On Thursday, November 4, a select cross-section of Managing and other Senior Partners at a number of leading law firms in the Czech Republic together with one General Counsel gathered at PRK Partners’ offices in Prague for a Round Table conversation on the state of the Czech market.
The conversation started with a general question about whether participants were seeing more business come in the door than they did in 2015. Alexandr Cesar, the Managing Partner at Baker & McKenzie, said that business overall is “roughly the same – not going down – which may be a good sign for this region,” but immediately turned the subject to an understanding of the changing nature of: (1) clients, (2) people, and (3) competition.
Speaking on the first subject, Cesar noted that “I think we are seeing a change in clients, who are saying we will do more work in-house and we will use you only on more exciting work.” Turning to the second subject, Cesar said that “from the people perspective, it’s about our lawyers, it’s about motivation, and it’s about remuneration. It’s about the career path, which is becoming significantly important. It’s getting more difficult, as you have more young people thinking about their careers, and local law firms can hardly offer 25 equity partnerships, so this is something that is becoming more and more stressful.” Finally, Cesar explained, competition among firms “requires us to distinguish ourselves and understand why clients are choosing one law firm and not another. That requires innovation because we need to be creative about how we deliver.”
Although business overall is steady at the moment, Cesar insisted that the “legal pie is getting smaller and colder.” He elaborated: “Smaller because competition is getting bigger. We don’t have any kind of BREXIT situation or anything like that, so there’s no real source of new business to compensate. And colder because of the pricing competition and all things connected with that. You know, every three months I get a bar brief and I go through it and I see seven to eight pages of junior associates trying to start up their careers in new law firms. There’s more and more of them, [so the pie is] getting colder as a result.
Robert Nemec, Partner at PRK Partners, echoed Cesar’s analysis. Nemec reported that “the economy is doing quite well, so in general there is more interesting work in the market,” and said that “at the same time, as Alexandr said, competition is increasing, both from local firms and from newly established firms, as there are quite a lot of new firms created by people who have been trained in local or international firms and left to open their own boutiques, offering highly competitive fees.” Finally, Nemec noted, “at the same time an increasing number of in-house counsel, both in corporations and within the state are, in some ways, competing with us.”
Stil, Nemec insisted that he was “quite optimistic about the current movement on the market,” and, unlike Cesar, he announced himself unconcerned about the high number of new associates entering the profession. According to Nemec, “I don’t really see that that as a real issue. I think we all need young, well-educated, talented people with motivation to work in our law firms.” Nemec conceded that “we have approximately 14,000 lawyers in the Czech Republic – which is a ridiculous number for the size of this market,” but said that, “at the same time, the market for top level legal services in Prague is only something like two thousand lawyers, and there is no fierce competition from the remaining twelve thousand attorneys – especially those who do not provide legal services in Prague.”
Client Expectations and Fees
As a result of the competition on the market, Nemec said, the pressure on fees, especially in work coming from the state, is extreme. Nemec claimed that the fees offered in the Czech public procurement system are “no longer low – they are ridiculous.” Nemec shook his head. “It is nonsense.” And sticking with Cesar’s metaphor, this “obviously results in most firms no longer participating in that market, which makes the pie smaller.” And there’s a ripple effect, Nemec explained. “At the same time some clients see these ridiculous prices that the state is offering for legal services and are asking why corporations should pay triple or whatever the amount is. We obviously have doubts whether any responsible law firm would be able to offer as little as EUR 20 an hour for legal services, but this is happening and it is affecting the market.”
Unsurprisingly, the subject of dropping fees was a popular one. Jiri Sixta, Partner at Glatzova & Co., reported that fees are about as low as they can possibly go, and he explained that firms are now forced to find other ways to stay profitable: “Now it’s about compensation packages, and it’s about lawyers being less greedy.” Still, Sixta was sanguine. “But I think if you are providing good service clients understand that and will pay for it. There is, of course, a significant number of clients that do not care that much about the quality – they just need to tick the box that the lawyer saw the document or approved something. And those are probably not our target clients, because we cannot offer our services at EUR 30 or 40 per hour.”
Jan Myska, the Co-Managing Partner at Wolf Theiss in Prague, agreed that the damage “has already been done in terms of prices. I think this didn’t happen in the last year or two, and I don’t think it’s going much more down now – but it’s not going up, and I think once you make it apparent to your client that you are willing to work for a certain amount it is very difficult to explain that suddenly, now, when the market is better, you’ll be working for more. I think the way to deal with that so you can be at a reasonable hourly rate is to combine your fee structure with a success fee, which is motivating for your client.”
