Clash of the Titans: Big Four vs MBB vs BigLaw

Clash of the Titans: Big Four vs MBB vs BigLaw

What’s past is prologue

William Shakespeare

The professions are like evolving organisms, each continuously evolving to thrive in its environment. As George Beaton pointed out, each profession – accountancy, law and management consulting – started and grew in a profession-specific silo.

But now these silos are breaking down, fast. So to understand what’s happening, let’s start in the past, specifically the important intersecting points in the historical development of the accounting, legal and management consulting professions. The past as William Shakespeare observed, is a prologue to our present. And I would, our future.

Prologue I: Setting the foundation

During the late 19th and early 20th centuries, firms of the day were built on the master-apprentice model, as were crafts and trades. Each profession was in its infancy, serving the needs of clients, and running its businesses, although none would have spoken of the ‘business’ of practice. The global economy prospered on the foundations of the Age of Enlightenment, the Industrial Revolution and freeing up of world trade. The need for capital created the first networks of correspondent banks in the US as infrastructure projects fused the separate towns into a cohesive economic entity. Similar trends drove other western economies.

The world economy was booming in the late 19th century, this is best illustrated by the UK’s Edwardian Era of plenty, the US’s Gilded Age and France’s Belle Époque. The financial centres of the time were London, Paris, Frankfurt and Berlin as Europe was the world’s banker while New York emerged as a financial centre only in the early 20th century. Fuelled by commerce, it is also during this time that companies were recognised as separate legal entities with its rights being further crystallised in US and UK courts.

It was during these economic times that the founders of today’s Big Four and BigLaw firms established their practices, initially as sole practitioners. These practices were, in many ways, time telling (in the sense used by Jim Collins in his book, Built to Last: Successful habits of visionary companies) and many did not survive beyond the first or second generation. The importance of training and professional standards in the legal profession were first institutionalised by Paul Cravath in 1890 in what has become known as the Cravath System.

As we entered the 20th century, the need for professional standards led to the creation of professional bodies to govern the conduct of members of each profession, with strict rules of professionalism. The efficiency race in factories led to the creation of the management consulting profession (then known as management engineers) and this race gave birth to Henry Ford’s Model T. In fact the world’s first management consultancy was founded in 1886 by Arthur Dehon Little and Roger B. Griffin in Boston and the firm to this day is known as Arthur D. Little.

Prologue II: Industrialisation

As the world stood still during the World War I years, so did the development of the professions. The aftermath of World War I and the need for the productive investment of capital led to an increased demand for accounting, consulting, and legal advisers. The thriving practices of the time developed with the network of banks which funded development of infrastructure. This in turn gave birth to networks of professional services practices, with head offices mainly on Wall Street.

The Roaring twenties saw the rise of ‘world cities’ fuelling the growth of commerce and culture. During this time, most of the prominent accounting, management consulting and law firms we know today were born in the metropolitan centres of Berlin, Chicago, London, Los Angeles, New York, and Paris. In the hubris of the boom no one was prepared for the economic bubble that brought the world to its knees with the Great Depression. Some of the ill-equipped accounting, management consulting and legal practices of the time became economic casualties. Out of the turmoil came order, with the introductions of the:

These acts paved the way for accounting and management consulting firms to grow beyond their founding partners and small offices. During this time accountants became a staple of large corporations, while management consultants transitioned from time and motion studies on shop floors to high-flying strategy and finance advisers in boardrooms. Law firms were kept busy by corporate clients navigating through new and ever-changing regulatory frameworks.

World War II kept the business professions focused on facilitating governments’ efforts in moving capital and battalions across the Pacific, at least metaphorically.

Golden Age of Capitalism

At the end of World War II the accounting, legal and management consulting professions helped focus the $160 billion (in today’s dollars) injected by Marshall Plan to rebuild Europe and Asia. During this time tax accountants and lawyers were allowed to practise in partnership in Europe, German firm; Rödl & Partner embodies the multidisciplinary practices that prevailed in the European markets. These were forerunners of the clash of the accounting and legal professions that began half a century later. The accountants were first amongst the professions to make a concerted effort to follow their clients globally via networks of accounting practices. It is also during this time that globe-trotting Baker & McKenzie first embarked on its expansion journey, landing first in Caracas, Venezuela in 1955.

In the post-World War II era of economic expansion the world benefitted from Japan’s Golden Sixties, Germany’s Wirtschaftswunder, France’s Les Trente Glorieuses and Italy’s Miracolo Economico. It is during this time that some of the predecessor accounting and law firms of today were established. In 1968 Nobuzo Tohmatsu, then president of Japanese CPA Association formed Tohmatsu Aoki & Co that would become Big Four firm Deloitte Touche Tohmatsu, which to this day is the largest accounting firm in Japan. In 1962 Arved Deringer would partner with Claus Tessin to establish Deringer Tessin Hermann & Sedemund which would become the merger partner of Magic Circle firm Freshfields to form Freshfields Bruckhaus Deringer. In 1969, Jean-François Prat would go into partnership with Robert Badinter and Jean-Denis Bredin of Badinter, Bredin et partenaires to form France’s leading transactions firm, Bredin Prat and is today the French best friend of Magic Circle firm, Slaughter and May.

