An Ever-Changing Market: A Turkish Round Table

Round Table Participants:

•   Dogan Eymirlioglu, Partner, Balcioglu Selcuk Akman Keki Avukatlik Ortakligi (host) 
•   Ahmet Ilker Dogan, Vice President – T.B.U. – General Counsel, Alacer Gold (General Counsel) 
•   Asli Orhon, Country Counsel, Hewlett Packard Enterprise
•   Bora Kaya, M. Legal Counsel, Gama Energy Systems 
•   Resat Moral, Managing Partner, Moral Law Firm
•   Semih Metin, Partner, Nazali 

Business is Better Than You Might Think

CEELM: A number of international firms without offices here in Istanbul, who traditionally look at Turkey as one of the most exciting markets to do business in, are telling us they are not very optimistic. At least from the perspective of the type of work that they’d be chasing – in terms of M&A, in terms of PPP/infrastructure even – they don’t feel a lot is happening. Is that feeling reflected on the ground?

Dogan: I can understand where that’s coming from. There are surely some elements that may support that point of view, but I think there’s also room to be quite optimistic about what’s going on in Turkey. M&A activity, when you look at the statistics, has actually done much better than last year. I find Turks have this tendency to be utterly pessimistic on the advisory side and utterly optimistic on the business side. More often I think it’s the business side taking over. The existence of certain PE funds whose sole mandate is to invest in Turkey is one of the motors of the M&A market. We still see a lot of interest from strategic investors, mostly in heavy industry, manufacturing, consumer goods, agriculture, and food and beverages. Those investors actually see it as an opportunity, because the price expectation gap between the locals and foreigners is now reduced. 

On the PPP side, there’s a slowdown in new deals coming up on the market, but I think it’s merely the market gearing up for next year. On the bond issuance side, I think it’s been an active year with a significant number of companies looking at eurobond issuances. More importantly, this was the year where we started seeing IPOs as a real exit alternative for PEs instead of chasing sales to larger strategic investors or secondary deals with other PE firms. Four already took place, and there’s one that is being prepared, at least, and that has been publicly announced. I think after the sad events of July 2016, everybody was way too pessimistic, but the market has outperformed expectations, and we have had a relatively good year.

CEELM: When you say it was better in terms of M&A, is that volume or value?

Dogan: Both volume and the number of deals.

Semih: I think that there has been a small decrease on the transactional side of legal work, because of the serious consequences after the attempted coup in Turkey last year. But I think the Turkish economy is in a takeoff period at the moment. As my colleague says, Turkish companies are becoming cheaper, and this provides more opportunities for foreign investors. I can’t say that the Turkish market is shrinking, but we can say that maybe the Turkish market is transforming. For example, our firm is mostly focused on working with retainer clients. I think the firms that rely on large transactional work may suffer for a period, but if you provide various kinds of service to your clients, which can be in the form of a bundle of work, including taxes, social security, customs, and legal, all together, then the firms working as “one-stop shops” will be in a good position in Turkey.

Dogan: I couldn’t agree more. I do indeed think that certain types of transactional work are going down, but when you offer a full service, including litigation, that compensates for any fluctuation on transactional work. I’m sure our in-house colleagues have had some headaches with the new data protection laws that came in that require a lot of time, no matter what you do. So yes, if you’ve got the right combination of practices, it’s still a very good market to work in.

CEELM: Ahmet, what is the in-house perspective?

Ahmet: I agree with Dogan to a certain extent. M&A seems slower volume-wise, but transaction-wise I don’t think it’s going to be less. There will be no big transactions in the near future, I believe, because what needs to be sold has already been sold. There will be no handover that will be handled again, so mid-size companies can be sold, as Dogan mentioned, and there is lots of interest. I think IPOs are booming nowadays, and until the end of the next year I expect IPOs to be the key issue for law firms. Since financing seems so expensive for everyone, I think IPO is one of the options that they will consider. And the government is providing lots of incentives for IPOs, so companies are going to concentrate on those issues, to my understanding. 

What I hear is that lots of financing and refinancing is happening, and I believe refinancing is going to come, because in the past lots of incentives or licenses were being given to lots of energy companies, and I don’t think they are earning so much good money, so they should need refinancing. And so refinancing is another of the key issues for the coming few years.