Robert Nemec was more optimistic, noting that “some of the clients have already learned their lesson.” Nemec suggested that patience might be key. “We have lost a number of clients over the years who have gone to other firms for legal services – and a large number of them have come back, understanding that for a certain kind of work you may hire a certain kind of firm that is providing a commoditized form of services, so to speak, but at a certain level you really need an expert working on it with the appropriate seniority, which is not the model which is used by the more aggressive leveraged law firms.”
Alexandr Cesar felt that patience isn’t enough, and firms need to work more actively to educate the clients. “Going forward, I think it will be very important for us to stabilize the needle from the clients’ mentality – the needle between what is a commodity and what requires value-added work. And I think so far we are losing on that, and I’m a little afraid that in a couple of years, clients will think of even litigation as commodity work, because you will just do it for a fixed fee. So we just need to work jointly somehow to convince clients that that there is work that requires value-added attention. We do a lot of things that are commodities, and of course there’s no way around that. But we need to stabilize the needle somehow because in my view the understanding has shifted so aggressively to a different level, and we need to convince our clients to understand that this is not a commodity; this is an added value.”
To nobody’s surprise, Karel Budka, the General Counsel of Invia.cz, suggested that the situation is ideal for clients: “You need a big law firm for some huge cases, but the others, which are more frequent, you can take almost any firm and it’s no problem. For the big deals, sure, but for the smaller cases you need to outsource there is no justification for the higher fees.”
At this point Paul Stallabras, Partner and Head of International Banking & Finance at CMS, was sympathetic. “I think what one forgets sometimes are the enormous internal pressures in-house lawyers face. It’s the same as any other business, and it’s very difficult to justify a higher price for something that looks on paper to be the same. We’re seeing an increasing use of procurement processes in larger companies, and we’re seeing e-auctions for services, and that way in-house counsel cannot be criticized for spending too much money, because there’s pressure on them, the same as on everybody else, so the circumstances when in-house counsel are able to justify a higher fee in relation to a particular job are quite few and far between.”
Jiri Sixta was unimpressed. “That’s why there’s some pessimism around this table, because the amount of work is increasing – this year especially we have the highest number of hours billed per month and for last month and year – but it’s not transferred into an appropriate increase in fees because of the e-auctions and the caps and success fees.”
The Younger Generation and Work-Life Balance
Sixta then turned to another common source of complaint for senior partners in CEE – the changing expectations of the younger generation. “What I see as a problem is there are a lot of young lawyers that are lacking motivation for advocacy and for working long hours. First because they do not see the potential for partnership in the large firms – that’s true – but second because they really insist on this ‘work-life balance.’ And that’s a huge issue and can make it difficult to find people who are willing to really work hard for a couple of years with no fixed promise that after that time they will become partner.”
There was, in response to Sixta’s comment, general agreement. Miroslav Dubovsky, Managing Partner at DLA Piper, noted that the phenomenon is hardly limited to Prague and referred to similar complaints he’s heard from “across the region and from the West – actually all my colleagues from Germany and France and even the UK and the United States are saying the same things.”
Nemec admitted being surprised when he heard similar reports from other markets, saying, “I honestly thought that this was a specific issue in our particular region because our career paths were extremely fast.” He explained: “I became a partner in six years or something like that after joining the firm as a junior associate or as a trainee, which is something that is not repeatable in today’s market. So I thought perhaps partner positions are filled by our generation and the younger lawyers are now waiting for us to retire. We had this specific issue, that unlike in the international law firms with Partners retiring to make space for the new ones none of our partners have ever retired. I thought this was a specific issue for us but then we discussed it with our colleagues from New York, and they said exactly what we are suggesting – that the generations are changing.”
Regardless, Nemec said, changing expectations suggest different perspective, and different opportunities. “At the same time this might actually be beneficial because a number of those young people apparently aren’t even looking for partnership. They are happy to work in the office – to do high-level professional work – with perhaps fewer hours spent in the office, but they are not eager to become partners.”
Dubovsky agreed: “I think connected to that is their ambition to change firms and change careers much more quickly. So I think we are looking at a situation where junior lawyers will be with us for three or four years and then they will try to do something else, perhaps not even necessarily within law. They may go to do something completely different. The new generation as I see them has different preferences and an open mind and it is completely changing the way how they live and work.”
Alexandr Cesar suggested he had seen a similar phenomenon going on in-house as well: “We talked about generation change, but I think there was also a generational change among clients as well. I have so many cases where a senior in-house guy leaves and a junior guy takes over the work and the ball game is completely different.”
