EY and Deloitte recently made headlines and fueled speculation by purported plans to spin-off their audit and advisory arms. EY, Deloitte, PwC, and KPMG (The Big Four) have come under protracted, intense criticism for a lack of independence in their auditing of company accounts because of fees their advisory partners generated from consulting, tax, and advisory work. A split would liberate advisory teams from those conflicts and enable them to vie for a significant chunk of additional legal work.
Untangling the audit and advisory arms would be a big deal. It would rachet up pressure on all but a handful of elite corporate law firms that dominate premium legal matters. Everything else would be up for grabs. The split would likely boost Big Four advisory profits and market share but have a lesser impact on their workforce and customers. That’s because the byzantine partnership structure of the Big Four would remain intact. This creates multiple challenges—and competing interests—for centralized governance.
Structure shapes an organization’s purpose, culture, economic model, metrics, decision-making, and willingness to collaborate. The Big Four members are amalgams of multiple individual partnerships, each with its own balance sheet. They are complex, inter-connected partnership networks operating under a single brand name. Partner members are not always aligned in their economic, strategic, or cultural interests. Like partnership law firms who share these intramural tensions, conflicts play a key role, too.
The Big Four structure is remarkably similar to most large law firms who operate under a single brand name but whose partner interests often diverge along economic, practice area, geographical, and generational lines. The largest law firms—Dentons, DLA, and Baker McKenzie are all Swiss vereins They share many of the internal challenges and conflicts confronted by the Big Four.
What if one or more Big Four advisory spin-offs jettisoned their legacy partnership structure and replaced it with a corporate one? That would be a really big deal. Partnerships are for partners. Corporations, especially in the digital age, are becoming responsive to a wider stakeholder group— workforce, customers, society, and the planet. This paradigm shift inures to the benefit of its workforces and customers because it aligns their interests in ways that the partnership model and the traditional shareholder-focused corporate structures do not.
The transition from a partnership/verein structure to a corporate one would spawn a mindset change. The partner-centricity and internecine conflicts that are endemic to the Big Four and law firms would yield to customer focus and a unification of purpose. It would also turbocharge collaboration and erode balkanization of competing internal groups. This would inure to the benefit of customers and the workforce.
Digitally advanced companies (read: leaders) take a longer-term view, one that promotes sustainability. The dynamic with their various stakeholder groups is more relationship-oriented and less transactional. This contrasts with the short-termism of traditional partnership law firms whose annual rite of divvying up profits produces a “take the money and run” and “planning for the future is somebody else’s problem” mindset. A corporate structured Big Four advisory arm would be playing a long game. This would galvanize the workforce, attract and help retain talent, augment investment, promote innovation, and reward high-achievers with a financial stake (equity) in the organization’s future.
A Big Four advisory adoption of a corporate structure would turbocharge the legal function’s digital transformation and kick-start its broader alignment with business purpose, culture, metrics, data agility, technology platforms, agility, and customer-centricity. It would also further expose the gap between the Big Four’s holistic approach to solving business challenges and law firms’ narrower contribution to corporate problem solving and value creation.
There are several other reasons why a corporate structure would be transformative not only for the Big Four advisory adopters, but also for their workforces and customers. Before listing them, a quick review of the Big Four’s pre-history in legal provides context.
The Big Four And Legal: Their Second Go ‘Round Will Not Be Déjà vu All Over Again
The Big Four are not new entrants to the legal industry. Their initial foray back in the 1990’s did not work out so well. The Enron and WorldCom collapses, the criminal indictment and bankruptcy of Arthur Andersen, passage of the Sarbanes-Oxley Act (SOX), and the ABA’s rejection of multidisciplinary practice (MDP) contributed to their exit. Why will this time be different? To borrow from Lou Reed’s Sweet Jane, “Those were different times.”
The Big Four’s reentry into the legal industry nearly three decades after their retreat is different this time. A Lexis Nexis Report notes that the Big Four’s head-on approach to competing with Big Law taken in the ‘90’s has been replaced by a focus on legal work that plays to its strengths. The list includes: project and process management, automation, technology, data agility, change and supply change management, multidisciplinary expertise, design thinking, and digital transformation to cite a few. The Big Four now compete with Big Law asymmetrically. They seldom vie with elite law firms for premium “bet the company” legal work, choosing to compete for a wide range of other matters that comprise the bulk of overall legal spend. This is “operate the legal function and integrate it with the company” work.
The Big Four have capitalized on the disaggregation of legal work that hardly existed in the ‘90’s. Back then, law firms handled the bulk of legal work except for a relatively small in-house portfolio. Today, the migration of work from firms in-house, coupled with the growth of law companies (a/k/a ALSP’s) and the adoption of technology and multidisciplinary expertise, has created a more competitive, expertise-oriented, non-binary, and fluid market for legal services. This has been accompanied by erosion of the myth of legal exceptionalism and lawyer claims that all legal work is inherently bespoke.