CEELM: Is financing becoming expensive because lots of refinancing is happening?

Ahmet: Interest rates are going up, and it’s tough to find financing. You have to give lots of security and the interest is really high in Turkey. One year ago, rate-wise, it was totally different – almost double, you could say. 

CEELM: And when it comes to IPOs, is the main interest the Istanbul stock market, or are players looking towards London?

Dogan: I think this year we’ve seen a slightly different picture. It was traditionally Istanbul only, but this year we’ve seen listings in London and in Frankfurt. Turkish companies, in particular if they are structured – like everybody else – through Dutch or Luxembourg vehicles, no longer hesitate to get listed abroad. And now the Turkish market, locally, can offer them all the services they need, and they can access the necessary experts here locally, in Istanbul or in Ankara, without having to fly off to London or Frankfurt or Paris. So I think that provides a good diversification in the market.

Ahmet: And additionally I can report that law firms are full of business. When you just reach them they cannot reply tomorrow. It seems much busier.

CEELM: Asli, from the perspective of working for a huge multinational, how do you feel that Turkey is perceived?

Asli: Turkey is currently perceived as an unstable market, and ever since the declaration of the state of emergency it has become more challenging to do business, especially in the public sector. While for sales-based companies like ours Turkey is still very attractive, we really compete in difficult conditions – I’m talking from an information technology perspective. It’s a very competitive sector, and it’s difficult to find margins in that sector – and it may not be every’s company’s priority to invest in IT during such difficult times. 

The world is moving in an IT-driven direction and the economy is shaping now based on new technologies that provide effective usage of data, such as the Internet of Things, machine learning, and so on. So it’s still very important to invest in new technologies. In Turkey, big businesses are very aware of this new transition and so we still do well, however of course most of the time investment is kind of limited, and companies are looking forward to cost-cutting techniques, and the focus lately is on reorganizations and restructurings rather than new investments. For example, HPE has engaged in a series of spin-offs since 2015 with the purpose of building a better organization that would compete more effectively in the market. First we split off HP’s printing side, and then the enterprise services side, and then the software side, so our strategy now is to be more agile, nimble, smaller, and more focused in certain areas. So let’s see what’s going to happen in the long run, but many companies that operate in competitive sectors like technology are looking for ways to reshape their organizations.

CEELM: Bora, you have an interesting perspective. How’s the market influencing your work?

Bora: I have to start with the big picture. The numbers, the figures that are being announced with regards to the local economy, seem promising. But on the other side, we know that the current deficit is growing. And the Turkish lira is somehow losing value. So it’s not easy to comprehend what is going on in terms of the global economic markets of Turkey. However, when it comes to the energy markets, and specifically the EPC market for power plants, there is a decline in demand for gas-operated power plants, but now, based on recent announcements from the government encouraging the use of local coal by steel manufacturers and new projects for thermal power plants, I can tell you that I’m expecting a few projects in the coming years which will be based on the use of local coal. And I know that there were some projects which were postponed due to some productivity issues and the lack of support from the government, and I think they are going to take place within the next years. 

But also there’s better incentives, better support from the government, for the renewable energy projects so they’re going to be in place for the coming years as well. 

In terms of our company’s operations, we are doing business mostly abroad, because we have recently completed two power plants in Turkey and there aren’t any other new projects in the pipeline in the country. As a group we are also dealing with PPPs, but the PPP market has somehow come to a saturation point. I think the burden on state incomes has now exceeded a point where the treasury can handle more projects. That’s why I don’t think that any other PPPs will be tendered other than the health sector, and even within the health sector, existing projects are already being done by other investment groups. So in terms of PPPs, I think the picture is clearer for me. 

In terms of bond issues and refinancing and financing, I agree with Ahmet: It’s not easy to find cheap credits or loans, so refinancing is becoming very important. Bond issues – not just the local bonds, but Euro bonds and other financial vehicles – are of utmost importance for us. So we’re trying to do those as well. 