The strategy revolution of the 1960s saw the rise of the Lords of Strategy which turbocharged the rigour in management thinking for businesses. While McKinsey & Company’s Marvin Bower (who was trained as a lawyer at Jones Day) instilled his professionalism ethos that became the management consulting profession’s platinum standard. It was Boston Consulting Group’s Bruce Henderson who led the strategy revolution with his many intellectually elegant strategy tools, such as the experience curve and the growth-share matrix. This strategy revolution also gave birth to Bain & Company when Bill Bain (who was groomed to succeed Bruce) and several Boston Consulting Group executives left to form the third of the MBB firms in 1973.

The takeover battles of the late 1970s and 1980s on Wall Street saw the rise of M&A Titans, Joe Flom (“Mr Takeover”) of Skadden, Arps, Slate, Meagher & Flom and Martin Lipton (“Mr Defense”) of Wachtell, Lipton, Rosen & Katz. It was during this time that some rainmaker lawyers were propelled into the boardrooms as large corporations enlisted their help to formulate legal strategy in titanic takeover battles. The financial civil war on Wall Street fuelled the growth of the White Shoe and Charmed Circle firms which to this day enjoy a near-monopoly of large and complex deals. The 1980s was also an important time for the accountants as the Big Eight, for the first time, established itself under cohesive global brands – Arthur Andersen, Arthur Young & Co, Coopers & Lybrand, Ernst & Whinney, Deloitte Haskins & Sells, Peat Marwick Mitchell, Price Waterhouse, and Touche Ross. The information technology revolution of the 1980s saw the Big Eight build and expand their own consulting arms, setting the scene for clash of the accounting and management consulting professions.

Globalisation and growth of the 1990s

Globalisation and growth were the themes of the 1990s for all three professions. McKinsey & Company’s global expansion and growth in this decade epitomise the major management consulting firms’ expansive strategy of the day. Under now dispelled Rajat Gupta’s tenure as Managing Director, the MBB firm expanded into 23 new countries and revenue almost tripled to $3.4 billion. It is also during this time that the MBB firms start to see competition from upstart mid-tier firms such as Arthur D. Little, A.T. Kearney, Booz Allen Hamilton, Booz & Company, L.E.K. Consulting, Monitor Group, and Roland Berger leveraging strength from their niche practices.

In the legal arena while the Charmed Circle firms have monopoly of the capital that flows through Wall Street, out of the City, the Magic Circle firms made a concerted push to globalise by virtue of UK’s relatively smaller legal services industry and the global nature of the deals that flow through London. All the Magic Circle firms save for Slaughter and May expanded into Asia and Europe via alliances, greenfield offices and mergers. This would set the scene for the many trans-Atlantic mergers of the 2000s between mostly mid-tier US and UK law firms.

The accounting profession saw further expansion as the Big Six firms seemed to reach their natural growth ceiling in traditional arenas of accounting, auditing and tax. The Big Six made a concerted push into the legal arena with Arthur Anderson paving the way through Andersen Legal. The Big Six became the Big Five when Price Waterhouse merged with Coopers & Lybrand to form PricewaterhouseCoopers. By this time the consulting practices of the Big Five firms were now billion dollar goliaths in their own right in the management consulting industry.

Clash of the professions 2000s: Sarbanes-Oxley

At the turn of the Millennium, the Big Five firms entered a golden era having successfully built billion dollar empires in each of the accounting, legal and management consulting industries. The Big Five firms had successfully crafted strong brand reputations that transcended both the traditional boundaries of a single profession and geographic borders. Why it was the accountants has not been fully explained, but it was probably the result of being the profession that scaled fastest and was the first to globalise in the service of its globalising clients. The ease with which the accounting firms’ consulting and legal arms grew demonstrated the competitive advantage they enjoyed – global brand and global platform.

Before the Big Five firms’ march into the consulting and legal arenas was halted by Sarbanes-Oxley, they had built billion dollar consulting practices and some of the largest legal practices in the world. Using publicly reported data we have analysed the Big Five’s consulting and legal practices against the MBB in 2001 and compared them with then largest BigLaw firms in 2003; before the divestment of those practices occurred (click the infographic below to enlarge).

The world of the professions in the early 2000s was dominated by the size of the Big Five. Our analysis reveals:

  • PricewaterhouseCoopers was the largest professional service partnership, generating $22.3 billion, followed by Arthur Andersen’s $18.8 billion (when we combine Arthur Andersen and Andersen Consulting).
  • KPMG had the widest footprint, having established practices in 152 countries, followed by PricewaterhouseCoopers’ presence in 150 countries.
  • PricewaterhouseCoopers’ staff were most productive, averaging $139k, followed by Deloitte Touche & Tohmatsu’s $130k per head.
  • Andersen Consulting was the largest consulting practice in the world, generating $9.5 billion, followed by PricewaterhouseCoopers Consulting’s (later re-named ‘Monday’) $6.7 billion.
  • MBB firms’ staff were most productive as all three recorded higher revenue per head, McKinsey & Company led with $442k, followed by Boston Consulting Group’s $389k, and Bain & Company’s $295k.
  • The largest legal practice by number of lawyers was Andersen Legal’s 3,400 lawyers, followed by Baker & McKenzie’s 3,053, just edging out KLegal’s 3,000 lawyers.

