PwC’s Takeover of ‘The World’s Best Tax Law Firm’
In a move that illustrates how the professional services market is changing, about half of General Electric’s tax department — once described as as ‘the world’s best tax law firm’ — is moving to PwC in April.
Under the deal, about 600 people — the majority said to be lawyers or accountants — were offered positions at PwC where they will handle GE’s tax work for at least five years. PwC will also be able to sell their advice to other clients as part of a packaged suite of other services that extend well beyond its traditional focus on accounting.
The deal is attracting attention not only because GE’s tax unit had gained renown for its aggressive tax strategies, but also because it underscores a shift in the professional services market. GE had originally built up its tax department in the 1980s in order to reduce reliance on outside law firms, but now it’s shedding some of that internal capacity and instead of the work returning to law firms, it is moving to a Big Four firm.
David Wilkins, a Harvard Law Professor who is researching the Big Four, said it is an example of how these firms have expanded beyond accounting, and gained a foothold in the legal market by selling their expertise across a broad range of areas well beyond tax, and into compliance, regulatory planning and other specialties.
“It is the evolution of the professional service firm model,” said Wilkins, who is faculty director of the Harvard’s Center on the Legal Profession. “It’s just one more example of the rapid blurring of the boundaries between what used to be thought of as separate and distinct professional services.”
As the Big Four have been diversifying their legal services, he said many law firms face an opposite situation as they confront the ‘unbundling’ of corporate legal services: That is, as corporations seek to reduce their outside counsel expenditures, many general counsels have stopped using law firms as a one-stop shop to handle a matter. Instead, they are breaking down each lawsuit, transaction or legal project into its constituent pieces and sending each piece to the lowest-cost provider.
One result is that law firms, which tend to charge higher rates, are increasingly competing to handle only the highest stakes matters. Meanwhile, the Big Four have positioned themselves to capture the lower-stakes legal work, which may command lower rates but is also available in higher volumes.
“Everybody talks about unbundling of legal services, but the more important thing is we’re seeing rebundling,” Wilkins said. “What PwC is going to be doing is bundling these sophisticated tax services with other services.”
Those forces have combined to create difficult market conditions for law firms including flat to tepid growth in demand for their services. Last November, for instance, Wells Fargo Private Bank’s Legal Specialty Group reported that based on its survey of 130 major law firms, there had been less than one percent year-over-year growth in demand for services.
“All the lawyers want to talk about is the ‘bet the company’ case,” said Wilkins. “There’s a market for that but it’s a market that’s by definition small. The accountants say they don’t want the ‘bet the company’ case, they want the run the company case.”
By advising multinational companies across a wide range of areas, he predicted the Big Four will market themselves as “trusted advisors” who are intimately familar with the entire business.
GE’s Tax Department
In 2010, GE reported $14.2 billion in worldwide profit, but no taxes according to the New York Times’ investigation, “GE’s Strategies Let it Avoid Taxes Altogether,” which noted the tax unit has been described as “The World’s Best Tax Law Firm.” The following year, GE reported paying about a third of the average corporate tax rate, according to the article.
GE’s tax department took shape throughout the 1990s after Ben Heineman took over as general counsel and began building internal capacity to reduce outside counsel expenditures. Heineman recruited John Samuels, a former Treasury Department lawyer who oversaw tax policy, and was then a partner at Dewey Ballantine.
In a 2013 profile in NYU Law, Samuels recounted the “career risk” of moving in-house from a law firm, which at the time was rare. During the next two decades, Samuels built a tax department of 1,200 people. He has since departed GE and was not available for comment.
Now, as GE transforms from an industrial equipment maker to a digital technology services company, it is shedding assets including most of its finance unit, GE Capital.
Mark Mendola, PwC’s vice chairman and U.S. managing partner, said GE’s chief financial officer Jeff Bornstein and its tax director Mike Gosk had started questioning whether the overhead costs of the tax unit made sense given the company’s transformation.
“I think what they asked was, ‘Do we really need this on a continued fixed cost basis?’” said Mendola.
To retain the benefits of having tax professionals without shouldering the cost, GE held an auction, with PwC and at least one other professional services company bidding on the best contract to absorb the tax unit, he said.
“I wouldn’t take all their employees unless there was a commitment they would use them,” said Mendola.
He said the contract with GE will run five years but wouldn’t disclose other terms except that his company did not pay any cash or buy the employees. The unit will service GE, as well as other clients, at PwC’s regular rates, he said. GE will also receive a portion of the revenue collected by the tax unit, a PwC spokesperson said.
Mendola said the majority of hires are either JDs or CPAs, but the exact number won’t be available until his human resources department finishes negotiating contracts. About half are located in North America, with others in the U.K., South America, Asia and Africa, he said.
Within the legal community, the move has raised questions about whether other corporate law department that built up their internal capacity may also seek to offload some of their capacity to reduce fixed costs.
Stephen Poor, the former chair of Seyfarth Shaw, said the deal illustrates the rise of nontraditional advisors and their ability to compete with law firms, in part because of their size and their multidisciplinary approach, which cuts across accounting, law and other areas.
“There’s been this tendency for corporate law departments to bulk up,” said Poor. “Is this a canary in the coal mine for a reversal of that trend? I don’t know … but credit GE for really thinking strategically about this line of their operations.”
Source: Bloomberg Law