And course every company’s dream is to pull off a successful IPO. But it’s not an easy task. When I was working for Ronesans Holding, for example, I knew that investors wanted to limit their risks – and if you are a company active in various sectors, the risk is so big that they cannot invest without expecting huge internal rates of return. So you have to separate your operations in a way that allows investors to cultivate the risk margin. If you are dealing with many sectors it’s not going to happen. I think that’s why also they are looking to do IPOs not in just one stock exchange, but in a set of institutions at the same time.

CEELM: Resat, when you look at the market strategically, and you think of hot sectors where you know you’ll want to be pursuing work in the next twelve months, what are the main industries that you think should be targeted?

Resat: I believe that in the M&A market, there’s always interest for niche sectors. On the other hand, the first shock [from the attempted coup] is gone. Since a niche market always brings attention, strategic investors weren’t even affected by the negative developments, because they continue. And from the start of 2017, financial investors have been coming back.

Retail is always a big sector. And I expect M&As in the area to grow in the near future in the retail and real estate retail sector, since shopping mall construction has decreased. We can expect to see some real estate M&A transactions in the near future.

In terms of energy, as you know there were two big government auctions which generated major attention. All the big players concentrated on those two auctions, and now they have recently come to the table for potential further transactions. 

Regarding new markets, compliance will be something. There are a lot of compliance issues, involving data protection, the real estate market, and student dorms. There is a lot of evolving legislation which will affect compliance work – and thus, of course, provide legal work.

CEELM: The GDPR is a buzzword across Europe at this point, and it’s going to keep a lot of firms well fed until it gets implemented – and probably afterwards, as disputes and litigation start popping up as well. Is there anything else that’s happening in Turkey at the moment that’s keeping law firms busy on the compliance end?

Dogan: Not in terms of compliance, but Turks, as Bora said, diversify a lot, and they have started to invest a lot outside Turkey. We typically invested in the former Ottoman territories and the CIS because of cultural affinities, but I see more and more Turkish companies looking into Africa – in particular sub-Saharan Africa. Infrastructure projects, hotels, hospitals. The tricky part is that in most African projects the sponsor needs to bring the finance along and there one often finds oneself going against Chinese competition. So I’m seeing a lot of interesting JVs or financing models where the project is initially awarded to the Turks and then they flip it over, but that’s a market that is pretty much under the radar of Turkish companies. 

On the IPOs I couldn’t agree more. It’s a hype thing, but there’s practically no real retail market. At the end of the day you almost always see that it is the QIBs – qualified institutional buyers – who end up purchasing the shares.  There’s an immediate need for liquidity, either for refinancing or for investments and that’s why we need new products and innovative products, and that’s what keeping us sleepless at night.

CEELM: That plugs into a different question: What has been driving the Turkish lira down? Is it geopolitical developments, or is something else at play?

Semih: It’s the unpredictability of Turkey. Nobody’s making any predictions about the future of Turkey. In Turkey we can make predictions. But when you look from abroad, I think it’s very difficult to make predictions with regard to the Turkish future. I think that affects the value of Turkish currency.

Dogan: I think it may be more economics at work – pure basic economies 101 – than political perception. Political perception accounts for 3-5% of impact. We basically borrow in foreign currency, but our revenues are in Turkish lira. And we keep failing to make up the difference. When you look at the currency basket, all these currencies move pretty similarly. The trouble is, our balance sheets are fragile. It creates a multiplication or exaggerated effect, but it is a question to be solved. Unless we create revenues in foreign currency, it’s going to be there – or we will simply decide, collectively, to have a huge devaluation. Which might follow Serbia’s solution, but it may not not be a good one. 

Ahmet: Government is showing a deficit for the first time for the last ten years. I don’t know the exact numbers but this year is the first time that we have a deficit. In the budget, there’s a huge gap. And we cannot control that. Plus our geopolitical place, near Russia, Iran, and Saudi Arabia, means everything impacts us more than other countries. When you just look at Bloomberg, the deficiency of the Turkish lira is high – almost triple, in coming months, the Brazilian currency or the South African currency. At the end of the day, the government deficiency’s one of the key issues, and our geopolitical position is the other part.

