# The four tiers of professional services firms
A single M&A deal shows the whole landscape at once. When Microsoft buys a company, McKinsey may advise on strategy, Kirkland & Ellis drafts the deal documents, PwC runs the tax and financial due diligence, and a five-person boutique of ex-regulators handles the antitrust filing. Four different firms, four different tiers, all on one transaction, none of them really competing with each other.
That is the core insight of this lesson. Professional services firms look like one industry, but they operate in separate competitive zones, each with its own economics, its own clients, and its own power over the buyer.
In professional services, the product is expertise sold as billable time or fixed fees. There is no factory, no inventory, and the main asset walks out the door every evening. What differentiates firms is not what they do (advice) but the stakes of the work they are trusted with and the price they can command for it.
That trust ladder sorts firms into four tiers. Firms compete fiercely inside their tier and rarely across tiers.
These are the firms clients call when the decision is existential and price is almost irrelevant.
Strategy: McKinsey & Company, Boston Consulting Group (BCG), and Bain & Company, collectively "MBB."
Law: In the US, firms like Cravath, Swaine & Moore, Wachtell, Lipton, Rosen & Katz, and the volume leader Kirkland & Ellis. In the UK, the "Magic Circle" (Allen & Overy Shearman, Clifford Chance, Freshfields, Linklaters, and Slaughter and May).
Pricing reflects this. Elite US law firms bill senior partners at rates that crossed 2,000 dollars per hour for the most sought-after names, per widely reported figures as of 2024. MBB engagements routinely run into the millions for a few months of work.
The balance of power here tilts toward the firm. Clients are price-takers because the alternative (getting it wrong on a company-defining matter) is unthinkable.
Deloitte, PwC (PricewaterhouseCoopers), EY (Ernst & Young), and KPMG are the giants by headcount and revenue. Combined global revenue is well over 200 billion dollars annually (per each firm's own reported figures, fiscal 2023 to 2024).
Their origin is audit: the independent verification of a company's financial statements, which listed companies are legally required to obtain. That requirement, enforced by regulators like the US Public Company Accounting Oversight Board (PCAOB) and the UK Financial Reporting Council (FRC), gives the Big Four a near-guaranteed recurring revenue base. Almost every large listed company must buy an audit, and only four firms have the global scale to serve them.
On that base they built tax, deals, and consulting arms. Here is the key power dynamic: the Big Four compete with MBB on consulting, but from below on price and from a position of breadth. A CFO might use Deloitte for a large systems implementation that MBB would never touch, then hire McKinsey for the three-slide strategy that reframes the whole company.
The Big Four carry a regulatory handcuff the elite firms do not. Auditor independence rules (tightened globally after the 2001 Enron collapse and the resulting US Sarbanes-Oxley Act of 2002) restrict a firm from selling lucrative consulting to a company it also audits. That is why EY explored splitting its audit and advisory businesses in 2022 and 2023 (a plan it ultimately shelved). The tension between audit stability and consulting growth is the defining strategic problem of this tier.
Below the giants sit large, respected firms that serve mid-sized companies and specific sectors or regions.
Consulting: Firms like Oliver Wyman, Kearney, and Roland Berger, plus the "second tier" of accounting-linked advisory.
Law: In the US, firms often grouped as "AmLaw 50 to 100" (ranked by revenue in the American Lawyer survey), such as regional powerhouses and national firms that are strong but not "bet the company" default choices. In accounting, the next-tier networks: BDO, Grant Thornton, RSM, and Mazars.
These firms win on value for money. A 400-person manufacturer being acquired does not need Kirkland's rates, and cannot get Kirkland's attention anyway. It hires a strong regional firm that does excellent work at half the price.
The power balance here is roughly even. Clients have real choice among many capable firms, so pricing is competitive and switching is common. Relationships and sector knowledge (say, a firm known for healthcare deals) are the main defenses against commoditization.
Boutiques are small firms that dominate one narrow slice of work. Examples: restructuring specialists, a litigation boutique of former prosecutors, an antitrust shop of ex-regulators, or an elite M&A advisory house like Centerview Partners or Evercore in the investment banking adjacent space.
Boutiques break the "small means cheap" assumption. A restructuring boutique can command elite rates because when a company is insolvent, deep specialist expertise is worth more than brand breadth. Their pitch is focus and the absence of conflicts: because they only do one thing, they can act against parties the Big Four or full-service law firms cannot touch.
Here is the applied part. Follow one deal and watch the money.
Imagine a private equity firm buying a 500 million dollar business. Illustrative allocation of adviser fees (these are stylized figures to show relative scale, not quoted prices):
Professional services margin is driven by leverage: how many junior staff bill against each partner.
Take a consulting project priced at 1,000,000 dollars for ten weeks. Team: one partner, two managers, four analysts.
Now the same project sold by a boutique of one senior partner and one analyst, priced at 400,000 dollars, staff cost 120,000 dollars:
The boutique bills less in total but keeps a similar or higher margin because there is no expensive middle layer to feed. The Big Four make money the opposite way: thinner margins, enormous volume, recurring audit relationships.
Knowledge check
1. The lesson uses the M&A example (McKinsey, Kirkland & Ellis, PwC, and a boutique all on one deal) primarily to illustrate which core idea?
2. Why is 'tier' argued to be a better lens for understanding professional services firms than the type of service they provide?
3. A board facing a hostile takeover hires a top elite law firm even though it is expensive. What concept best explains this decision?
4. Select ALL correct answers about the economics of professional services firms as described in the lesson.
Select all the correct answers.
5. Select ALL correct answers that characterize Tier 1 (global elite) firms.
Select all the correct answers.
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The suppliers to all of this are talent (top MBA and law graduates) and, increasingly, AI tools that automate document review and research. The distributors are, unusually, the clients' own gatekeepers: general counsel, CFOs, and procurement teams who decide which firm gets the call.
The regulators (PCAOB, FRC, bar associations, and competition authorities) shape the board most directly for the Big Four, whose audit franchise exists only because regulation requires it.