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Basically Bullish: The Czech Revel in Good Times

Basically Bullish: The Czech Revel in Good Times

Legal Markets
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Czech lawyers, not known for ebullience, are nonetheless finding it hard to keep the smiles off their faces. After a decade of disappointment and struggle, if the Managing Partners at Czech firms are to be believed, the last remnants of the global financial crisis have dissipated and business is booming. As spring rolls through Central Europe, the sunshine is both meteorological and metaphoric. Prague is basking in the warmth.

1. Good Day Sunshine

The positivity is well founded. The Czech Government Agency for Foreign Direct Investment reports that, after steady progress for several years, the country now ranks first among Central and Eastern European countries in terms of FDI stock – which reached its highest level ever in 2016 – and per capita inflows. The World Bank puts the country at 27th in its Ease of Doing Business report, behind – in CEE – only Macedonia, Austria, and the Baltics. As of January 2017, the unemployment rate in the Czech Republic was the lowest in the EU at 3.2%, and the poverty rate is the second lowest of OECS members, behind only Denmark.

Against this backdrop, Allen & Overy Partner Prokop Verner’s enthusiasm is unsurprising. “Last year and this year are very busy,” he says. “M&A lawyers have been very busy. We’re 25% ahead of last year, because of bigger deals.” Verner describes a “return of confidence in strategic buying in the region,” and “lots of money – cheap financing – from the banks. Czech banks are actively looking for projects to finance.” Verner says of his firm’s Prague office that “we’re at the peak of our capacity and looking to grow.”

Christian Blatchford, Partner at Kocian Solc Balastik, shakes his head as he comes into the room a few minutes late to a meeting, apologizing that “it’s a busy time.” Once settled in, Blatchford explains that “it’s a really good time for the top of the market” and says that “it’s quality winning out over price.”

Martin Kriz of PRK Partners is similarly positive, describing M&A as “incredibly active here, with lots of assets changing hands.” He repeats: “It’s incredible.” And Miroslav Dubovsky, Country Managing Partner at DLA Piper, agrees that “business is good, at all levels, across the board.”

The Partners at Schoenherr also report good times. “We’re swimming on a wave of transactions,” says Partner Vladimir Cizek. “Definitely better than three years ago. Everything is booming – M&A, Real Estate, Regulatory, and Employment, as well as niche areas like WCC, new-tech, etc.” Colleague Martin Kubanek, the Managing Partner of Schoenherr’s Prague offices, ties the Czech resurgence to the country’s political stability. “If you look at the Visegrad countries, others have clearly populist governments. The Czech Republic’s is slightly more pragmatic.” 

Of course, when lawyers look into the future, grains of salt are inevitable. Although Alexandr Cesar, the Managing Partner of Baker McKenzie, admits that “surprisingly, we have been quite busy the last couple of months,” he also insists, “I’m still cautious. Like any business, the good times can disappear.” 

Indeed, it appears that not all firms are seeing the same boom. Cesar, for one, says that a significant percentage of the office’s workload is coming from the Baker McKenzie pipeline. “The firm is trying to shift work to the less-expensive jurisdictions, like the Czech Republic. Rates here are cheaper.” Thus, he says, “The Czech economy is great, but I don’t see it reflected in the legal market.” 

Jan Myska, Managing Partner of Wolf Theiss, also is skeptical about the enthusiasm reported by his counterparts at other firms. “Probably nobody wants to say it’s not a good time,” he says, insisting that “2016 was OK – but not fantastic,” conceding only that “there were some winners and some losers.” By contrast, Myska says, 2015 was “quite good,” leading to some real optimism for 2016. But he says the “second half of 2016 was a bit slower than the year before,” with “not so many big deals that would keep people busy for a long time.” Even real estate, which everyone else pointed to as a consistent source of business, “was still busy, but mainly existing real estate rather than new developments.”

Ironically, Myska suggests, the overall rebound in value may actually be limiting the domestic M&A market. According to him, “we can see a lot of parallels with 2008 and 2009 when prices started going up – people were reluctant to sell because they thought prices would continue to rise. That was clearly the case in 2007, 2008, and 2009, before the crisis hit. The people went to the market and were ready to sell, but once they saw the prices going up they decided to wait, because they thought good times were coming.

Trying to determine which practices in particular are booming is a difficult proposition. On one thing, however, everybody agrees: Real Estate is hot. 

Alex Cook of Clifford Chance says that “Real Estate has been extremely active – retail for sure, and logistics as well. At some point activity will tail off, but when that is, I don’t know. Czech investor groups have been getting into Real Estate, as well as Chinese investors of course, so interest in this asset class remains very high.”

And litigation – a practice many of the international firms started to embrace during the lean times – continues as a source of revenue. Prokop Verner at Allen & Overy says, “Because of the economic downturn we were forced to look for new sources of revenue. So litigation.” He laughs. “It remains because things won’t be good forever, so we keep it.”