Dogan: I agree with Bora that we’re going to see a change of attitude. These government guarantees that have been issued for the PPP projects … it is a very good idea to get the PPP market off the ground, but now it’s being heavily criticized publicly by newspapers, by the opposition, everywhere. And it’s something hitting the budget as well. It appears that the traffic estimates were high when those projects were tendered. But everybody wanted to do it, and everybody wanted to finance it, so nobody carefully looked at the estimates. Australia had the exact same problem, and now we’re going through our own phase, and this is hitting the public budget pretty hard. 

Eastern Investors Appreciate Cultural Similarities

CEELM: Let’s shift subjects. What type of investors are you seeing come into Turkey?

Dogan: I think it’s a good idea to start with who’s not coming, and who’s leaving. I think we see a significant decrease in investments from the United States. The good old days of major American private equity funds, and deals worth tens of billions of dollars are not there anymore. But I think we still have interest from China, the EU definitely, and I absolutely think the leading candidate today would be the Middle East, plus Malaysia and Singapore.

CEELM: That’s interesting. What’s driving that particular market?

Bora: I don’t know the dynamics of their decision-making process. But this is a new market for them, and they don’t know its history, so I don’t think that they’re making as rational decisions as others. Their decisions must mostly be based on cultural affinities.

Dogan: When you look at Malaysia, Singapore, and the Middle East, it seems to confirm that money comes from where you do your marketing. Turkish government agencies, law firms, companies … for the last three years I would say they’ve been looking more towards the East than to the West to get funding, because it was easier to get and it was easier to negotiate given the cultural affinities and the lending appetite in those countries. When you look at ISPAT [the Republic of Turkey Prime Ministry Investment Support and Promotion Agency], they’re organizing more trips to the Gulf than to Western Europe. 

Bora: Yes, and maybe just I can add some facts about that. General Electric was our partner. They left, and now a Malaysian private equity fund came and bought GE’s shares. In terms of our business approach, we were mostly working with General Electric, Siemens, other US-based or EU-based companies, but now, in our recent projects, we are cooperating with Mitsubishi, Sumitomo, [and other] Far East or Eastern companies. So the picture is changing.

Ahmet: Europeans are just looking at the results of due diligence projects, when you have a huge bankruptcy or some numbers in mind, but if you explain to Easterners they can say, “skip that one and go ahead.” You cannot do that for the EU or the other countries. You can take a single investor like that just to cover your losses.

CEELM: Is that a good thing or a bad thing for the market in the long run? Having these trusting partners, so to speak, that are less interested in the numbers, is that beneficial, or potentially problematic?

Dogan: I see no downside to it, unless they’re acquired by some Western investors in turn, because it’s not a lack of disclosure. On the contrary, it’s full disclosure – but simply their decision-making paradigm is different. To the American investor or the Western European investor you talk of the same risk, and the reaction is different. But as Ahmet said, you can explain it to a Qatari, a Saudi, or a Malaysian, and they say, “Okay, I understand that, but nevertheless let’s do it.” So I think overall it’s a positive thing.

Resat: Middle Eastern negotiation culture is even different from Europeans or United States. It is more brother-to-brother negotiation. A Middle Eastern investor can even amend an already-signed agreement if you explain it in terms of financial impact or a financial deviation between the signing and the closing. It is something with the culture. You cannot explain such a thing to a German – you cannot even mention it to a UK person or a German person.

New Mediation Requirement and Arbitration Options

CEELM: Let’s talk about legislative developments. Is there anything that we need to be on the lookout for?

Asli: The GDPR is something we will all have to deal with as it comes into force. There’s also the new development in the Labor legislation introducing a compulsory mediation process. This creates an additional opportunity for law firms and lawyers – and essentially creates the new profession of mediator. I don’t know whether it is going to be really effective, because most of the companies who actually have disputes with their employees try to resolve them on amicable terms before anything goes to the courts anyway. So there is already an informal mediation process – but now it’s becoming formal. It is hard to tell how the process is going to affect employee litigations; I suppose it will depend on the role of the mediator mainly. It may decrease the number of lawsuits, or on the contrary, it may just prolong the pre-litigation process. 

