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Building Blocks: The Rise of the Regional Austrian Firm Across CEE

Building Blocks: The Rise of the Regional Austrian Firm Across CEE

Legal Markets
Typography

“Vienna is the gate to Eastern Europe” – Niki Lauda

By this point the so-called “Regional” law firms are well-established across CEE, holding down the middle against the more expensive international law firms with hubs in New York and London and the domestic law firms operating in only one (or, especially in the former Czechoslovakia, sometimes two neighboring) countries.

Equally well known is that the great majority of the most successful of these CEE Regional firms come from one country: Austria. 

But why? Austria is hardly the largest market in either economic or geographic terms in CEE. Why, then, should firms from that one small central European country have been more dedicated to expanding their presence across the region – and more successful in doing so – than firms from anywhere else in the region, including mighty Germany? 

For this iteration of our Building Blocks of CEE feature, we spoke to a number of partners from leading Austrian firms to get their opinions on the subject.

What’s a Regional Firm?

“The beginning of wisdom is the definition of terms” – Socrates

Generally, the commercial law firms operating in CEE fall can be sorted into three broad categories: International, Regional, and Domestic. 

The closer one looks at this definition, the more it begins to break down – in large part because, as the markets cool and competition for clients increases, firms from each of the categories expand their pitches. International firms insist to prospective clients that they too possess the regional knowledge and the local commitment generally attributed to Regional and Domestic firms, while Domestic firms form ever-stronger alliances with one another to compete with their Regional and International rivals, and Regional firms begin establishing tentative toe-holds in cities previously ceded to their International counterparts, like Brussels, Moscow, and Istanbul.

For the purpose of this article, then, we will consider a Regional firm to be one that operates under one name in more than two markets and does not have an office in London or New York. 

Are Austrian Regional Firms Really That Prevalent?

“Get your facts first, then you can distort them as you please” – Mark Twain

Not all Regional firms are Austrian, certainly. Notable Regional firms from other markets include both Peterka & Partners and bnt, which started in 1999 and 2003, respectively, in the Czech Republic and have since expanded to eight and nine other markets each.

There are also Regional firms left behind when International firms withdrew, including bpv Legal, which took over four offices in CEE from German firm Haarmann Hemmelrath in 2006, and Kinstellar, which took over four Linklaters’ offices in the region in 2007 and has since expanded into five more.

In addition, there are Regional firms that have successfully expanded across specific markets with particular cultural and historical ties, as Karanovic & Nikolic and ODI Law have done in the former Yugoslavia and a number of firms (such as Sorainen, Cobalt, Ellex, and Tark Grunte Sutkiene) have done in the Baltics. 

There’s also, uniquely, Drakopoulos, which now has offices in Greece, Albania, and Romania – a specific market coverage not matched by any other firm.

But these seven (non-Baltic) firms essentially are the exceptions that prove the rule, as no three of them can tie their origins to any one country, and in total they cover 44 markets.

By contrast, six Austrian firms alone – CMS Reich-Rohrwig Hainz, Cerha Hempel Spiegelfeld Hlawati (CHSH), SCWP Schindhelm, Schoenherr, ENWC (now Taylor Wessing CEE), and Wolf Theiss – claim a total of 59 current offices across CEE.

The Fall of the Wall 

“Change brings opportunity” – Nido Qubein

Of course, none of these Regional firms – Austrian or otherwise – existed before the end of communism in 1989. Once Berlin’s Brandenburg Gate re-opened, however, things changed quickly. Former ENWC (and now Taylor Wessing CEE) Partner Georg Walderdorff remembers a “vacuum in Eastern Europe following the fall of the Iron Curtain and especially after the fall of the Berlin Wall,” and says that, “as a result many Austrian companies invested into the Czech Republic and Hungary, which represented a sort of windfall opportunity for us.” 

Indeed, Austrian activity started almost immediately, when two firms that have since disappeared as stand-alone entities – Heller Loeber Bahn & Partners (which has since been subsumed into Freshfields Bruckhaus) and Weiss-Tessbach (which merged with DLA Piper in 2003) expanded quickly into Hungary.

In the early days, Freshfields (and former Heller Loeber Bahn & Partners) Partner Willibald Plesser recalls, not everybody was so sure about the plan. “There were people who were less convinced that it would be 100% a success story, but generally everybody was enthusiastic. I think we all felt this is only happening once in our lifetime, so we must do something, and that is what we did. I remember some of the partners from other firms in Vienna saying ‘don’t you have anything better to do than to travel and work in Hungary? Don’t you have any work here in Vienna, where you’re well paid? Why are you doing this?’ It took convincing.”

