Why are there no lawyer-backed MDPs?

With the rise of multi-disciplinary practices (MDPs) receiving daily comment in the professional news, this is certainly a question worth asking.

Before adding my own observations to the debate, I should spell out what I am thinking about and what I am not.

For starters, I appreciate that much work of many solicitors’ firms in England and Wales falls outside the reserved areas. As a result, there is a sense in which many law firms are already MDPs. Similarly, I am not thinking about those alternative business structures (ABSs) that, in the course of providing retail legal services, offer ancillary, non-legal services, such as car hire, medical reports, etc.

Those are the things which I am not thinking about. What I am focusing on are diverse business-to-business professional service firms, typified by, but by no means limited to, the big four accountancy practices. These MDPs have historically not provided legal services to clients, although the majority of the big four accounting firms are now licensed to do so in England and Wales. MDPs can be found in most jurisdictions, but whether they include legal services among their client offerings depends on local regulations.

Taking as read the need to comply with the requirements of the Solicitors Regulation Authority (SRA) and other professional regulators, it’s worth asking why so few commercial law firms have yet to develop business plans to provide multi-disciplinary services to their clients. My conversations with partners in larger legal firms identify three issues as inhibiting the formation of solicitor-backed MDPs.

First, conflict and competition: a solicitor-backed MDP may find itself in competition with other professional firms that are valuable sources of referred work. Equally, the MDP may give rise to additional conflicts, which cannot readily be managed.

Second, culture and ownership: for equity partners in a large, successful law firm to transfer their practice into an MDP where professionals who are not solicitors are offering services of which solicitors have little or no knowledge may be a bridge too far.

Third, profitability: there is a notion that, for equivalent levels of ability, seniority and experience, solicitors earn more than accountants! Law firms that have reviewed the possibility in more detail have recognised that, for some firms at any rate, average profit per equity partner would be diluted. While this line of thinking carries some immediate deterrent effect, it may miss the point. Existing law firms with multiple service lines may already effectively be managing different businesses with different levels of profitability. In an MDP, the question has to be approached via a consideration of the business structure and who participates in what profit stream.

So what of the rise of MDPs that include legal services among their client offerings, but which are not ‘lawyer-backed’?

Much has happened since the first wave of accounting firm takeovers of law firms in the 1990s. To a greater or lesser degree each of the big four accounting firms has become a diverse professional service group with global reach and a huge diversity of service offerings. This position reflects a year-by-year, decade-by-decade ability to realise the potential of business opportunities arising from the globalisation of markets, the evolving needs of clients and regulatory change. It’s hardly surprising, therefore, that most of the big four now have, or have applied to the SRA for, whole-firm ABS licences. Successful applicants, including KPMG and EY, will be able to provide legal services under the terms of the licences.

Should law firms be afraid? Probably not. Should law firms take notice? Definitely.

The entry of agile, powerful and well-managed competitors into any marketplace is not to be dismissed lightly. The current debate around the consulting services market, which is proclaimed as a major growth area by each of the big four firms, focuses on the astounding pace of change that the big four can achieve when they put their minds to it. EY, for example, plans to grow its strategy consulting practice to over 2,500 professionals by 2020 and has recently appointed a new global leader for the business.

Some figures may help put this in context. In the UK, the Legal Business 100 confirms that the 2014 revenues of the Magic Circle law firms totalled £6.65bn. The equivalent figure for the big four accounting firms was £8.71bn. Globally the disparity is even more pronounced. The 2014 Legal Business Global 100 shows that the top ten global law firms had revenues of $21.2bn. By contrast, the 2014 global revenues of the big four accounting firms were £120.3bn. At $24.8bn, the 2014 global turnover of the smallest big four firm, KPMG, exceeded the combined revenues of the top ten global law firms.

The big four therefore have the muscle to drive change and provide the largest global clients with the breadth of services that most law firms will not have the scale to match.

In early-stage competition, building revenues comes first. As part of a conscious strategy, profits will then follow for first-movers, while those who are late to the party may struggle from the outset, unable to compete against established firms and their evolving pricing policy.

Will we see other professional service organisations applying to the SRA for whole-firm ABS licences? Without a doubt.

Will we see a solicitor-backed MDP? I hope so.