Dogan: I’m very pessimistic about that new piece of legislation, in terms of the outcome. From one perspective I very much appreciate that it creates a new economy, in particular for those who are licensed as mediators. But you can be represented by a lawyer at that mediation table, so that sort of kills the entire spirit of it. More importantly, most of the time with Turks, if they’re going to settle something, they don’t need any formal arrangement or setting for it. We look at how the trainings are structured, how the guidelines are given to the mediators, and they’re not actually mediators or arbitrators at all, they’re more like facilitators. It’s just an additional procedural step that creates a minor cost item. It creates its own economy, but I don’t think it’s going to reduce the amount of litigation we’re going to have. It’s just one more step in the middle, another box to tick before you end up in court.

CEELM: Is there anything that could be done to make it better?

Dogan: No. In particular, if it’s between a company and an individual, in an employment dispute, 9.9 out of 10 times the employee’s going to win in court anyway, so he’s got no incentive to mediate or negotiate. The company sometimes – it depends, the fine people in this room are not perfect example – but your average Turkish company says, “Okay, let him sue me, we’ll see it in three years’ time...”

Resat: In any case, in practice it has already been mediated. Of course, such legislation will create an economy. We have some attorneys in our office who have mediation licenses, but none of them intend to do that work, and indeed we do not market it. But of course, regarding the more corporate and more commercial items, we as lawyers perform a non-official mediation. But for those employment matters, it’s something procedural, it has to be on the form. Okay, tick it and move on. So I think that it will be not as useful as it is expected to be.

Ahmet: The thing is that at the end of the day the employee’s taking x amount of salaries, which is almost definitely going to happen – you can foresee that he will get paid.

Semih: It is guaranteed.

Dogan: I think there’s something else to be very optimistic about in the litigation environment: The new ISTAC arbitration center. I think that’s our way out of lengthy and costly litigation. When you look at court fees in Turkey, they don’t appear to be too much, but when you split it over three years, between everything, the cost of litigation gets significantly higher. ISTAC and the people in it are well-versed, perfect professionals, and experienced in international arbitration. When you look at that court, it’s all the big names of international arbitration, who previously served on countless occasions as ICC arbitrators. I think the main advantage is, if you qualify for a local arbitration, then it almost has the same impact as a local court decision, only you get it in, say, six months. Their fast track arbitration also works. It is sometimes even cheaper than courts. It’s just going to take time for the market to understand that this product is there. For commercial disputes, I think this is one thing to be very optimistic about.

Ahmet: For you guys, is it working? I have seen they are giving lots of trainings and so on. I don’t see the practice in the contracts and so on. Or have you used the arbitration court?

Dogan: We have a good working relationship with the secretariat and they already have a number of pending cases. I had the privilege to act as a sole arbitrator on a fast-track arbitration between a Turkish company and a foreign company, and it got settled within forty-five days.

Resat: We have started, for the last one and a half years, putting clauses on agreements, but we haven’t filed a dispute with them yet.

Dogan: Frankly I really don’t hesitate about recommending ISTAC rules to any client. It’s pretty much streamlined with the ICC, it’s cheaper, and it covers both domestic and international arbitration – and it’s in Istanbul. Most of us have had ICC arbitrations which were designed to be seated in Vienna or Zurich, but for cost reasons parties actually had the hearings in Istanbul, so ISTAC plays into that game as well. The default seat is Istanbul unless you agree otherwise. So I think that for the first time I’m not afraid to recommend something wholeheartedly, saying, “these rules – you can go for these.”

Resat: And in parallel, in line with that, the Istanbul Chamber of Commerce has started to market itself more aggressively in order to be a competitor against ISTAC. For the last year or so.

Bora: We are not still using these tools, because our adversaries or, let me say, our partners in business, don’t want to see those rules or ISTAC as a dispute-resolution center. Just like us with other jurisdictions, in fact: We don’t want to see the Moscow Arbitration Center in our contracts with Russians, because we don’t think that the process will proceed as smoothly as it can with ICC arbitration. The ISTAC rules parallel the ICC rules, and when you look at the panels, you can see all the well-known names in the international arbitration market, so those do not cause any problems, however when you get an ISTAC judgment, most probably you’re going to need to execute it in Turkey, and that’s where the problem lies. You have to strengthen the whole judicial system, I think. I know that a lot of effort is being spent to facilitate the use of ISTAC, which is very valuable, but you have to make the same effort for the entire judicial system.