Dubovsky at DLA agrees that litigation is a growth practice, noting that “clients are more litigious than they used to be.” He also, however, reports a growing demand for arbitration – which he says “in my mind is the right solution for resolving disputes – as well. “Arbitration had a peak, then fell out of favor (because financial institutions had been setting up their own tribunals and therefore also winning most of them), but that has changed and arbitration seems to be recovering a bit now.” 

Alex Cook says, simply, “Litigation is something that can be grown, and should be grown. Litigation is a growth area generally,” along with “compliance, anti-corruption, cyber-security, data protection, and regulatory compliance.”

2. To Grow or Save?

Business may be good, but firms are split on whether to put those newfound profits in the bank or to reinvest them. Alexandr Cesar at Baker McKenzie, for instance, says that despite the rebound in business, utilization in the office remains about 10-20% lower than it was before the crisis, so they’re adapting to the good times by increasing the work-load rather than hiring new people. Alex Cook of Clifford Chance also admits to caution: “The lesson from the excesses of the past is for us to be conservative in growth. Not growing, and maintaining a lean ship.”

By contrast, Prokop Verner of Allen & Overy reports that “on utilization, we are running close to 100% for a number of months now so will be expanding our team.”

Erwin Hanslik at Taylor Wessing has a similar perspective: “We’re of course investing into ourselves. Human capital. We’re growing, and adding lawyers. We’ve also enlarged our office physically.”

Christian Blatchford says that he and his colleagues at KSB are “spending more and more money on marketing and quite a lot of money on IT. More and more on people – but we’re not expanding our team. If you look at our capacity, there’s still slack there. There’s still room.”

And Miroslav Dubovsky says, “We are doing two things to respond to good times: 1) Investing in IT – useful particularly for DLA, because we think we are an innovative firm. And 2) investing in people. We’re growing; we have a real ambition to grow.”

3. Nothing’s Perfect

On one thing, however, there is absolute consensus: Fees remain low and aren’t rising. Indeed, according to Erwin Hanslik at Taylor Wessing, they’re the only blemish on an otherwise clear sky: “Fee pressure is always an issue, but otherwise nothing is a problem.” And according to Alexandr Cesar at Baker McKenzie, “fees are not going back up. We still see the pressure. Every week we lose a client pitch based on fees. I don’t think that fees are going to go up anytime soon, and at some point money is always the issue.”

Jan Myska at Wolf Theiss agrees. “I’m afraid it’s still the same on fees – the same pressure on fees for local work as compared to clients coming through the [Wolf Theiss] referral network or pipeline.” In addition, Myska notes, “of course clients wish to pay at the end of the transactions — they want us to share the risk.” As a result, he says, he’s seeing a “much higher success fee element.” 

Regardless, Vladimir Cizek at Schoenherr has little patience for those who are waiting for fees to come back up. “I do find thoughts on ‘fees recovering’ somewhat naïve,” he says. “The market has changed in its nature, and clients are more sophisticated in asking for alternative fee arrangements more and more. There will be no recovery; we are simply in another age of legal services delivery.” 

4. The More Things Change, the More They Stay the Same

The shrinking economy of the past decade resulted in a well-documented transformation of the Czech legal market, with a number of larger international firms withdrawing from the market (including Eversheds, Norton Rose, and Hogan Lovells) and a number of smaller local firms spinning off of those that remained (including BADOKH and Rovenska & Partners, both led by former White & Case partners). It appears the market has stabilized, however, and both phenomena appear to be slowing.

And, unsurprisingly, partners at the international firms remaining in Prague reject the proposition that the market can no longer support their fees or infrastructure. Instead, according to David Plch at White & Case, the thinning of the herd actually benefitted those firms that survived the process. “I would disagree that there are fewer big deals in the Czech Republic, because there are fewer firms that are left to work on them. The competition is not as fierce as it used to be. There are only three or four firms on the market we can hire from to get good talent in specialized sectors: Clifford Chance, Allen & Overy, and, for M&A, Weil Gotshal.” Indeed, he says, “when we’re conflicted out, it can sometimes be difficult to find firms to refer the work to.”

Prokop Verner at Allen & Overy agrees: “The market changed a little bit since 2007. Firms like ours benefit the most from this busy market – as bigger deals require the involvement of larger firms.”

Alex Cook of Clifford Chance dismisses any reference to the viability of international firms in the Czech Republic altogether: “The talk about the international firms retreating is sort of bizarre, I have to say. Of course we are a smaller office in a smaller market, but the question is, are we able to contribute to the market, to the region, and to our firm as a whole. For me the clear answer is yes. We perform very well financially, we are very inter-connected with the rest of our firm, and we actually send quite a lot of work to our network.”

Fewer new firms are appearing on the market as well. Alexandr Cesar says “two years ago there was a lot of movement on the market, and new firms appearing – like BADOKH, things like that. Nothing recently.” He smiles. “Maybe potential split-offs have found out how difficult it is.”

Christian Blatchford agrees that “the market is changing,” and he suggests that “the Middle Market – the second and third tier firms – is having a hard time. Outfits that split off from firms like ours 5-10 years ago, with 5-6 people – the price structure is no longer sustainable, as they’ve grown, had people go on maternity leave, etc. The long-term pricing model seems unsustainable.” 