Technology; the speed, complexity, global footprint, and new threats and competition of business; regulation and compliance; paradigm changes in the buy-sell dynamic; data use; and other factors have transformed the role and remit of the legal function. It is now part of a larger whole. Law is no longer solely about lawyers, and the legal function is being reshaped by its customers and end-users, not lawyers. All this creates a favorable climate for the Big Four. Their deep C-Suite ties, business knowledge, and gargantuan multidisciplinary workforces are advantageous to integrate and extract greater value from the legal function. A corporate structure would significantly reduce internal partnership conflicts and inure to the benefit of customers.
Several corporate legal departments have already begun their digital journeys, and this has widened the gap separating them from law firms. The Big Four could help bridge that gap. They already advise many global businesses on digital transformation, and that makes them a logical choice to guide the corporate legal function’s digital transformation. A corporate-structured Big Four advisory arm would operate in a more team-oriented, cross-functional, collaborative way than a partnership. It would focus on outcomes and customer satisfaction, not elevating individual partner profit.
Why The Corporate Model Is Good For The Legal Workforce And Customers
It is axiomatic—but worth calling out—that a healthy, fulfilled, purpose-driven, agile, and engaged workforce is good for an organization and its customers. That’s why digitally advanced companies are focused on their employees and customers. They recognize that both are prized corporate assets whose well-being is essential to achieving enterprise goals and sustainability. The corporate model is not a panacea, but it is superior to the legacy firm partnership for workers and customers. Here are several reasons why.
- The legacy partnership model produces eye-popping partner compensation, but it offers little purpose to its workforce and even partners. Numerous studies on the causes of the Great Resignation (a/k/a Reshuffling) reveal that purpose—the “why” of the job– is critically important, especially among younger workers.
- Culture. Organizational culture is an increasingly important consideration for the workforce. Humanity,collegiality, learning new skills, collaboration, upskilling, managerial tutelage, diversity, equity, and inclusion are cultural elements that help attract and retain top talent. The law firm partnership model generally lacks most of these characteristics. It is more individualistic than collective; zero-sum than collaborative; input over output-oriented; rigidly hierarchical, not flat; homogenous, not diverse; and risk-averse, not innovative.
- Health and Well-Being. The legal industry suffers from well-above-average rates of suicide, mental health issues, substance abuse, and divorce. The personality type associated with law (traits law firms tend to prize) is competitive, over-achieving, driven, and trained to avoid making mistakes at all costs, not to experiment. This personality profile likely contributes to the overall poor health and well-being of legal professionals, but environmental factors exacerbate it. Long hours, pressure, an elevated fear of failure, intense competition, lack of purpose, and plenty of “make work” undermines mental and physical health and well-being. Work-life balance yields to the demands of billable hour quotas, and humanity is often checked at the front door. Corporate structures are not immune to this, but they are increasingly making long-term investments in their workforce and customers. This is essential to corporate success and requires a no-holds barred, ongoing assessment by management of its relationship with the workforce. Both sides must be transparent, agile, and committed to advancing the corporate purpose. They must also be humane and alert to each other’s health and well-being.
- Teamwork. The partnership model pays lip service to “collaboration” and “teamwork,” but it is seldom evidenced by traditional law firms. Teamwork, alignment, collaboration, cross-functional teams, and agility are all elements of successful companies that hire for these traits and establish them as cultural foundations. Successful teams are diverse but unified by a common goal.
- Profit-per-partner remains the Holy Grail of law firm metrics. The workforce is well aware of this; billable hours and business origination is how it is achieved. Partners become the de facto clients of their workforce, not the end-users of firm services. The corporate model promotes customer-centricity and rewards it accordingly. The partnership model is partner-centric and measures worker contribution by input, not output. Many corporate legal departments once aspired to be in-house captive law firms. That’s changed. Business demands that legal align with business, adopt its technology platforms, processes, data agility, customer-centricity, collaboration, and value creation. This elevated expectation of the legal function by business has created a widening gap separating corporate departments and their outside counsel. Legal service providers with corporate structures are well-positioned to bridge the in-house/law firm gap.
- Hierarchical vs. Flat Structure. Law firms have rigid hierarchies designed to preserve the status quo—serving partners. Corporate models have become flatter, enabling high-achievers to contribute up to their skill level. Seniority and job title remain paramount in firms; skills and results are key in the corporate structure. Successful corporations are diverse, collaborative, cross-functional, inter-generationally synergistic, agile, and innovative. These are not characteristics associated with large law firms.