Dogan: I think the same problems that you just described – all of which I agree with – exist for other arbitration awards as well. ISTAC is not disadvantaged compared to ICC or UNICTRAL when it comes to enforcement, but I agree we still have things to do on our enforcement processes, in all matters, not just ISTAC but even for a regular court decisions. 

The GDPR and Turkish Data Protection Law

Resat: Referring to the GDPR, I think that within the next couple of years there’s going to be a major amendment to Turkey’s similar legislation to try to adjust ourselves to it.

CEELM: That actually is something I’m curious about. Is this going to involve in-house trainings, or are you going to externalize it? Will you have the budget to externalize it?

Ahmet: If you’re a bank or the insurance company or another regulated company, you have to be heavily engaged with outside counsel. Even for us, you have to take some advice and be taught in a weekend, internally as the case may be.

Dogan: I think the main game changer with these new regulations around data protection is going to come from the consumer sphere. Maybe about 30% of Turkish consumers are litigious, but the rest, they think it’s too much of a hassle to go after a company. But with this new regulation, we see a change in the mindset of the consumers and customers, in the sense that, “Okay, this is something very personal, that I hold dear to myself, and if the company’s playing around with it, then I should go after them.” So I see them becoming more and more litigious when it comes to infringements of data protection. 

Tourism companies are a perfect example of that. Maybe they wouldn’t go after 150 euros of rebate or claim, but if you disclose their personal data, such as something they eat, something at the hotel, or if they get poisoned and you accidentally share their medical records with your agency, then they come after you. And this was not an attitude we saw before. Sometimes people would go to consumer courts and all that for 150 liras, but now they really start to take it personally – in particular members of the younger generation who are Internet-savvy, and who think about personal space and privacy. I think it will become a serious issue if not properly addressed.

Resat: International procurers or companies will have to follow codes of conduct which contain GDPR-compliance rules. And in order to comply with such codes of conduct, for example, a procurement company exporting goods would have to comply with, in addition to legislation, contractual demands as well. The new GDPR-related legislation has already been affecting the retail and e-commerce sectors for the past year, and the government has already started several investigations of retail companies regarding their compliance with consumer legislation.

Bora: In terms of the GDPR, as we are also operating abroad and still bidding for projects in UK or Serbia or all the energy projects that are going on around the world, we are getting consultancy services from international law firms about what we have to do if we are awarded those contracts, because we are not an established EU company. We have our subsidiaries in the EU, of course, and they are taking their own precautions, but as the headquarters, we are also obliged to comply with the GDPR requirements. The GDPR imposes a lot of different obligations than the Turkish legislation does.

Asli: I think that even Turkish legislation requires us to appoint a data protection officer, which creates another department within the company. That is a little bit worrisome, as locally it is not always possible to create those resources. When you think of the multinationals, these types of subjects are mainly managed centrally. It will all have to be figured out, and it’s going to be a very confusing process.

A Transforming Legal Market

CEELM: Let’s shift subjects. What’s the legal market looking like these days?

Semih: I can’t say that the Turkish legal market is shrinking, but I can say that it is transforming, both for clients and firms. So as legal professionals we need to adapt to this new environment. For example, in recent years, we made lots of inbound deals. But nowadays we are working on some outbound deals. We are representing clients regarding future work abroad. For example, we are representing lots of clients who are planning to build factories in North Africa, in Algeria, in the Balkans. You need to be prepared this new environment – and you need to have some international contacts with regards to Africa, with regards to the Balkans. I think that’s the common issue.

CEELM: How are you pursuing those contacts? 

Dogan: It depends on what type of firm you are. If you’re an independent firm, of course, road shows are still a good thing. And I think it allows you to make a better judgment of characters. Almost everybody has mastered the art of marketing brochures, but it’s only when you sit face-to-face with local counsel that you can actually feel the fabric. If you’re in a large network, then you can rely on your network – but even in that case, I think the personal touch still matters. The profession still remains one of personal contact and knowledge.

CEELM: One of the ways that Turkey really stood out in the market analysis we performed for the special October issue of the CEE Legal Matters magazine was that between 2014 and 2017 the number of ranked firms jumped from something like 37 to 70 – by far the largest such increase in CEE. How do you explain that?

