when their auditors give them non-audit advice of any materiality."

"Sometimes the best advice the lawyers can give is to sue the accountants."

"I feel more comfortable having independent legal and accountancy advice, each acting as a check on the other."

No synergy/benefit

"There is no value added from combining lawyers and accountants."

"No obvious benefit to the client."

"I see no logic in merging law and accounting firms."

Quality

"As yet, the combined firms have not attracted top flight lawyers or law firms into their networks in all jurisdictions."

"I've had experience of a firm of accountants' legal section, and the quality was not good enough."

"Combined firms have not so far attracted - and seem unlikely to attract - the best lawyers."

Too dominant

"It might be seen by shareholders to be giving too much influence to one firm."

 

"Our auditors are close enough to our business already."

"When you lose confidence in one team in an MDP it is difficult to part company if one is locked into the other teams in the same MDP."

"Could give one firm too much power to enforce their views."

"Danger of dominance of legal business by non-lawyers."

Different Standards

"Lawyers have higher ethical standards."

"The two professions have different cultures - they are important and valuable and should not be merged."

High fees

"Reduced competition may result in an increase in professional fees."

"Perception that costs will get higher."

"There is already criticism of the level of consultancy fees paid to auditors."

Cross-selling

"There's enough pressure already by independent firms to use other departments. MDPs would aggravate this time-consuming and embarrassing practice."

"Constant attempts to cross-sell services."

Conflict

"Accountants are already riddled with conflict of interest situations."

"Chinese walls don't work. I wouldn't want an accounting firm to even know we had instructed their legal practice. It may create nervousness on the other side if the same accountants did work for them."

"Already, finance/consultancy arms of big accounting firms are sharing client confidential data among associated parts of the same firm without clients' knowledge and consent. This is not acceptable."

 

 

NEUTRALS AND THOSE IN FAVOR (Heads of legal and finance directors)

HEADS OF LEGAL

FINANCE DIRECTORS

"I would favour 'combined' if it saves time and costs."

"Greater tendency to review tax and commercial implications simultaneously."

"Would consider using multidisciplinary firm where: 1. The task is simple (e.g. overseas company formations), and 2. The expertise, financial and legal, truly rests within one firm (e.g. benefit structures or tax planning)."

"Occasionally a multidisciplinary firm might be attractive for a particular job, but I would not expect this very often."

"Key criteria - quality of individuals and reputation of firm."

"Presence of firm in many jurisdictions."

"I use the best. If separate - fine. If combined - fine."

"'Would depend on firm."

"Should produce more efficient and co-ordinated advisers. Should reduce costs. Should improve business focus of advisers."

"One-stop-shopping has the attraction of easier and cheaper communication between two professionals working on the same project or on the clients' account generally."

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