Still, the floodgates being opened, more firms followed quickly. CHSH opened its own Budapest office in 1993, and ENWC followed to the Hungarian capital two years later. At this point, the benefits were apparent. Georg Walderdorff recalls, “in every country we went to (except Ukraine) we made a profit in our first year. So, we thought, ‘we can make this work.’”

“There were people who were less convinced that it would be 100% a success story, but generally everybody was enthusiastic. I think we all felt this is only happening once in our lifetime, so we must do something, and that is what we did.”

Not all firms took the same path, however. When Schoenherr opened its first foreign office in 1996, for instance, it skipped Budapest (which it didn’t open in until 2007) and instead opened in Bucharest.

Strommer Reich-Rohrwig Karasek Hainz – the predecessor to CMS Reich-Rohrwig Hainz – didn’t have foreign offices before its tie-up at the end of the decade with Cameron McKenna (which already did have a regional presence), though Partner Peter Huber emphasizes that of course they were still very active in the region. Regardless, once the CMS brand was launched, the Austrian firm made up for lost time. “What happened is that actually prior to deciding to join CMS we of course sat down with the relevant people at Cameron McKenna and basically hammered out this strategy as to how we would approach the CEE markets,” says Huber. “And that resulted in us opening up our offices in various jurisdictions, including the former Yugoslavia and some other countries.”

Reasons for Austrian Success

So then, why were Austrian firms so successful, spreading like wildfire across Central and Eastern Europe? The recipe for that success, it appears, is a combination of historical ties, preparation, favorable timing, and, perhaps, a soupçon of culture.

The Austro-Hungarian Empire

“Empires inevitably fall, and when they do, history judges them for the legacies they leave behind” – Noah Feldman

The theory most consistently put forward for the success of the Austrian Regional firms links their expansion to the ties and cultural memories in Central and Eastern Europe of the Austro-Hungarian empire, which dissolved during the First World War. Georg Walderdorff puts it succinctly: “Our advantage is both the Austro-Hungarian empire and geographical proximity. So, we understand how these countries work a little bit.” 

CHSH Partner Johannes Aerenthal claims that connections to the former empire run deep and didn’t take long to reassert themselves after the end of communism. “Even though Austria was hindered from doing its normal business with the CEE countries surrounding the country due to the Communist era, still there was a lot of common ground with the people there, which means that once the Iron Curtain went up, the old ties that went back to the Austrian Hungarian monarchy were reloaded.”

According to Aerenthal: “A lot of Austrian entities used to have subsidiaries in the pre-communist area, which they of course lost after the Second World War due to the communist regimes, but even despite the intermediate time of 40 years, still it was true that we know the region, we know the people there, we know how they perform and what their strengths are. We know their culture as a lot of those countries surrounding Austria (which means Hungary, Czech Republic, and Slovakia) and a bit farther, like parts of Bulgaria, parts of Romania, were part of the Austro-Hungarian monarchy. And so, a few hundred years of joint history are still a basis for a good understanding of each other even though it has to be admitted that the communist period destroyed a lot.”

Erik Steger of Wolf Theiss agrees. “Many of the countries we look at, as Wolf Theiss – and it’s the same for Schoenherr, for Cerha – most of these countries once were part of the Austrian-Hungarian empire. Now you can smile about that, but the monarchy went on for centuries, and to some extent you can still find that old glue in the region, some kind of common culture. You know, how do they express an issue, how do they talk to each other, how do they get along with bureaucracy, how do they get along with each other? All of these countries have come a long way and have their idiosyncrasies, but that joint history still, to some extent, makes it easier to collaborate and to stick together for us than it does for firms headquartered elsewhere in the world.”

It’s not only pre-World War I ties that matter. Willibald Plesser, who led the expansion of Heller Loeber Bahn & Partners (HLBP) into CEE, thinks that Vienna’s relationship with Central and Eastern Europe during the communist era is equally important. “Even in the Cold War there was a lot of activity going on with COMECON (the Council for Mutual Economic Assistance, which existed from 1949 to 1991) states through Vienna. In business, the foreign trade organizations would agree on arbitration clauses in Vienna, they would have meetings here. I remember a lot of work was sort of dealing with Eastern Europe, even before 1989. So there was a good feeling that you understood people, how they acted and reacted. So it was, I think, for us, somehow natural. I think the region was, in a way, very close to our hearts.”

