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Impact of the Big Four on the Legal Market
There has been much talk in the past year that the Big Four were sniffing around the alternative legal services (ALSP) market looking for an acquisition. Many legal market watchers, including your (humble) analyst, publicly stated that they expected at least one Big Four-led acquisition into the ALSP space in 2018. That wait is now over. EY announced on August 7th that they will acquire Riverview Law, a UK based provider of both managed legal services and technology.
Legal market watchers could be forgiven for thinking the attention that this deal has received is much ado about nothing. Riverview Law, after all, is significantly smaller than many of the most well-known ALSPs. While financial details on the company were not disclosed, Riverview Law is rumored to have earned somewhere between five and ten million pounds in annual revenue last year. While that number is just a rumor, we know, from the firm's Company House filings, that they have around 100 employees. That bit of knowledge, combined with knowledge gleaned from previous public filings, gives the revenue rumors some credibility. Compared with Axiom, which is expected to earn $360 million this year, and Elevate, which earned approximately $40 million last year, Riverview looks small. Scoffing at the deal in this manner, however, misses the point. Some deals are important because of their size. Others are important because they are accelerators — they increase the pace of change in an industry or in a segment of an industry. EY's acquisition of Riverview could be seen in this light. Below is a quick analysis of how the acquisition may impact different sections of the legal market.
ALSPs: An Evolving Market
EY's acquisition of Riverview Law has the potential of shaking up the ALSP market in two important ways. First, it may help facilitate increased acquisitions within the space. Many of the most prominent ALSPs are a decade or more old. Some of their founders, like Elevate's Liam Brown, have publicly stated that they want to remain independent. For the others, their founders and early investors are likely looking for exit strategies. It has been rumored that several prominent ALSPs have been “for sale” for some time, with the word on the street indicating that differences with valuations are holding up sales. If this is true, the Riverview acquisition may help establish a baseline benchmark multiplier in the ALSP market. Once the firm's sale price is known — and it will be known — it will help reinforce the revenue and profit multiples which are used to inform valuations. This should help make the market more efficient and, potentially, usher in more sales.
There is a second, potentially more important, reason why the Riverview acquisition is important in this space. Managers of existing ALSPs now face the daunting task of competing with a Big Four player. EY will be a fierce competitor for several reasons. Its size — at $31bn in revenue and 250,000 employees worldwide — is certainly important. Its client base and strong capabilities in process management will also be key. But most important is their brand. Trust is incredibly important in the legal services market — even in the lower value areas in which ALPS compete. Law departments, as the leading purchasers of legal services, are fundamentally in the business of risk mitigation. While the cost of service is important, so is the credibility of the vendor, and this is particularly true for ALSPs. By hiring an “alternative” provider law departments are taking two risks — first, that this new “alternative” approach can work and second, that the ALSP in question is the right vendor in the space. EY's strong brand equity and familiarity, coupled with existing relationships with clients make them much better placed to make this argument to corporate leaders than Axiom, Elevate, UnitedLex or any of the other leading ALSPs. The Big Four have the unique benefit of being seen as a “safe pair of hands.” This will be a key competitive advantage.
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