Resat: There are a lot of dimensions. You know, we have to divide law firm history in Turkey, in my opinion, into three generations. The first generation we had, following the waves of foreign direct investment starting in the late 90s, saw firms led by such natural-born partners as Pekin, Birsel, and Cerrahoglu. The second generation – the one currently turning up at the table – started with the end of the first generation with Mr. Herguner and now continuing with Esin and Paksoy. Now it seems that the third generation is in the game. One reason for the increase in firms is the de-mergers of the big first-generation and second-generation law firms. And of course the increasing number of highly-qualified lawyers who are working as well, and the transformation of family-owned firms such as our own. That’s why those rankings are increased now. 

In this third generation, with so many firms, the competition is tough – and it affects fees as well, because all the in-house lawyers are from these three generations of firms, and they know how much law firms are billing. In 2002, 2005, there was a lack of leading players, and so the legal fees were much higher. Now there is a lot of competition, and companies will benefit in order to get the highest-quality service against a fair value. Not the lowest value, note – a fair value. The market is going through an evolution.

CEELM: What about from the in-house perspective? Do you feel that over-abundance of law firms present, or is it just an impression from the outside?

Dogan: That’s a good question, I’m very curious about the answer.

Ahmet: Honestly, I am an ex-law firm employee, and yes, it is a transformation, and I believe the new firms are very great, honestly. And it’s good for in-house counsel, because you have a variety of options that you can choose from.

Asli: I can add something to that. In terms of transactions, most of the time, for international companies, there is already a preferred law firm that is in place globally. So, locally the options are limited. Aside from that, on a daily basis, for day-to-day legal work, there’s definitely a lot of options, but there’s still the downside of working in a big international company – it is harder to change certain traditions. So if the company has been working for several years with a firm, then it’s more difficult to change to another law firm. Even though that you may know that another law firm may provide you with a higher quality of service, or there are other law firms that you think that are more qualified to do certain work, it requires work, time, and effort to change things. And for companies that do not have big law departments in the country, it may be more difficult to drive those changes locally.

Dogan: I think Turkey is different from that global trend in the sense that we increasingly see the number of panel firms shrinking. Everybody’s cutting down the number of firms in their panels, from the 20s to three or four. So there’s huge competition on that side. I think a disturbing local trend, which might work to the disadvantage of everybody involved, is that most companies now have these procurement rules which say, “you should have at least three offers on no matter what legal services you purchase.” The in-house counsel – or the CEO or the CFO – already knows which firm they are going to work with, but they still have to satisfy the rules and get two more offers. Most firms still have the appetite and manpower to bid in many procurement process. You fool them once or twice; if they see no work coming in, then they stop bidding.

CEELM: What about fees? The market has been complaining for a long that the fee levels and fee pressure were unsustainable. Is that being alleviated?

Dogan: I think it’s a cultural thing. Fee pressure will always exist in Turkey, in the aftermath of 2008 in particular. But this hasn’t changed; my father complains about the same thing. It’s just a question of knowing which clients to pursue and which ones you have to drop. And it’s an economic analysis question for each firm, there is no magical catch-all answer that would satisfy everybody. You need to look at your numbers, your profitability, and whether or not that client and their payment capabilities are working for you. It’s all communication. The fee pressure is there – it will always be there – and lawyers and in-house lawyers at the companies will always be smart enough to come up with creative solutions to do business together.

CEELM: Asli, you mentioned a focus on being lean in the country. Is that reflected on your legal expenses side as well?

Asli: There is definitely enormous pressure on the legal budget. I think it’s true worldwide, not just for Turkey. For several years now, companies do most of their work internally. The current trend is to give to the outside counsel really specialized work that requires special expertise, such as litigation, major M&A projects, and so on, which is kind of understandable, because internal company policies are also becoming very important in doing business in a certain country, so the outside counsel may be unfamiliar with those policies, and there are lots of aspects and internal dynamics to closing a deal that are part of the ordinary business of the company. In HPE for example, there are many internal issues to consider when approving a potential deal. So you have to know all those rules and policies in order to be able to give the appropriate legal feedback. So that’s why there’s a limited number of areas where you can give work to the outside counsel. Asides from that, when you ask for a few proposals from differing reputable law firms, you see a huge difference between the prices offered. So of course if you know one of them well enough, then you go with the cheaper price, but between law firms there’s a huge fee difference sometimes.

