Accountancy: So far so good for the missing link: Peter Carty looks at the progress of Garrett & Co, the law firm tied to Arthur Andersen

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A SMALL 13-partner law firm like Garrett & Co does not normally attract much attention. It might garner a couple of column inches by opening an office in Eastern Europe, but that would be about it.

Yet Garrett is being snubbed by firms of accountants and is under fire from other solicitors. The reason, of course, is its links with Arthur Andersen, the most successful big six accounting firm.

Multi-disciplinary partnerships between lawyers and accountants are still banned under Law Society rules, but the Andersen-Garrett axis is the next best thing. The firms are separately managed, but if Andersen feels that Garrett has the resources and competence necessary for particular jobs it includes its name in lists of lawyers it puts forward to clients. Garrett also hunts for work on its own.

Since opening for business in London just over a year ago, Garrett has added regional offices in Reading and Leeds. At all of its sites it shares premises with Andersen. Controversy has accompanied each office opening.

In February, three partners defected from Pitmans, a Reading firm of solicitors, to set up a Garrett office. Some local accountants are not keen to involve them in the beauty parades of solicitors they arrange for clients.

Malcolm Penney, a partner in Ernst & Young's Reading office, says that although Garrett's partners are known, notably for their intellectual property expertise, it is still early days. 'We would not want to put anyone forward with whom we have no track record.'

However, the Andersen link also debars invitations to tender: 'I'm sure, realistically, we would regard ourselves as giving opportunities for the competition to get a foot in the door.'

The uproar caused by the opening of Garrett's Leeds office in May continues. No fewer than 10 solicitors jumped ship from a local firm, Simpson Curtis. Some Leeds lawyers see Garrett as unfair competition.

'What I object to is that they are giving out two messages,' says Alan Bottomley, joint senior partner of Hammond Suddards. 'They're trying to say to clients of Arthur Andersen: 'We can help provide an overall service'.' To others, he says, the message is different. 'They say, 'We're an independent firm of solicitors giving independent advice'.'

There is no evidence to suggest Garrett is not keeping within the strict letter of the Law Society rules. However, Mr Bottomley feels the principle behind the rules is being blurred. Hammond Suddards is not referring work to Andersen.

A symmetrical line is being taken by some local accountants on referrals to Garrett. One big six partner points to Andersen's twin threat in Leeds. On top of Garrett there is the planned tie-up with BDO Binder Hamlyn, which has a strong local client list.

'We're not all that concerned by the cold-shouldering,' says Andersen's UK managing partner, Jim Wadia. In any case, exclusion from assignments in the provinces may not last. Alistair Hunter, a partner in KPMG Peat Marwick's Reading office, says the idea of ruthless competition between firms can be misleading. 'There's no complete stone wall between any of us,' he says. For example, one firm may feel uneasy about acting for too many of the parties to a management buyout and bring in another.

John Howeley, chief executive of the Leeds Financial Services Initiative, a marketing and lobbying group across several professions, thinks the ostracism of Garrett and Andersen by some local firms will die out. 'In the long run they will become more familiar with the idea and will do business with them,' he predicts.

Julia Chain, one of Garrett's founding partners, is unrepentant over the shock waves in the regions. 'The team from Leeds had been looking for another firm anyway,' she says. The same applies to the Reading trio.

Law firms in other cities may be in for surprises; Ms Chain says Garrett will consider similar opportunities if they arise. However, she also says that Garrett has no policy of growing solely through block recruitment, pointing out that expansion in London has been piecemeal.

Other big six firms may have to follow Andersen. One-stop shops and the cross-selling capabilities that come with them are attractive. But the real pressure for law- accountancy combines is coming from elsewhere.

In Europe, notably France, Spain and the Netherlands, taxation advice is provided by lawyers. Consequently, the big six have taken over law firms and now run some of the biggest legal practices in Europe. As well as help with accounting and tax, multinational clients are accustomed to integrated cross-border legal advice.

'The problem is: how does the UK and Continental Europe align itself?' says John Barnsley, senior audit partner with Price Waterhouse's European firm. 'It's not so much the big six saying we'll compete against the lawyers. The pressure is coming from clients.' He reports their dissatisfaction at the present state of affairs.

'This was driven by our Continental European partners,' confirms Andersen's Jim Wadia of Garrett's formation. Garrett is the missing link in Andersen's European network.

Andersen's accounting and consulting arms are more distinct than those of other firms, enabling each extra space to concentrate on initiatives. 'Arthur Andersen can segment their services in a much more strategic and focused way,' says James Wheeler, managing director of the recruitment consultancy Hewitson Walker.

But the key to the Garrett initiative is Andersen's financial strength. Generating far higher fees per partner than other firms, it can afford to speculate on long-term projects. There is little sign that the Law Society rules will change soon. Solicitors cannot yet share profits with other professionals. There is therefore no immediate financial incentive for other big six firms to follow Andersen.

In any case, some are still busy refocusing. Coopers & Lybrand is to reduce partner numbers by 60 over the next year. And all the big six are on the defensive over professional indemnity claims, lobbying hard for liability to be capped by statute, with incorporation seen by some as inevitable.

Andersen's Mr Wadia thinks that the Garrett venture has done well in its first year. 'The missing link is alive and well and flourishing,' he says. The key question now is whether Garrett can grow out of its niche.

'It's not beyond Arthur Andersen & Co, as they presently are, to keep Garrett & Co in business,' comments Vanni Treves, senior partner of the City lawyers Macfarlanes. It appears that Garrett is attracting a certain amount of other work on top of that arising through Andersen. He does not view Garrett as a problem at its present size, but points to its next challenge. 'Is it going to challenge the Macfarlanes and Freshfields on their own ground?'

Mr Treves is doubtful. Legal competition in the City is fierce and clients are already well serviced.

Nevertheless, Garrett may start to cause problems for City lawyers in its second year. 'I'd like to think we would become a threat,' Garrett's Ms Chain declares.

(Photograph omitted)