What Does E&Y’s Proposed Acquisition Of Riverview Law Mean?

It means E&Y will soon own Riverview Law

Years ago in my early days working as a lawyer in-house, a major company in my employer’s industry acquired another, much smaller player also in the industry. Everyone was talking about what the acquisition meant— for our company, for the industry, and on a larger scale. Our CEO had been around the block a few times in more than one industry and was seldom disquieted by anything that happened. When asked what he saw as the ramifications of the transaction he replied, “It means that Company A now owns Company B.”

He was not trying to be glib or funny, he was simply stating the obvious — an acquisition affects the parties involved and, unless it is enormous or involves two major (by size, not by reputation) players in an industry, it does not have much impact. We should look at the E&Y acquisition of Riverview Law in the same way. It could mean much for Riverview Law and, obviously, E&Y believes it could have a positive impact on their business. For the rest of us, I doubt it will have a meaningful impact.

Unless…

Yes, lawyers like to hedge so this is my hedge. If Riverview Law under E&Y really takes off then it could impact the industry. But, the same is true for any player in the managed services segment. E&Y’s resources could assist Riverview Law in getting to the next level. So could E&Y’s customer base, who may look more favorably on using Riverview Law with E&Y standing behind it. And, obviously, E&Y’s name recognition could help.

But these are all “could” situations and again, other players in the legal ecosystem could take off and accomplish disruption similar to the E&Y/Riverview Law combination. They have access to capital, established businesses, and strategic savvy. Who owns Riverview Law will not be as important as how many decide to use managed services.

Remember…

Most acquisitions do not succeed. This is not a recent phenomena, it is a long standing statistic. Somewhere in the range of 75–80% of acquisitions do not succeed. That may not seem obvious, but that is because those acquisitions which do not succeed tend to be swallowed by other news. Time passes, public companies take visible writeoffs, brands are dropped, and we just forget about old whatsisname, the acquired company that no longer exists.

Of course, those selling a company may do very well. And, I am not predicting that the E&Y acquisition will fail, far from it. If E&Y lets Karl Chapman do his thing and gives him the resources to grow the business, it could be an amazing thing to watch. But, those are a couple of big “ifs” and it will take time to see how the combination works out.

In any event, there is the trend…

The acquisition did bring more attention to the trend of law departments using managed services providers. So, everyone who is in that business got a boost from the acquisition, at least in terms of general counsel asking themselves whether it is time to make the jump.

Will that accelerate the trend? Probably not. Indeed, the report from the field from general counsels is a lukewarm “piquing their interest.” Those already inclined to make the jump will jump and those still debating the value proposition will keep debating. E&Y’s confidence in Riverview Law will not translate into law departments making the switch (again, unless Karl is let loose), except possibly for a few who were considering Riverview Law and like the greater security E&Y brings.

There is a difference between what we see when events like this happen — lots of articles talking about what the event means — and what really happens. It is possible the articles will do more to prod general counsel into using managed services than the acquisition itself. As Bill Henderson might say,

For roughly 5/6th of the legal market, the adoption of new innovations is more a social process of imitation than a mental process of analytical reasoning. This means that the vast majority of lawyers (or law students or law professors) won’t change until they see others successfully change first. Adoption decisions are more than rational, explicitly stated risk calculations; they are also strongly influenced by the often unstated desire to fit in or, alternatively, the fear of being left behind.

In other words, the Riverview Law acquisition may not do much to shake the market, but FOMO (fear of missing out) and stories in the articles about law departments that have jumped to managed services may drive general counsel to act.

And speaking of trends…

This year has been the year of money moving into the legal ecosystem. Avvo, LegalZoom, SpringCM, and Riverview Law are just a few of the investments and transactions that have occurred. We still have four months to go. At the same time, the US economy is sending all sorts of signals that we are facing a downturn, probably in the next year or two.

When that downturn comes, I’m betting legal departments will run for more cost savings. Law firms have reduced costs in the obvious areas, which means there probably isn’t a lot left to cut if you exclude fee earner labor costs. At the same time, firms have ignored the opportunity to learn how to flex to bring down their breakeven point for profitability and to reduce costs to clients. I am not saying anything new here, but it is likely a downturn will clean out some of the weaker firms and favor the law companies. Many of the investments and transactions this year suggest some players are looking to the future, while the law firms dream of the past.

One more thing…

There is a lot of discussion about the Big 4 invading the US legal market. There are, however, some complications to consider. First, the Big 4 are still wary of the US regulatory market. They are wary of the regulations around the “unauthorized practice of law,” mind you, but the ones that really matter to the Big 4 are the regulations that govern what accounting firms may do as auxiliary services to auditing.

