The Deloitte Legal / Kemp Little deal. The other Big Four are watching. Unsurprisingly, as noted by several law firm brokers, PwC, EY and KPMG are all browsing the market for partners with similar capabilities around technology and IP.
Angela Gambetta
Lawyer Reporter
PROJECT COUNSEL MEDIA
6 November (London, UK) – As we have reported in a series of posts over the last few years, the move by the Big Four accounting firms into legal services has been well chronicled. And the fact they have been far more successful in enabling the legal function to embrace digital transformation has been an issue for Big Law. Yes, there is a general consensus that technology can make a big difference to the way legal functions work. In some markets, the legal function has been working with technology for some time and it is on the second or third wave of tooling solutions. In others, legal is exploring how technology might be used and which of the many products available on the market is best aligned with their needs.
But with the rise of the new technologies that have been formed with/around AI, the Big Four seem to have appreciated far more quickly the value that technology can play in legal operations.
For a detailed analysis on the Deloitte Legal / Kemp Little deal, read the following from The Lawyer:
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The Big Four firm’s acquisition of 86 lawyers from Kemp Little, including 29 partners, is its most significant move since announcing plans to expand in the UK over two years ago.
“This is a key piece of our legal advisory capabilities,” Deloitte’s Michael Castle told The Lawyer. The firm had spent the past year building out its managed services and legal management consulting capabilities through a series of big-name hires, but something had been missing. Curiously, that was a fully-formed team of specialist lawyers.
Deloitte was certainly not starting from scratch. Over the past year, it has made a series of hires including Travers Smith’s former chef Andrew Lilley, who was appointed by the Big Four firm to lead its employment law offering. Alongside Lilley, Deloitte recruited former Squire Patton Boggs partner Liz Pierson as legal lead for its reward practice.
But hires such as these were boosting disparate practices and there was a feeling in the market that there was a lack of a coherent framework around the strategy. The Kemp Little deal goes someway in solving that: “We already had a team of lawyers providing advisory services, but we really needed to put our strategy together and getting that final piece of the jigsaw”, Castle adds.
Early conversations last year showed the two managing partners that an acquisition could serve both parties well. Deloitte Legal wanted to advise technology corporations while proposing a wide range of digital offerings – so it needed lawyers to do just that. Kemp Little wanted to pilot new products and diversify its service beyond its reach – so it needed money.
Kemp Little’s Joint says: “In our own ways, we were successful in terms of being a leading firm with a tech focus. Our challenge was keeping that focus but improving how we deliver legal services and expand to managed services and technology offerings as part of our capabilities.”
The two had further conversations in the ensuing months and it became clear in Joint’s head that there were clear opportunities to take their client delivery to a previously inaccessible level. Around that period, 15 months ago, both Joint and Castle were looking at understanding what the future of law looked like. “It was happening right in front of us,” Joint said. Even if law has historically been slow to adapt, managing partners were considering their next phases to stay competitive with clients and help them adapt to different business models sparked by the rise of digital and automation as well as different geopolitical balances.
“The conversation came at the right point”
That summer, Castle delivered a three-year strategic manifesto to Deloitte’s partnership on the growth of the legal arm. As for Kemp Little, the firm had developed a few products and a consulting business, yet now, it was time to scale up. “The conversation came at the right point,” he concedes.
As they talked, Castle was intrigued by the lawyers’ work on commercial and digital media and thought they could grow synergies with the growing employments ranks at Deloitte Legal. “It was an example of a law firm that had a shared vision around delivering legal services differently but that was also leading on those services,” Castle explains.
The talks became serious to the point in which the duo explored the possibility of a takeover. It became an option once they realised that, as businesses based on people, it would be necessary that everyone felt part of their project. “All the way through, we wanted to make sure that Kemp Little would come across,” he adds.
Past connections
When Joint pitched the idea to his firm, it proved not to be a difficult sell. He did not pretend like the move wouldn’t make any difference, but he thought the benefits of the combination with Deloitte Legal surpassed any hesitancies.
The firm had spent years refining a strategy that could make the most of its technology and data offering. Sources in the market claim Kemp Little has been on the market for at least three years and that it had conversations with several potential buyer firms.
Kemp Little was founded in 1997 by Richard Kemp, who previously worked at Garretts, the legal arm of defunct accountancy firm Andersen. At the time, more than 200 Garretts lawyers upped sticks and defected to then-called Deloitte & Touche as part of an emergency rescue deal. The original name of the law firm was Kemp & Co, and in the late nineties the firm established itself by capturing mandates across the burgeoning Internet business that was rapidly growing amid the dotcom boom.