Martin Kriz at PRK Partners says, simply, “I don’t know of any associates starting new firms and being happy for a long time.”

5. Finding and Keeping Talent

With the return of good times to the Czech Republic, good young lawyers are in high demand, and many partners believe the key to finding and retaining them lies in paying greater attention to their wishes for good lives outside the office. According to Martin Kubanek, “in terms of HR, what we see now is the subject of work-life balance. Young lawyers are not so hungry.” 

As a result, it is widely believed that an increasing number of strong lawyers are choosing options other than big law firms out of law school. Martin Kriz at PRK Partners says there are “not enough good lawyers for the amount of work we’ve got.” He laughs, ruefully. “It’s a good time for legal recruiters. They take someone from us, we pay to take someone from another firm, and at the end of the day we’ve all spent a lot of money to stay in the same place.” Still, he concedes the silver lining: “That means business is good.”

Jan Myska, the Managing Partner of Wolf Theiss’s Prague office, says: “A lot of firms are hiring, looking for people at various levels, but fresh graduates are not as keen to join law firms as before and are more attracted by state service or private business.” 

“This generation is not looking so much for financial independence or the bottom line,” Myska maintains. “Their desire for work-life balance and lifestyle is making it much harder to attract them. So it’s not even about money. They care more about work-life balance. Which is great — I have a lot of sympathy for that. It’s about providing more flexible arrangements, but it is difficult to achieve that.

David Plch at White & Case believes he has found the solution. “One of my big themes is recruiting and how we treat our people. Flex time, for instance, which is becoming more of a subject generally. Little things like providing free fruit in the office – low cost, but sends a message that we take care of them. One key facet of my role as the office Executive Partner is to create an environment in the Prague office which attracts talented people from all fields pertinent to our business – from lawyers and tax advisors to HR professionals, to marketing and finance, to legal interns – and which also provides them with the necessary tools and room for their professional and personal growth in the long run.” Plch believes that this requires more than just lip service. “In this new, more sophisticated market for talent, no one can hide behind glossy HR brochures. It is important to me that the reality of what we offer (and of what we want) always matches our image among our potential future colleagues.”

Still, Plch insists that he’s not unhappy about the changing nature of his role. “Younger lawyers are much better and more sophisticated than we were 20 years ago,” he claims, and while “many other lawyers in the market say, ‘oh, they don’t want to work’,” he believes it is in fact possible to “flip it and make it to your advantage.”

And Prokop Verner at Allen & Overy rejects in its entirety the suggestion that young lawyers require special care. “You have complaints about the new generation,” he says. “But I see things differently. I have a very different perspective. Young lawyers make me happy. You don’t see unmotivated people. You see juniors working really hard.”

While finding and retaining young lawyers may be a problem, many lawyers – though few are willing to risk discouraging their own senior associates by saying so for the record – believe that there are too many senior lawyers and not enough partnership slots available. Martin Kriz at PRK Partners says, simply: “There’s aren’t many people making real partner in the market.” He worries that, with the prospects for split-offs shrinking and limited opportunities for partnership combined with the perception that firms put an unfortunate emphasis on the first part of the work/life balance, “the profession is simply not attractive for newcomers from law school.”

“One of my big themes is recruiting and how we treat our people. Flex time, for instance, which is becoming more of a subject generally. [..] One key facet of my role as the office Executive Partner is to create an environment in the Prague office which attracts talented people from all fields pertinent to our business.” 

Perhaps as a result, it appears that a number of senior lawyers have decided to move in-house in recent years – including, most notably, the June 2016 move by White & Case Partners Michael Smrek and Damian Beaven and Local Partner Ales to R2G. White & Case’s David Plch says that actually works to the advantage of the better law firms: “There are so many quality lawyers in-house now, and they’re more aware of the necessity for quality.”

6. A Final Word

Ultimately, of course, managing fee pressures, the changing expectations of young lawyers, and strategic decisions about investment are simply part of the Managing Partner role. The takeaway, overwhelmingly, is that those decisions and processes are taking place against a much sunnier background than a few years ago. 

Martin Kriz of PRK Partners says that, for the Czech Republic and its neighbors to flourish, there are some basic conditions: “We need peace and not war, and we need some kind of decent treatment from Western Europe.” With those in place, he says, “I’m basically bullish about Eastern Europe.”

We would like to thank the following for their contribution to this article:

  • Erwin Hanslik, Managing Partner, Taylor Wessing Prague
  • Alexandr Cesar, Managing Partner, Baker McKenzie Prague
  • Miroslav Dubovsky, Country Managing Partner, DLA Piper Prague
  • Christian Blatchford, Partner, Kocian Solc Balastik
  • Vladimir Cizek, Partner, Schoenherr Prague
  • Martin Kubanek, Managing Partner, Schoenherr Prague
  • Prokop Verner, Partner, Allen & Overy Prague
  • Alex Cook, Managing Partner, Clifford Chance Prague
  • Martin Kriz, Partner, PRK Partners

This Article was originally published in Issue 4.5 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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