Peter Huber of CMS also mentions more recent history: “We may not be speaking the same language, but there’s a mutual understanding of the mentality and of the way one does business. One should also not underestimate that even prior to 1989 there were always relationships between Austria and countries like Hungary and the former Yugoslavia, so that was certainly not unknown or uncharted territory for Austrian firms and Austrian banks and Austrian law firms.”

Timing is Everything

CHSH’s Johannes Aerenthal believes that, in addition to the lingering remnants of the Austro-Hungarian empire, the Wall fell at exactly the right time for Austrian firms: “It was a lucky punch, I would say.” According to Aerenthal, “it was not just the joint cultural understanding, but also it fell directly into a time when the Austrian economy was growing, due to joining the European Union [in 1995] and suddenly having access not only to the European Union but also to the CEE region. It was really a booming time, business from Western Europe/US coming to Austria, using Austria as a hub, and going further into Central Europe. This is the reason why we all, along with our competitors, went as well. We had to! We didn’t have a choice, because our clients told us ‘we will go with you there, but you have to have an office there, and if you’re there, we take you! If you’re not there, we’ll take somebody else.’”

If You Build It, They Will Come

The clarion call of Austrian companies filling what Georg Walderdorff described as a “vacuum” was heard by a large number of Austrian firms, of course. Even today, Walderdorff notes, “In most of these countries Austria has the largest number of investors. Not in the size of investment, but in the number of investors.”

Plesser, who opened offices in three non-Austrian markets for HLBP before that firm’s merger with Freshfields required them to withdraw, says that “it was logical that the Austrian banks, the Austrian telecom companies – all of them are among the biggest investors in Eastern Europe – they all felt the same thing that we did: ‘Wow, we must expand our business there.’ And I remember that Erste Bank, for instance, said at the time, ‘you know, we have products, we have banking products, we need to roll them out in a country greenfield. They have banks, but not at our level. We have the products; we just need to go there and sell them.’ The same for insurance companies. There weren’t any life insurance products in the Czech Republic, so Vienna Insurance Group said, ‘Wow, we just need to go there and find a distribution structure’ – which they did.” 

Peter Huber makes a similar point about CMS Strommer Reich-Rohrwig Karasek Hainz’s expansion into the former Yugoslavia at the turn of the century. “Of course there are strong historic and also some economic ties between that part of the world – the former Yugoslavia – and Austria. We saw that it’s really where client demand was. For example, leading Austrian companies like Telekom Austria: Basically their first major investment was in Croatia, which was a transaction I worked on prior to joining CMS, and then others followed.”

“...there was a lot of common ground with the people there, which means that once the Iron Curtain went up, the old ties that went back to the Austrian Hungarian monarchy were reloaded.”

But most who were involved at the time insist the expansion wasn’t only client-driven, and they insist there was a strategic vision in play as well. Willibald Plesser express his firm’s reasoning nicely: 

“It was both. We had clients who went there – for instance telecom companies, even before the opening of the Iron Curtain, and they wanted to go there, and they took us along, so we had actually clients that, let’s say, piggy-backed us into these markets. But the second thing was we realized very early on that we had a very large market at our doorsteps. It is important to note that we were also the first office from Austria to open an office in Brussels, even before Austria joined the EU. Our merger motto at the time when we did the Bruckhaus merger was A History of Thinking Ahead. We were always proud to see how future developments could benefit us, what could we get out of them and make out of them. Not so much the inside world, how much does it cost us, what does it mean for the structure internally – you know, so many groups discuss a lot about internal stuff. Thank goodness we always had partners who were so successful that they thought, ‘we will be able to do it, we just need to do the right thing, and whatever it costs we can do it,’ and so in a way, both going to the European Union in very early days and then also going to Budapest and Prague and Bratislava in three consecutive years – 1989, 1990, 1991 – was driven by the strategic desire, that this was a one-time historic opportunity for Vienna that was cut off – just behind Vienna – by the Iron Curtain, and open up this enormous region that we had always been in contact with. We had professional dealings with in-house lawyers from COMECON countries, and I remember we had done deals – long before – in the Balkans, in Serbia, in Yugoslavia at that time, and I think that gave us confidence that we knew how to operate there, and we knew enough people that would encourage us to come. So it was a logical step. It was strategic, but it was also nice that we didn’t have to invest money into greenfield operations, as actually clients paid our way to go there, so that was pretty nice.”