Where’s New Business Coming From
Martin Kubanek, Managing Partner of Schoenherr, reported that his office was pursuing a new form of business. “One aspect in terms of the market which should be mentioned [and] that did not exist in the past is the family-owned businesses that are now being sold from entrepreneurs in their 60s who are now exiting companies. We are expecting to see a huge wave of sales of these businesses in the market in the next five years, which is a new activity, and many of these clients are willing to hire law firms for this one-time exit. This is something we didn’t know about 10 years ago but which is just starting to come up as a new source of M&A activity.”
When asked how firms could get the work, Kubanek explained, “I think some law firms organize seminars for family-owned business in terms of how to sell their companies. That’s one of the options.”
Jiri Sixta expressed a skepticism about that kind of work and described that approach as hit-or-miss at best: “You have to go outside Prague, because those guys will not come to Prague. You have to go to the regions to educate those people, but it’s a long shot. You have to believe that if they decide to sell next year they will remember you.” In addition, Sixta explained, such clients are especially difficult to catch for larger commercial firms. “Those clients are the most difficult ones, because they know their businesses and they know the value of money. It’s not like a corporation, so they are more difficult when talking about fees. Yes, if you can convince them that this is their life-time chance and you will save them a lot of money that’s fine, but if you come to them with your blended rate, and they are used to working with someone much cheaper than that it’s very difficult to convince them.”
Robert Nemec agreed: “You also have to take into consideration the fact that that most of the Czech SMEs or small businesses or even large businesses are not used to using legal services in the last 20 years at all. They just have one local counsel who is advising them on German law and Swiss law and US law and changing the clauses in the agreements as they feel appropriate. And the clients are convinced that this is the appropriate way of providing legal services, so if they approach a standard or large law firm and see how the work is actually done they are surprised at how much they would have to spend. There are situations where you would see a large local company spending less than fifty thousand crowns a month on legal services, which is absurd. There is no tradition of Czech entrepreneurs using legal services not only for litigation, if they have unpaid invoices, but also as prevention for drafting agreements or for preparing the companies for financing for M&A or whatever. So it’s entirely new for them.”
For these reasons, most participants reported paying little attention to the aging generation of Czech entrepreneurs as a potential source of business. Alexandr Cesar explained, “We are not targeting these people. For us our focus is working on multi-jurisdictional cross-border transactions – that kind of work.” Jan Myska agreed, drawing laughs in the room in the process: “The same for us. We do not do it, but of course we don’t mind and we would be happy to work with them if they happened to knock on our door.”
In Myska’s opinion, although the first half of the year was a clear success for Czech firms – “based on reports for the first half of 2016, we are first in the region, ahead of Poland and Turkey, which traditionally are ahead of us a bit – there were important lessons that needed to be drawn from it. “There were no really huge deals, although the entire volume is much higher – but it is based on an increased number of smaller deals. So I think that generally for all of us we have to accept the reality that we shouldn’t be waiting for a huge shot because there are none coming, really, or at least not very many, so clearly this SME segment of the market is something which we have to take seriously.”
Myska elaborated: “I was very surprised to see that even for private equity the number of deals in 2016 is not substantially lower than it was before, but the volume of the deals is significantly lower, which gives me an indication that the PE lawyers may be interested in deals they were not interested in several years ago.”
And Robert Nemec pointed out that working on smaller deals for Czech entrepreneurs was more challenging but also more satisfying. “On the one hand, because of the smaller size of the deal the budget for legal services on such deals is limited, which makes it more difficult for us to be able to compete on that market. On the other hand, the great advantage of these deals is that actually the real owners – people who care about the results – are participating in that deal so it’s not the procurement guy or someone who is not entirely interested. These people really care because it’s their assets that are at stake. So it’s a difficult client on one hand, but on the other hand it’s the kind you like to work with because he doesn’t just care about your stamp or legal opinion. He really cares what the quality of the service is.”
Paul Stallebras, however, described a radically different market, referring to “significant growth in M&A regionally over the last six to 12 months” and saying, “whether that’s a kind of temporary bubble which happens to be the result of a number of big deals coming to the market at the same time remains to be seen, but in my experience there are an unprecedented number of large transactions in the region. I have never seen this many.”
Stallebras admitted he had no idea what had triggered the development, suggesting only that “it’s probably a mixture of maybe people getting to a point where they would like to sell, and I also query whether there might be an increased interest in international businesses in investing in the region, whereas markets like the UK may not be looking as attractive just at the moment, and possibly the US as well, and a number of other markets in Western Europe, so I think and there’s money out there that has to be put to work. So there’s an opportunity. And you look at the people who are coming into the region to do these kinds of transactions. These are big players with a lot of money to spend.”
