Trending: Has EY Law bitten off more than it can chew in Pangea3? Quite possibly
When Thomson Reuters decided to offload its global legal managed services company, I like to think that the conversation went something like this:
TR: “Hey EY, wassup, you wanna buy Pangea3? Yeh, you might have heard we’re having a little restructure and we’re all about tech products now, not services. We bought Pangea nine years ago, which is ages, and, you know, things have changed, what can I say. Anyway it’s a great business, 1,000 professionals globally, very slick operation, it’s totally an ‘us not them’ situation. So, you wanna buy it?”
EY: “Oh wow you say 1,000 professionals? Globally? Sheez, that will really piss off the rest of the Big Four, scare the crap out of law firms, and get us on the map for legal operations with global corporate clients. We’re in!”
The reality would have been much longer and much more boring, if my brief stint in a law firm corporate department is anything to go by. But there is no doubt the acquisition arose out of an opportunity that EY snapped up like a hot cake.
It was probably right to do so. But just because it’s EY should we naturally assume that this was part of some pre-ordained world legal domination plan that is falling nicely into place? Probably not.
Ask people in EY Law what the strategy is for Pangea3 and they will probably tell you they don’t have a clue. Certainly, one person we spoke to said: “How is it going to be integrated? I’m not sure there is a plan. We’ve made a fairly big statement to the market but I’m not sure how much substance there is to it.”
To be fair, it’s early days. Former sole global law leader Cornelius Grossman, who is now co-leader with Jeff Banta (the former deputy vice chair for the Americas Tax, who was in June last year brought in to jointly head global law), tells us that it accelerates EY’s ability to scale up and is in line with its strategy to do so.
“We’re on a growth agenda: we want to build up the legal managed services business and roll that out globally and when we got this opportunity it was the perfect fit for our needs,” he says.
EY already has 2,400 legal advisers, so with Pangea3 that brings it to 3,400 – more than KPMG, Deloitte and most law firms with the exception of goliaths such as Dentons and Baker McKenzie. PwC has around 3,500 lawyers, so if we’re playing a numbers game, it is just short, dammit.
EY is buying knowledge and experience not technology – it will use the KIM legal operations platform licensed from Riverview as the basis of a combined offering that will provide clients with a menu ranging from higher end legal services to an acclaimed process driven volume business largely leveraging Pangea’s people, who are adept at using a range of different technology.
Incidentally, the Pangea3 business has never reached its potential thanks to under investment by TR and the fact that many large global law firms such as Herbert Smith Freehills and Baker McKenzie have leveraged an abundance of bright paralegals to set up their own lower cost support centres.
EY’s plan now is to build on this platform by licensing and developing its own tech offering: it has a large group of engineers to develop tech internally and Grossman says is willing to acquire solutions “if that’s a good deal.”
“We’re not becoming a technology company but if a solution clearly complements our business, we’ll consider it. The most important thing is that we fit the technology to the solution required, whether we develop, license or buy it,” he says.
The ultimate aim is to have 75% legal advisers, 25% legal operations and over a billion of revenue, providing a seamless offering of process and tech driven solutions as well as bespoke offerings. “That is what we’re heading for,” says Grossman.
According to Grossman, there are few overlaps between Riverview and Pangea3, and they have worked together for some time on client engagements, particularly when it comes to the contract lifecycle. “We see that as an ideal fit for scaling up the Riverview business and sending a message to the market that we’ve got knowledge, technology and process,” Grossman says.
You can’t help but be caught by the energy of the thing. And this is EY, who in September 2018 reported an eye watering record global revenue of $34.8bn. They don’t mess around.
But not everyone in the market is convinced. Obelisk founder Dana Denis-Smith says: “The integration will be one to watch for sure but with a lot of M&A it goes nowhere. This helps EY to say, ‘We’re market leader and we’ve done away with a competitor’ rather than ‘we’ve acquired real market efficiency.’ I can see the point of Thomson Reuters selling but I’m not convinced that for EY it’s such a good match.”
She adds: “EY want to signal to the market they are a big player and that there is a degree of consolidation in the market, but it’s narrowing down the options for the client.”
The target market for EY are clearly global corporates with a lot of compliance work. Its release following the acquisition said: “Following the recent acquisition of Riverview Law, EY Law practices are broadening further their depth and capacity to serve corporate legal departments around the world.”
What’s less clear in reality is whether the acquisition will narrow down the options for law firms, which make up a large part of Pangea3’s client base: across the board the LPO works with 47 of the top 50 law firms. Much of Pangea’s offering revolves around litigation support, which while it is connected to the audit business, EY has to be very careful doesn’t result in conflicts but it won’t be going after litigation work itself.
Conflicts are a constant issue when you get to this size and Denis-Smith says: “Having multiple entrants is good for the business and diversity. It feels like we’re going back to the LPO days rather than redefining the way work will be done. As if we’re leveraging on low costs without the vision.”
The acquisition comes as the government actively looks to break up the Big Four thanks to conflicts and concerns over poor quality audit in some cases: just last week the Common’ business committee led by Rachel Reeves concluded from its inquiry that the only way forward was to break them up.
“Our legal business is predominantly non audit, so it doesn’t affect us,” says Grossman. In many ways the legal services arm will benefit if audit is split off, because it won’t be fettered by such regulatory constraints.
Whatever your take on it, this acquisition has sent out a strong message to the market. Riverview’s former head of operations, Jeremy Hopkins, who is now senior legal project manager at Baker McKenzie, said: “The Riverview acquisition was fairly low risk. This is the confirmation of what may have been a glimmer of interest: it is now a statement of absolute intent.”
As observed by people such as Mark Cohen at Forbes, who quotes Elevate founder and executive chairman Liam Brown, this is indeed another validation of the alternative legal services opportunity and an indication of the maturing of that market.
But the temptation within the legal sector is to view the Big Four, in particular the more advanced practices of PwC and EY, with an unhealthy dose of awe, fear and self loathing. To revisit the breakup point above, while law firms have their very definite challenges,.EY is not without its own little distractions.
So, as to the question posed in the headline: has EY bitten off more than it can chew? Possibly, possibly not. But let’s judge its success by its actions, and not get too bowled over by the rhetoric.