Defiance or alliance?
10 January 2000
Abigail Townsend reports on the inevitable rise of the multidisciplinary partnership and the problems it poses for the legal profession.
The last couple of years have proved to be turbulent for the legal profession.
Mergers, partner moves, the Woolf reforms, globalisation, business development and technology are dragging one of the UK's oldest professions into the 21st Century.
But the latest and perhaps the greatest challenge facing the profession is multi disciplinary partner- ships (MDPs).
1999 ended with the Law Society council voting overwhelmingly in favour of mixed partnerships.
The council recognised that the implementation of full MDPs will take time and considerable legislation but has agreed to work towards "allowing solicitors...to provide any legal service through any medium to anyone" (The Lawyer, 18 October 1999).
But this is not an entirely new concept in the UK. Most of the big five accountants already have a legal arm - Dundas & Wilson and Garretts are the associated firms of Arthur Andersen, KPMG launched KLegal in May 1999, and PricewaterhouseCoopers has its own legal arm Arnheim Tite & Lewis.
Ernst & Young and Deloitte & Touche, which both have multi disciplinary practices in other parts of the world, are poised to join their rivals in the UK.
Ernst & Young's adviser for legal services Andrew Dowes says: "Our preferred strategy [in the UK] is to have an association with a law firm or to start our own."
He is unable to confirm when this will happen, but he says Ernst & Young is holding discussions with law firms, adding: "We see this as a long-term development but certainly it is something that will happen."
Most believe the move towards MDPs is inevitable because of economic and political pressures. But exponents of the practice say the biggest push will come from the clients who, in an increasingly global market, want a one-stop shop for legal and financial services that they can use anywhere in the world.
This was the main reason behind Dundas & Wilson's decision to join the Arthur Andersen network a little over two years ago.
Chris Campbell, Dundas & Wilson's managing partner, says : "The key benefits for us were the additional opportunities for our clients and our people. The driver was getting into an international market beyond our own Scottish market and to help our clients.
"These were seen as immediate benefits, and coupled with that was the perception that in the mid to long-term the ability to offer integrated services would be attractive to our people and clients."
However technology company Equant's senior counsel and vice-president Elizabeth Wall believes that MDPs in their current format do not benefit the client She says: "There should be a level playing field of regulations otherwise you have a two-tier system and a free-for-all. I do not think clients want that."
Despite this view Campbell does not think Dundas & Wilson's decision to join the network was a gamble.
He says: "One of the things that was key to our thinking was to strike first and ensure the party we wanted to work with was available. We went with the multi disciplinary solution because in the long-term that will be the right way to go.
"Scrape below the surface of most mergers and you will see that firms are simply getting bigger for the sake of size. It is looking for economies of scale rather than a strategic reason for going down that track."
But Arthur Andersen has not had the same level of success with its associated law firm south of the border.
Garretts was set up in 1993 as Arthur Andersen's associated law firm. But the firm spent most of 1999 haemorrhaging partners. In May, it lost its senior partner, two department heads and a partner. Three of these departees went to regional rival Addleshaw Booth & Co. It ended the year with three partner departures in swift succession, including the head of banking Susan Molloy to Halliwell Landau.
A source close to the firm believes the departures have been caused not by the concept of an MDP, but by the way Arthur Andersen is trying to achieve one.
The source says: "The sort of vision Andersen Legal has is not really being developed. If you are going to compete at the very top then you need critical mass and the best clients and Garretts has neither."
Not so, say Garretts. Senior partner of the Manchester office Tim Hamilton concedes the firm has suffered during the last year but believes it is part and parcel of establishing a new model.
He adds that many of the departees had the wrong expectations of Garretts when they joined. "We will probably have a high turnover of staff as we grow the practice because we are creating something different," he says.
"Andersen Legal is a new model and some individuals will find the culture challenging and ultimately too challenging. It is disappointing to lose good people but it is a fact of life."
But even the accountants have their doubts about this new model. Simon Mabey is a partner at Smith & Williamson and while he believes MDPs are here to stay, it is not a situation he relishes.
Mabey says: "The big five had a bit of a rocky start but they have enormous resources. If they are prepared to throw money at it for some time then I think they will get there in the end.
"But the big five will then stop recommending outside firms and will also have less experience of outside firms. Do you really want to buy all your clothes and food and everything else from Marks & Spencer? You will not know what is going on with other shopkeepers."
He is particularly concerned with potential conflicts, adding: "It is a very interesting and difficult area and I suspect we have not seen the end of legal cases on the subject.
"The one way we will get there is if the accountants and lawyers' professional associations provide the same rules. I prefer the Law Society's rules - if you have a conflict you cannot act. But I'm not sure the will power is there to harmonise."