Law Firms Come and Go
The participants at the Round Table were asked whether, as no international firms had left the market in 2016 (after both Hogan Lovells and Norton Rose Fulbright had done so in 2014 and Eversheds had left in 2015), the Czech Republic was reaching equilibrium. Martin Kubanek said that he had heard many years ago that “the globals will leave and only national champions, the regional firms like Schoenherr, and the spin-offs of course would stay behind,” but said, “I think this scenario is not happening yet.
Robert Nemec said that regardless of what they thought would happen with the larger international firms, he and his colleagues at PRK Partners knew what they wanted to happen: “It is certainly not our wish that they leave. We would very much prefer if the reputable international firms on the market stay, because of course the lawyers do not disappear. Ninety-nine percent of the lawyers working for these firms are Czech lawyers who would stay on the market. And instead of being under the pressure of working for international firms and being obliged to maintain a certain level of fees and standards and everything, they would be free on the market, which is much more detrimental for the market situation. And plus, it sends a negative signal about the market to other international firms – they would be wondering ‘what’s going on there” Why are all the reputable firms leaving the market? Is there something wrong there?’”
For his part, Miroslav Dubovsky, the Managing Partner of Hogan Lovells in Prague until that firm withdrew in 2014, thinks the market is unlikely to see many more departures anytime soon. “I think that the global legal market is changing and is forcing many international law firms to reconsider their strategies and also the markets in which they operate. I therefore think that those international law firms which are here know why they are here, and they will be staying here – are here. and will be here.”
Alexandr Cesar was more interested in what might be coming than going, noting that “if there will be, for example, significantly more Chinese capital in the country, I wouldn’t be surprised if a Chinese firm opened here in the next five years. I think in 10 or 15 years most European cities will have a Chinese firm in them.”
And Stallebras suggested that it’s not self-evident that no more Western firms would be coming in. According to Stallebras, “one thing I suppose you might see in terms of an entry into the market is that I can see Prague being an attractive place for a firm that might want to have a presence in Central and Eastern Europe as a hub from which they can operate elsewhere. Maybe some of the American firms who want to have a presence in Central and Eastern Europe might choose Prague to do that. But that’s not necessarily anything to do with the Czech market. This is a very good place to have a hub – we have a bit of a hub here ourselves.”
Is the Czech Government Doing What it Can to Attract FDI?
Miroslav Dubovsky said that the attractiveness of the country as a base may be dampened soon, as “I’m hearing from clients that the Czech Republic is losing its labor force advantage and that they have difficulties in recruiting new employees. If this is not changed then the investors might invest elsewhere.”
Stallebras pointed out that such changes are common in the region, noting that “some of the other countries that looked very attractive not so long ago are facing various political issues and so now the Czech Republic is being viewed, as it should be, as a stable environment in which to invest.” He smiled, adding that “for your information we have a client who’s been looking at where their operations might be post-Brexit, and the three places they are considering are Italy, Poland, and the Czech Republic – and if you look at the stability of those three markets and where you’d like to have your business, you’d probably choose the Czech Republic.”
Robert Nemec was unsure. “The main problem is that the Czech Republic is doing virtually nothing to attract these investments. You would expect … that they would try to encourage some of the financial companies who are thinking of leaving London to move here, but I haven’t seen any activity from the Czech Republic to promote the jurisdiction.”
Dubovsky agreed. “You have too many changes in the law, a slow court decision-making process, and some surprising court decisions. One would hope that the situation would be improving. At the same time, you have changes in the regulations coming from the EU and from the Czech state which have an impact on companies. All of this is creating some degree of uncertainty for the businesses operating here.”
What should the government be doing? Simple, according to Nemec. “I think the first thing would be to promote investment, which is not happening. The second thing is to prove that our legal system is mature enough and our court decisions are investor-friendly … and that’s obviously in the long-term. I’m very skeptical in that regard, because if you look at most or some of the court decisions even by some very high courts in commercial matters they entirely lack an understanding of the commercial reasoning for these transactions. And this is something that cannot be changed in the short-term. This is a long-term process.”
At that point the Round Table drew to a close, and the participants headed back to their offices and the business of working for their clients.
We thank PRK Partners for their hospitality in offering to host the Round Table.
Attendees:
- Robert Nemec, Partner, PRK Partners (Host)
- Karel Budka, General Counsel, Invia.cz a.s.
- Alexandr Cesar, Managing Partner, Baker & McKenzie Prague
- Miroslav Dubovsky, Managing Partner, DLA Piper Prague
- Martin Kubanek, Managing Partner, Schoenherr Prague
- Jan Myska, Co-Managing Partner, Wolf Theiss Prague
- Paul Stallebras, Partner, CMS Prague
- Jiri Sixta, Partner, Glatzova & Co.
This Article was originally published in Issue 3.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