Let’s look at a public company. Go to the proxy statement and you will find a chart, usually near the end, which lists the fees paid to the independent registered public accounting firm for the current year and the prior year. That chart breaks the fees down into various categories. The big three are audit fees, tax fees, and all other fees.

To maintain its position as an independent auditor, the accounting firm performing audit work should not perform other, non-audit work, in an amount that “ a reasonable investor with knowledge of all the facts and circumstances would conclude that the auditor is not, capable of exercising objective and impartial judgment on all issues encompassed within the audit engagement.” In addition, the auditor is specifically prohibited from performing “[l]egal services and expert services unrelated to the audit.”

No problem, right? If your company’s auditor is one of the Big 4, pick one of the remaining three to do the legal work. Well, it isn’t that simple. Large, public companies, often need the services of two or even three of the Big 4. For example, they may farm out tax advice to a second Big 4 firm and they may have a third provide other, non-financial auditing services. They would want to keep one of the Big 4 “clean” — meaning if there was an audit dispute or another problem, they could switch their audit work to the clean firm (and you want an alternative to keep the firm honest on the cost of the audit).

Overall, this means it can be difficult to give some legal work to one of the Big 4 (difficult, not impossible). And, of course, there are conflicts of interest to consider, both legal and business. Add to those factors considerations such as whether the office of the Big 4 firm your company wants to use for audit services has expertise in your industry, an office near your headquarters, and who would handle your account (recognizing that the lead partner must rotate every few years).

Then there is the question I and others have raised. At what point do you lose the value of having independent lawyers answering questions? If your company’s outside lawyers provide a plethora of other lucrative services, such as consulting and tax advice, do you question whether they are providing the independent legal advice your company needs? Accounting firms got into trouble in the conflict of motives area in the past and are not anxious to go there again.

To sum up, yes the US market is a juicy target and yes there are ways to address the issues that arise when accounting firms become law firms. Those answers have not come up yet or been passed on by regulatory authorities. When entering the US market, the Big 4 are conscious of the risk: providing legal services is a tempting growth area, but doing so needs to be balanced against risks to the existing business. For right now, all four are treading cautiously in the US and focusing their growth efforts on less challenging markets.

So, in conclusion…

We love to look for signs. If this happens, then that will occur. They give us the feeling that we really can see at least part of the future. In the end, of course, few go back and look at whether our correlations of signs with the future were correct. Predicting the future of E&Y/Riverview Law acquisition is too complex, as with most acquisitions (partly why companies have such lousy track records with acquisition). Too many variables come in to play, and many of them are outside the control of the actors involved. I have offered my opinion, but I am handicapped by the same challenge as everyone else. None of us knows what the future will bring until it arrives.

The real question pushed aside by the speculation is whether the movement towards managed services is right for clients, providers, the legal ecosystem, and society. I think it checks all four boxes, but we need data to assess whether that is correct. For those already on the managed services path (provider or consumer), staying on that path seems a wise choice (and may become wiser when we hit the downturn). Again, we need data to evaluate whether that is correct.

For those not on the path, a question: “When the downturn hits — and it will hit regardless of my time prediction — what plans do you have in place to seriously reduce costs, while improving quality, productivity, and timeliness?” If you don’t have a robust, on paper, ready to pull the trigger plan, then you are in a bad place that can only get worse. Why? Because those already on the path and those that do have a plan will be the first to suck up available managed services capacity, leaving you to ponder the famous phrase “pursuing other career opportunities.”

P.S. — And E&Y says …

On the same day this article was published, E&Y announced its plans for Riverview Law. Doesn’t change a thing. One could presume that E&Y wanted to expand Riverview Law’s reach, which is why they are buying it. Whether E&Y can expand headcount from 100 to 3,000 over the next five years is something we’ll have to wait to see. As with most acquisitions, plans for the future are big, but reality has a way of intruding. And, of course, if the market for managed services in law is that big, competitors will come rushing in (there are, of course, competitors).

As I noted above, part of the success of the acquisition rests on whether E&Y gives Karl Chapman the leeway and resources he needs to grow the acquired business. Karl has stated that he is staying on for three more years. Best of luck, Karl, here is hoping E&Y has the good sense to stay out of your way.

Ken is an author writing about innovation, leadership, and the future of people, processes, and technology in the legal industry. He is has been featured as a Top Writer on Medium in Artificial Intelligence, Innovation, and Leadership. He is an Adjunct Professor and Research Fellow at Michigan State University College of Law; and on the Advisory Boards for Elevate Services, MDR Lab and LARI, Ltd. You can follow him on Twitter, connect with him on LinkedIn, and follow him on Facebook.