Stephen Fiamma, partner in charge of US firm Jones Day Reavis & Pogue's London office, goes one step further, saying MDPs cannot work because of such conflicts.
He says: "Even now they are difficult to put together properly. They put out this marketing saying they are a band of brothers but when it comes to auditing they say 'no, we're just 500 separate partnerships who happen to have the same name'. That is pretty bogus in my view."
His main concern is auditing arms working within a partnership that is able to offer a range of services to the same client.
He says: "It will be extremely difficult for a tied law firm to come in and then, once the deal is done in a year's time, the audit arm to move in. If it is fatally flawed would they be inclined to blow the whistle? I think in the real world they would not. What we are dealing with here is human nature.
"In the long-term the only way MDPs will be viable will be if the accountants spin-off their audit arms. The problem is the audit arm is the entree that gives the ability to sell all the other services. It is the key door opener."
Nonsense, says Dowes, who says concerns about conflict are being exaggerated. He says: "Of course Ernst &Young is concerned about conflict but it is very much a UK and American focused thing. Of course we have conflicts but you just have to deal with them in a proper and professional way.
"There are already all sorts of areas where our services overlap. But conflict is something that affects even the big City firms. There is a lot of talk about how it is our problem but a lot less about how it is a problem of the law firms."
Campbell is at pains to point out that this has not been a consideration for Dundas & Wilson.
He says: "It is a tiny issue. I am aware of five or six situations where we believed there would be a conflict since we have been in the Andersen network. By far the greater source of conflict is when two clients want us to work on both sides of the deal and that would be the same experience of London firms."
And Dowes is upbeat about the sort of deals they can attract. He says: "When you talk about the bigger deals you are talking about mammoth financing but there are an awful lot of deals out there.
"It is a myth to think that everyone at Slaughter and May only does multimillion pound deals. There is an awful lot of good and interesting work out there."
With the UK's biggest accountants determined to see MDPs work, it seems that despite reservations from clients, and the different attitudes throughout the world (see box), MDPs are here to stay and can only increase in power and size.
The American Bar Association (ABA) appointed a commission to look into MDPs last year which reported in favour of them. But the ABA House of Delegates, which has to vote in favour of the report for it to become policy, has deferred the vote until summer 2000.
It is widely believed that the House of Delegates will not vote in favour because the state bars, particularly the influential New York bar, are against MDPs. One senior US lawyer adds that the Securities and Exchange Commission (SCC) is also opposed to them.
But this does not seem to be deterring the accountants. In November, Ernst & Young appointed two partners from Atlanta's King & Spalding to form the Washington DC firm McKee Nelson Ernst & Young. The accountant is financing the firm and it will be housed in its offices - Washington DC is one of the few US jurisdictions that allows separate law firms financed by accountants to practice under the same name.
It seems that while the authorities are busy opposing MDPs, the accountants are busy forming them anyway.
Member states have different policies on MDPs. Germany, the Slovak Republic, Spain and some cantons in Switzerland permit them, with the UK recently giving its approval. France, Italy, Belgium and The Netherlands do not permit MDPs, and the Paris bar is refusing to support them despite the government's approval.
Ernst & Young reached a compromise with the Dutch Bar Association at the beginning of March which allows it to share profits with its legal arm but does not allow the lawyers to operate under the same name.
But PricewaterhouseCoopers and Arthur Andersen are battling with the Dutch government at the European Court of Justice in a bid to force the bar to permit full MDPs.
Europe was dealt a blow last week when the Council of the Bars and Law Societies of the European Union (CCBE) voted in favour of a ban on MDPs. A policy statement stated MDPs threatened the independence of the legal profession. The vote was unanimous except, of course, for the UK.
Arthur Andersen was the first to strike when it took a team of lawyers from Blake Dawson Waldron in 1994 and set them up as Sharwood Eyres & Wilkie. The firm later became Andersen Legal.
KPMG and Ernst & Young have legal arms in Australia and PricewaterhouseCoopers entered the market in 1999 when it merged with Dunhill Madden Butler. Deloitte & Touche is currently looking for a merger partner.
Minter Ellison's London partner Robert Hanley says that although the accountants are recognised as long-term competition, the initial trepidation that greeted their arrival has wavered.
He says: "When they started talking big dollars and big expansion plans there was a real concern. But we are not as worried now as we were a couple of years ago. They have not attracted the top lawyers, neither have they attracted the top clients."
Andersen Legal, for example, suffered a blow at the end of last year when it lost four partners in swift succession, including managing partner Phil Kapp.
The influential New South Wales Law Society announced in September 1999 it was changing the structure of law firms. The changes will allow firms to incorporate, share profits with other professionals and raise outside capital for the first time.
Hanley believes as well as making it easier for MDPs, the changes will help firms compete with the accountants: "We may have something the accountants have always had - deep pockets. It levels the playing field."