According to Wolf Theiss Partner Erik Steger, his firm also played the long game in expanding outside of Austria when it did. Steger explains that after the first wave of giant privatizations had begun to wane in CEE came a second wave, “mainly driven by bank privatizations.” Unsurprisingly, Steger reports, Wolf Theiss, known for its strong banking practice, decided, ‘yes, we would like to go.’” 

Finding their first foreign offices successful, Steger reports, “we decided that we wanted to expand across the region, starting with our neighboring countries. We had realized that for other multi-national law firms this market is too segmented into smaller jurisdictions. And we felt we could own it easier than they could. We felt that there was a lot of investment into the region from abroad that would continue to seek high-quality legal advice, and why should we not be there for them once they arrived? And that was not only true for Austrian companies but also true for companies from throughout Europe and the US. We felt that we could position ourselves as a professional services provider in the region to those companies who viewed the region as one combined market space where they would want to go despite the fact that you have several borders, and you have several jurisdictions and languages and what have you. We would work with that and get that complexity done for the client. Wolf Theiss is a comparably young law firm that only started to really grow international in the late 90s. Now all the traditional Austrian firms of course had longstanding relationships with the blue-chip Austrian corporates. For us, going to CEE was a way to get our foot in the door with these and with international companies too, so they would eventually use us in Austria as well, because we would suddenly be in a position to build a relationship with them and to be seen on the same level as the incumbents. To do some work for them. And that they would then use us in Austria and, ideally, in the entire region as well.”

Aber Warum Nicht Deutschland? 

“Liegst dem Erdteil du inmitten / Einem starken Herzen gleich” (“You lie in the middle of the continent / like a strong heart”) – Austrian National Anthem

But what about German firms? They, like their Austrian counterparts, were also based outside the Iron Curtain. Why were they so much less successful? Georg Walderdorff articulates the phenomenon nicely, noting that, at this point, only Noerr and Roedl & Partners really have any ongoing presence outside Deutschland. “Germany is 10 times bigger than Austria,” he points out. “It’s interesting that there are no German firms in the region. There should be 50 law firms in the region by that math. At the most there are two.”

The most common explanation is that while Austrian firms were able to expand quickly outside their country after the end of communism, German firms focused on their own internal markets following reunification with the German Democratic Republic. Willibald Plesser says that dynamic was front and center in the interest expressed by Germany’s Bruckhaus law firm in merging with Heller Loeber Bahn & Partners. He recalls, “They were interested in merging with us because we were a top firm in the country, but also because we had this Eastern European experience and they didn’t, and we asked them why they hadn’t done the same thing we did, and they said, ‘well, we were so busy with East Germany after 1989, we even had to second people to the Treuhandanstalt [an agency established by the government of the German Democratic Republic to privatize East German enterprises prior to the unification of Germany] to help with the privatization.’ I mean, thousands of companies were then being privatized in East Germany. They were completely busy with that. They had offices at that time in Leipzig (which later was closed) and Berlin. That was as much as they could do. And many other German firms: Same way.”

“If anything I think the barriers for entry are higher, so to build up a credible network across multiple jurisdictions in the region is probably a riskier undertaking than it was 10-15 years ago.”

Of course, several of them tried, including Haarmann Hemmelrath (which dissolved) and Beiten Burkhardt (which reconsidered and retreated). But Erik Steger says that the sheer size and profitability of the leading German firms makes it difficult for them to survive in the smaller markets of Central and Southeastern Europe. “I do believe that for German firms, to some extent, the same applies as with the big UK/US firms. It’s very hard for them to sustain a business case that would allow them to make partners in the region. And that makes it difficult to truly merge, to truly expand into that region, because there is little you can offer in terms of a truly equal partnership to the people there, and if people in those countries can never make partner or always remain some other tier or partner, they don’t always feel highly motivated to join you.”