In 1999, Jonathan Little joined him from Bird & Bird. The firm took on its current name in 2001, as well as acquired a limited liability partnership status. In 2005, Little left the firm and joined Simmons & Simmons – nowadays, he is a partner at Jones Day.
Over the year, the boutique made a name for itself by serving clients on aspects around commercial tech, corporate and data protection. In 2013, Richard Kemp drove plans to launch a niche consultancy arm under Kemp Little’s name. The business was led by former Deloitte partner Chris Wray and vice-president Jim Odell, who in the early noughties used to run the UK Government business practice at Indian IT firm Tata Consultancy Services.
Alternative investments continued in the following year, when the firm debuted a service, named FlightDeck, which provided clients with advice and guidance on issues such as employment, tax and IP and gave free access to a range of documents commonly needed when establishing a business.
While the firm initially hired almost 20 consultants to spearhead the unit, it is understood that it later cut ties with most of them in 2017 amid a decline in profitability. In the past few years, the firm has invested on technology products like AI platform Dupe Killer, which spots copycat designs on the web, and Klick Learn, which delivers training online to help clients with guidance on compliance, regulatory and employment issues for employees. It is understood that in 2020 the products’ sales accounted for 5 per cent of the firm’s turnover in licensing fees and 4 per cent in service revenue, amounting to about £1m.
In many ways, Kemp Little’s roadmap on consulting and NewLaw business lines offered a miniature blueprint for similar investments carried out by bigger firms in following years. But according to former partners these growth ambitions often came at the expense of profitability.
“They always went for turnover rather than profit, with a view to become bigger,” one lawyer said. At the time of the acquisition, Kemp Little’s turnover for the financial year 2019/20 stood at around £17.8m, an eight per cent increase from the previous year’s £16.4m. Net profit was considerably lower, though; in the space of one year it shrunk 5 per cent from £3.8m to £3.6m. It only rose by a few millions since 2007, when it was around £1.5m and revenue stood at £5.4m.
“They [Kemp Little] always went for turnover rather than profit, with a view to become bigger”
Towards the end of that financial year, Kemp Little appointed four new partners, increasing its partner headcount by 27 per cent. A rise in headcount brought down the average profit per equity partner of the firm, which went down from £386,600 to £327,636. Since 2007, the first year that the firm submitted for The Lawyer’s UK 200 report, its headcount has risen from 43 to 109, with partner numbers rising from 11 to 26.
The firm kept deepening relationships across its core industries. In 2016, the firm reported a double-digit 15 per cent increase in turnover to £12.2m. At the time, the firm said growth had been driven by strong performances from its technology and corporate teams, who advise a range of technology companies from start-ups to more than 10 FTSE 100 companies. Its clients include gaming giant Activision, Expedia, Microsoft, Toshiba, T-Mobile and Thomson Reuters.
Among its clients was Deloitte itself. Over the years, the accountancy giant often instructed Kemp Little for advice on transactions across commercial and technology. But the Deloitte connection goes way back. A former lawyer says that a lot of former Andersen professionals like founder Richard Kemp became senior Deloitte lawyers, as well Wray, who led Kemp Little’s consulting business. In 2011, Kemp Little hired a new chief operating officer in the form of Siddhartha Mankad, who too worked at Andersen from 1997 to 2002. After his Andersen stint, Mankad worked for a long time at Boodle Hatfield, which was then led by Nick Temple, another Andersen alum. He had been managing partner for the technology risk arm of the same consulting business for a number of years.
Little goes big
A former Kemp Little lawyer said the acquisition serves both well, while SSQ chairman Gareth Quarry agrees: “It was a great move by Deloitte to acquire a firm that is perfectly in their sweet spot.” On the one hand, Deloitte is trying to increase its footprint in legal, as Kemp Little needs deeper pockets for its alternative investments. The transaction that will bring Kemp Little into Deloitte Legal was ironed out in early 2020. Deloitte Legal was advised by its in-house corporate development team and by a team from Addleshaw Goddard led by professional practices partner Aster Crawshaw. Kemp Little was advised by KPMG, commercial-focused law firm Hierons Law and Legal Risk, a specialist firm that advises on professional regulation and indemnity.
In March, as the negotiations were still ongoing, the pandemic upended the business world. “Covid-19 added an extra dimension to the transaction,” Castle said. “But a number of people had already formed great relationships before lockdown.” No particular deadline had been put to get the deal through.