Sarbanes-Oxley set in motion a chain of events at the same time the Big Five was reduced to the Big Four, as all but Deloitte divested their consulting business and PwC, their legal practice. Because most of the Big Five’s consulting businesses were focused on IT, IBM and Capgemini acquired PricewaterhouseCoopers Consulting and EY Consulting, respectively while Andersen Consulting became Accenture and KPMG Consulting became BearingPoint.

Clash of the professions 2010s: Professional Service Giants

More than a decade has since passed, and the accounting, consulting and legal arenas are drastically different. Incumbents in each of the professions are faced with structural changes as the digital economy gives birth to different business models, disintermediating the industry value chains. Increased sophistication in the consumption of professional services by corporations now staffed by those who previously their professional service providers mean the power has shifted permanently to buyers.

The segmentation of the management consulting industry is blurring as Big Four now compete head-on against the MBB. This was brought about as the Big Four firms became home to some of the global mid-tier consulting firms that struggled to compete against the brand prestige, service breadth and depth, and footprint of the MBB. We have seen Deloitte acquire the financially troubled Monitor Group and PwC digest Booz & Company and rebrand as Strategy&. Our research in the Australian management consulting industry reveals PwC and KPMG’s brand equity as measured by Beaton Benchmarks is now ahead of the MBB.

The legal industry saw the first listing of a law firm on the stock exchange in 2007 in Australia and in January 2012 the UK issued the first alternative business structure (ABS) licences. BigLaw firms are now more geographically fluid as trans-Atlantic amalgamations create DLA Piper, Norton Rose Fulbright, Hogan Lovells and Dentons, and most recently Sino-Western amalgamations like King & Wood Mallesons and Dacheng Dentons. Some of the BigLaw firms in jurisdictions characterised by highly sophisticated buyers and users of legal services, grapple with challenges from NewLaw are also seeing the blurring of tiers. All the Big Four firms save for Deloitte have acquired ABS licences, are now back in the legal arena in a more focused way.

Our analysis of the current state of the clash of the professions (click the infographic above to enlarge) reveals:

  • PwC and Deloitte’s professional staff are most productive, generating $197k per staff.
  • Among the Big Four firms in the consulting arena, Deloitte’s 57,900 staff in its consulting business currently is the largest by headcount, followed by KPMG’s 54,000. This may be attributed to the fact that Deloitte was the only Big Four not to divest its consulting business.
  • McKinsey & Company’s staff are most productive, generating $471k per head, followed by Boston Consulting Group’s $407k. We also note that while the MBB firms’ performance of revenue per staff has increased in the last decade, the Big Four firms’ performance on this measure has decreased.
  • Among the Big Four firms in the legal arena, PwC’s 2,400 lawyers is the largest, followed by Deloitte. This is probably because PwC was the only Big Four not to fully divest its legal business.
  • The largest of the BigLaw firms, Baker & McKenzie has the most lawyers with 4,245, followed by DLA Piper’s 3,962 lawyers. This however would have been eclipsed by newly merged Dacheng Dentons.
  • PwC’s legal practice has the widest geographic spread, with presence in 83 countries, followed by Deloitte, with 56 and EY’s 52. Interesting that Baker & McKenzie, the most globalised of the large BigLaw, is only in 46 countries.

Clash of the Titans

The next era will be a veritable clash of Titans with an intensity and consequences way beyond what the last 100 years has witnessed.

The boundaries between professions will become more and more blurred. New names, like Professional Services Giants, to describe the emerging combinations are required. And all the time the precious and perhaps precarious nature of professionalism must be protected for the benefit of society – and the professions themselves.

The scene is now set for the round 2 of the clash of the professions. As William Shakespeare put it, what’s past is prologue.

This post, first published in Bigger.Better.Both?, was written by Eric Chin, consultant to professional service firms on strategy, M&A and Asia. Please feel free to connect with me on LinkedIn or Twitter.

Sergey Maltsev

SaaS 🔄 | CFO 💸 | PE/VC 📈 | Globetrotting 🌍 | Libra ♎️

6y

Great stuff

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Eric Sedlak

K&L Gates LLP; Corporate/M&A Practice Group

6y

The Big Four's law firms will need to comply with conflicts rules on the same basis as large law firms.

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Kumar Anubhav Deep

Compliance & Risk-Wise PLC || Ex Team Leader (Automation Projects & AML Specialist) at JP Morgan Chase & Co. || Ex-Project BA at Genpact || Ex-Deutsche Bank || Ex-Standard Chartered Bank || Lean Six Sigma || Team Leader

6y

superb explaination.

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