As a result, Steger thinks it is “certainly a plus” that the Austrian legal market and economy are closer in size to those of many other markets in CEE and SEE. According to Steger, “coming from Austria, which is a relatively small state, when you talk to somebody in CEE it’s far more meeting on an eye-level than being perceived as talking down to somebody if you go there telling them how to do what and when to do it exactly. So I believe that this element also makes it easier to collaborate and to truly integrate. I do believe that if, from a perspective of CEE, if you’re talking to Germany, you’re dealing with someone you perceive just so much bigger than you are. And you would always feel smaller, [and] at times, of less value. Whereas talking to an Austrian is like, ‘Well, you’re not that big either, so let’s discuss.’”

Johannes Aehrenthal has a similar theory, suggesting that “We Austrians bring the message obviously a bit better wrapped around than the Germans. The Austrians were obviously seen as a little bit more friendly, and less aggressive, etc. This is one of the reasons of the Austrian success in the area.” Peter Huber agrees as well: “There’s a certain openness in the culture of Austrian firms.”

“Due to the fact that all local firms were founded, earliest, in the 90s, until recently they didn’t have enough investment power to go into more than one or two markets. This might change in the future, and we might see other local CEE firms entering the market. This is definitely possible.”

CEE-Ing the Future

“Plus ça change, plus c’est la même chose” – Jean-Baptiste Alphonse Karr

In recent years an increasing number of prominent Domestic firms in CEE have joined prominent alliances, but few of the partners at leading Austrian Regional firms appear concerned about the threat. Peter Huber explains: “We are not so concerned about this because we do not believe that these arrangements can offer the consistency or the seamlessness of the service that we promise and deliver to our clients. So yes, it’s a development to watch, but not a development that we are particularly concerned about.”

And Huber doesn’t see many more Regional firms coming on the horizon, either. “If anything I think the barriers for entry are higher, so to build up a credible network across multiple jurisdictions in the region is probably a riskier undertaking than it was 10-15 years ago. Whether that means we won’t see new regional players appear, depends. There could also be, like Kinstellar, an offshoot or a spin-off from an existing network, so we may still see those. But all other things being equal, it will be harder to set up a new regional network at this point in time. The competition from the local firms – yes, of course it is there; they did catch up. But it seems that, in some respects, they still do not have the resources to really work on the larger and more complex matters. So an international firm like CMS will always have an advantage over those players.”

Johannes Aerenthal, at CHSH, isn’t particularly convinced that the new alliances and networks will last anyway. “All those new developing networks need to have at least some group clients they can share with each other,” he says. “And that’s difficult. So you will see from those networks – and I’ve looked into this a lot the last few months, what is developing in the SEE area – we have now four or five SEE networks, so yes, there are a lot of networks, but I’m pretty sure in five years’ time at least half of them will be gone again, because they will not have enough to share between each other. And only those networks will survive if they have enough work for all network members.”

In addition, Johannes Aerenthal of CHSH believes that the changing nature of CEE markets is already working in the Regional firms’ favor. Aerenthal points to the slow but steady withdrawal of the larger International firms from CEE. “And this is good of course for all of us now,” he says. “This second or third stage of development in the area, this is for us an advantage, because we do not have to compete more than normal with international firms when pitching for regional mandates.”

Erik Steger concedes that the Domestic firms are ever stronger in the region and says that “it certainly has an influence on how we do our business and how we continue developing our firm in the region.” Steger notes that “many of those good firms are set up by alumni of Cameron McKenna, White & Case, Wolf Theiss, Schoenherr, what have you. They are good lawyers, they have excellent skills as lawyers as well as leaders, and they build sizable entities in these countries. So from a strategic point of view what we must do is make sure that we continue to have an offering that is attractive to clients who see the added value in using us, and therefore are ready and prepared to pay a small premium compared to what they get from that local firm.”

Conclusion

“The only thing that is constant is change” – Heraclitus

Will the hegemony of Austrian Regional firms last forever? Who knows? As Johannes Aerenthal of CHSH puts it, “those local firms in CEE having the intent to go into the regional market first need to be really strong in their respective local market, and of course you need to have money to invest, and this you have to earn first. Due to the fact that all local firms were founded, earliest, in the 90s, until recently they didn’t have enough investment power to go into more than one or two markets. This might change in the future, and we might see other local CEE firms entering the market. This is definitely possible.”

Still, the sun isn’t setting on the new Austrian empire anytime soon. Aerenthal has the last word: “To sum it up I think we Austrian firms are well established in the countries of the CEE region, and I am convinced that we will definitely stay in the region.”

Thank you to Andras Postzl and Monika Horvath of DLA Piper in Budapest, who also contributed to this article.

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