According to Joint, the two firms are following a detailed integration plan to bring all the Kemp Little people on board over the next three months. A number of Kemp Little partners will take on leadership positions, with Joint becoming head of Deloitte legal advisory in the UK. “The business will be fully integrated, with no legacy Kemp Little or legacy Deloitte Legal,” he said, with initiatives planned to mix the teams around internal projects and client work.
The fact that the two firms share a number of mutual clients is likely to make the process quicker. “We want to make sure people understand the opportunities they have to grow their careers,” Joint said.
Most agree that Kemp Little has likely agreed to a lock-in period that will restrict equity partners while they cash in the sum in the next few years. This is an option often adopted in acquisitions of professional services firms, as a form of guarantee over partners that in the space of one year might leave and take with them their entire books of business. Unlike with a normal company, the buyer is not accessing a suite of products with attached subscribers. The whole value lies in the headcount of the firm, anchored on a series of non-compete clauses and covenants. In this case, the total headcount of Deloitte Legal will reach 370 people in the UK, while globally it has 2,500 professionals across over 80 countries.
But Kemp Little partners, although accustomed to the entrepreneurial and independent spirit of a boutique, might have no reason at all to leave. Absorbed in the constellation of an accountancy giant, they are likely to cash in fees that go beyond advising on aspects of commercial and IP law as part of bigger transactions. With Deloitte Legal’s focus on consulting and managed services, they will become a component of bigger multimillion-pound projects. Deloitte Legal recently hired Luminance chief executive officer Emily Foges to lead its managed services business. The strategy around managed services comes as Deloitte Legal also recently announced the hire of hire of Jack Diggle from NewLaw provider Elevate to head its new legal management consulting arm.
The difficulty of breaking into law with an original formula and heightened competition won’t diminish the appetite for growth though. “This is a clear and unambiguous statement of intent by the “Big Bad 4” that they are coming after law firms and looking to take their business off them,” says John Croft, president of the NewLaw provider Elevate. “They are not collaborative and are now the single biggest threat to law firms across the world.”
He added that, for instance, Kirkland & Ellis’ revenue stands at around $3bn, while Deloitte’s rises to $38bn. “They are better funded and, as this Kemp Little acquisition shows, they will use that funding to take work away from law firms,” he concluded.
These shifts have left Big Law and the Magic Circle a bit upended. As we noted earlier this year from the PwC and McKinsey reports on the legal industry, few law firms are developing more resilient business models, or systems and mindsets to support it.
Digital revolutions come in waves, and until now professionals such as lawyers and accountants have largely thought “we are immune to drastic change”. The theory went “we deal mainly in knowledge rather than products, and that focus has in many cases protected them from being forced to overhaul their business models entirely. So up to recently, unlike goods and services, such as taxi hailing or retail, the legal industry had escaped serious disruption.
But the incursion of machine learning and artificial intelligence into legal departments puts lawyers in the “foothills” of profound change, something Richard Susskind has drummed into us time and time again, writing about the impact of technology on professions including the law.
If you read Susskind and Mireille Hildebrandt and David Moschella you come away knowing the tide, that the big digital shift that took place between 2006 and 2016 concerned moving from ownership models to sharing and streaming, cloud-based computing and the development of apps using location services such as taxi-hailing service Uber and food delivery services online.
But the current phase is more drastic, according to all those authors, and that is what is finally causing the radical effect on the business of law. Those first waves of “disruptive innovation” were not strong enough to reshape the professions, but this third will – and does.
So you have the Big Four accountancy firms triggering a growing commoditization of legal services using technology (with which they are better versed than law firms), and law firms have been forced to engage with clients using software and technology, in a shake-up of traditional ways of working. As Susskind said in The Future of Professions:
“The first 60 years of legal technology were devoted to automation rather than transformation — using technology to streamline and improve the way you already work. It is not about changing, it’s about grafting technology on to traditional legal practice. If you look at other sectors, what we’re seeing is something different, where technology fundamentally changes the nature of the service there you would be talking less about the transformation of lawyers and more about the transformation of their business models.
We’re a traditional lot and cultural change — which is so important if we want our lawyers to adopt the use of innovative tech — is exceptionally difficult.”
And a plethora of legal technology companies has emerged, many of which use an element of machine learning or artificial intelligence to make lawyers’ lives easier. Those include Ravel Law, which predicts outcomes based on case law, contract analysis specialists such as Kira Systems to speed up due diligence, and Virtual Pricing Director, which helps price deals using algorithms.
It is the accounting Big Four that swiftly adopted digital and emerging technologies. Lawyers? They like doing things the way they’ve been doing them for generations. As their clients are squeezing margins, demanding faster turnround times, and greater use of innovation, they are finding their clients are going elsewhere.
