In major news indicative of the direction of the legal services industry globally, EY — the entity that encompasses Ernst & Young companies worldwide — has entered into an agreement with Thomson Reuters to acquire Pangea3, the legal managed services business.
This follows EY’s acquisition last August of Riverview Law, a UK-based alternative legal services provider (ALSP). EY says these acquisitions further its depth and capacity to serve corporate legal departments worldwide and will bolster the ability of EY Law practices to help clients transform their practices and deliver meaningful value to their businesses.
Founded in 2004 by David Perla, former Monster.com general counsel, and Sanjay Kamlani, former OfficeTiger CFO and general counsel, Pangea3 pioneered the outsourcing of U.S. legal work to legal professionals in India. It was acquired by Thomson Reuters in 2010 in a deal valued at roughly $40 million. Pangea3 employs more than 1,000 legal professionals across eight service delivery locations on three continents.
“This new enhanced offering will make EY one of the leading professional services organizations for global legal advisory services and legal operations services, including legal function advisory, managed services and technology,” Mark Weinberger, EY global chairman and CEO, said in a statement. “The acquisition is an example of how EY is working to provide clients with holistic solutions, which are enabled by technology.”
EY said the transaction is expected to close in the second quarter of 2019, subject to the satisfaction of various closing conditions.
A recent report by Thomson Reuters documented the accelerated growth of ALSPs in recent years, noting that two years ago, the sector was still nascent and poorly defined, but that now ALSPs make up a market that is “better defined, quickly growing, and broadly adopted.” The report said that revenues for ALSPs grew from $8.4 billion in 2015 to $10.7 billion in 2017.
The report said that EY and the other Big Four accounting firms accounted for $1.2 billion of that revenue and stand to be the massive disruptors in this market.
Among the largest and fastest growing ALSPs are the Big Four accounting firms – Deloitte, EY, KPMG, and PwC. The Big Four’s legal service offerings compete more directly with law firms than those of other ALSPs: about 23 percent of large law firms say that they competed for and lost business to the Big Four within the past year.
The managed services segment, in which Pangea3 falls, also includes companies such as UnitedLex and Elevate. That segment accounted for $700 million of market revenue, the report said.
Questions about Thomson Reuters
Inevitably, news of this deal will rekindle questions about Thomson Reuters. In December, I wrote about TR’s decision to reduce its workforce by 3,200 and close 30 percent of its offices by the end of 2020.
The timing of that was befuddling, given that, just two months earlier, TR closed a major deal to sell 55 percent of its Financial & Risk unit to private equity firm Blackstone Group, in a deal that valued the F&R business (now rebranded as Refinitiv) at about $20 billion and that returned some $10 billion to TR’s shareholders.
Also at the time, TR was boasting about “overwhelming” sales of its new Westlaw Edge research platform, which it launched last July.
Not long after that came news that TR had withdrawn as an exhibitor at ABA TECHSHOW, where it had been a mainstay for as long as anyone can remember.
In the news release announcing the ER deal, Brian Peccarelli, TR’s chief operating officer, customer markets, said:
As we sharpen our focus on our core strengths – bringing new technology and workflow solutions together with our leading legal research, content and software solutions to our customer base – we believe the LMS business will be even better positioned to define the next evolution of alternative legal services with EY.
The press release also quoted Eric Laughlin, managing director, legal managed services, at TR:
Clients acknowledge that they need to modernize their legal operations; with Pangea3 and EY together, legal departments will benefit from broadened legal services offerings that bring the legal domain knowledge and scale to help guide and implement their transformation agenda.
They may be right. EY may well be in a better position than TR to build Pangea3 and take advantage of its full potential. But questions will nonetheless persist about TR. Why sell a successful business? And why now?
Those who should be paying closest attention to this acquisition are law firms. Just this morning, I wrote about a new report from Wolters Kluwer documenting the fact that firms that were early adopters and savvy users of technology will have the upper hand in competing over the next decade.
But every firm, no matter how savvy, needs to realize that their greatest competitors going forward are not other law firms, they are ALSPs such as EY. And with this deal, EY is that much better positioned to compete.