- Advancement/Professional Growth. The partnership model typically equates professional advancement with billable hours. The infamous DLA “Churn that bill, baby!” memo attached to a court filing called out a secret everyone knows: law firm overstaffing and overbilling. More recently, an internal memo by Hogan Lovells CEO Miguel Zaldivar noted the firm’s expectation of 2,400 “mostly billable” hours per year as a baseline for partnership consideration. Many firms give bonuses for hours that exceed billing quotas. This focus-on input and the partner-centric approach it supports is out-of-synch with the marketplace. It is soul crushing and a reason why, even before The Great Resignation, large law firms had a significant turnover problem. Turnover is not only rampant in the associate ranks but also among partners (where the term “lateral” is euphemistically applied). The pandemic has caused a large segment of the workforce to reconsider their priorities and options. Legal consumers are also considering their options. A corporate structure would help change this dynamic and shift the focus to what’s best for customers, not partners. That transition would alter the metrics, mindset, and motivation of the legal workforce.
- Different Models/Different Times. The partnership model has had a long run. The changing demands and expectations of business for the legal function, a workforce that has different success metrics and work-life balance expectations, technology, and other opportunities (in and outside of the legal industry) are challenges to its sustainability. A corporate structure is a far better fit for digital business and for a legal services workforce that must proactively defend its customers as well as create value for them.
- Creativity and Innovation. The partnership model does not lend itself to creativity or innovation. That’s because equity partners, many of whom are in the latter stages of their careers, have little financial stake in the firm’s future. Most focus on preserving the status quo—at least until they retire. This tamps down on creativity and innovation which many firms pay lip service to but few provide sufficient budget, backing, or political clout to effect change that materially impacts the workforce and/or customers. This is demoralizing for the workforce and detrimental to customers.
- Internal Conflicts That Undermine Cohesion and The Best Interests of Customers. A corporate structure would diminish internecine disputes over business origination as well as the proprietary approach to clients common among law firm partners, practice groups, industries, and geographies. A corporate structure would foster greater collaboration between practice groups, partners, and other legal professionals by focusing on output, not input; replacing legacy lawyer-centric metrics focused on profit-per-partner with measures that gauge and advance customer satisfaction and impact. Most of all, corporate structures have a unified purpose. That will not wholly extinguish internal squabbles, but it will diminish them by a unified purpose.
- Investment and Taking the Long View. A corporate structure would expand investment in customers, data, technology, and human resources. That represents a longer-term view, one that is less transactional and more relationship-driven. Digital transformation is a journey, not flipping a switch. It takes investment, calculated risk, time, and change management. The partnership model is not geared to this but the corporate structure is.
- An End To Fiefdoms. A corporate structure would break down partnership fiefdoms and replace them with more collaborative, cross-functional, agile workforces that would benefit the workforce and customers.
- Diverse Workforces. Big business understands that holistically diverse workforces (inter-generational, geographically, multidisciplinary, socio-economically, culturally, and experientially) are not only intrinsically valuable but also good for business. The partnership model remains far more homogeneous, particularly in the senior management/partnership ranks. A corporate mindset that considers the interests of a broader set of stakeholders is more apt to promote diversity than a partnership that tends to look for younger versions of themselves. That produces a more inclusive, team-oriented, innovative, and welcoming culture that will attract and retain talent, produce fresh ideas, and better align with customers and society.
- Data Agility. Business runs on data. It is not a substitute for human judgment; it is an enhancer. Partnership firms often fear that data will cut into their revenue and profit. A corporate legal delivery structure (already in place among a handful of law companies)
is far more likely to invest in mining, analyzing, and applying data to proactively identify, extinguish, mitigate, or quickly settle customer disputes. Data can also streamline the contracting process, regulatory and compliance matters and other legal functions.
- Equity. A corporate structure would reward contributors (not just partner-level ones) for their positive impact on the organization’s stakeholders. A wider cohort of equity holders in the organization promotes collaboration, teamwork, cross-functionality, internal stability, talent attraction, and a heightened interdependency between/among different functions of the organization. All this works to the benefit of the workforce and customers. This contrasts with law firm partnership where “equity” is profit sharing and, in some instances, a pension, not true equity. This goes to the heart of the issue: if you live by the law partnership model, you will die by it.
The Big Four have an opportunity not only to capture significantly larger legal market share, but also to end the long-standing hegemony of the legal guild. The spin-off of their advisory and audit arms is an important first step. Replacing their partnership structures with a corporate one would be a giant leap forward. It would turbocharge the legal function’s integration with business and elevate its impact on customers. A corporate structure would be a magnet for lawyers and allied legal professionals, offering them a unique opportunity to be in the vanguard of transforming legal delivery to meet the needs of its digital customers.
Article originally posted in Forbes.