Ahmet: But I think this involves the kind of assumptions that you are making in the proposals. The assumptions are the most critical part; if you don’t communicate there’s a huge difference. Because if you go to the cheapest external counsel they say, “we were supposed to work up to 20 hours. But we worked for 60, so you have to pay double the agreed cap.” Then you have fight with that law firm. The thing is that these assumptions are key. I don’t know how it’s going to be handled, but no one is calling me saying “my assumptions are in this respect, we send it at this price, these are the assumptions, and these are included and these are excluded.” No one is giving me that kind of information. And a basic issue is, yes, travel is excluded, translations are excluded, and so on, but often they simply don’t understand how a deal works, because if I want to arrange financing, for instance, it’s going to be finished at the end of the day. If you predict ten hours of meetings, and two inside your firm, it won’t finish, because you know that if you are taking x hundred million dollars of finance, it will not finish in twenty hours. So it should be broad enough to cover that. The lawyer that you’re asking for has to engage with you and ask, “what’s your expectation from the meetings, how does your relation with the counter-party go? Is it going to be a smooth negotiation or a tough one?” Then you can put a cap on fees that is reasonable.

Dogan: The market is pretty much fixed or capped but you’re spot on the money. Unless you explain your assumptions, you’ll always end up in a fight with the general counsel, because they operate on a fixed budget. They tell you “this is how much this is going to cost,” and when you go back asking 40% more, it’s like ...

Resat: Yes, but again, if you got the right assumptions, it might be that number.

Dogan: It might be. That’s why it’s important to explain what the assumptions are up front. I think Asli has a very valid point, when you see three top-tier firms bidding for the same work, more or less the quality’s the same, but the fees are different. I think it’s also a question of workload capacity and how busy that firm is at that time. If they have spare capacity, they can choose to offer a significantly reduced budget just to get the work in. But it’s important to understand whether it’s really a capacity issue or whether there’s something else going on, and the best way to do that is to go out and market, and ask a friend to try to figure out how busy they really are. With in-house counsels, it’s much better practice, but when you have to deal with the CEO/CFO, the primary focus is always the number. It’s like buying insurance. Yes, you get the cheaper policy, but if your insurer ends up not paying, then that policy’s not worth much, so you have to go and buy another one. It’s the same thing. 

Bora: Regarding what Ahmet about assumptions: When I request proposals from law firms, I send an RFQ in which I explain exactly what our needs are, in terms of the hours spent on drafting a particular contract, for advisory services, et cetera, and I’d like them to propose something based on those assumptions so that I can compare exactly what one law firm is saying with what the others are proposing. So when you follow this practice, you see that there is not a lot of difference between the prices. 

What we do after we decide on the shortlist is invite the law firms to speak with us, and we ask them to bring their most junior associates who will be working on our case with them. Because we know that they are the persons who will be really dealing with our project. So we choose the people, not the law firms, because our experience tells us that it is the people who make the difference, who provide the services – it’s not like buying a brand new refrigerator or an automobile. 

CEELM: Earlier you mentioned that there is a bit of a market segmentation, that some of the big boys are still growing, but at the same time, as we discussed, there’s a lot more players in the market than there were in 2014. Those lawyers must have come from somewhere, right? Are there many split-offs in the market?

Bora: I think it parallels what is happening in the Turkish economy, because when you look ten years back, there were only, let’s say, five or six major companies or groups that were operating internationally, and thus which had international problems that required consultancy services from international law firms. But now, there are more companies which work globally. So in parallel to that, I can see now the law firms are also splitting, and we see more law firms that are providing international consultancy services. So that is one of the trigger points. 

And having these new law firms in the market has an effect on the in-house approach as well. When you go ten years back in the in-house world, the CEOs or the owners of the companies were thinking, “Okay, I am spending so much money for the outside legal counsel, so if I employ qualified lawyers within the company and I pay them market-rate salaries, which were not too high back then, it would be a cost-wise decision.” So the in house departments were much bigger ten years ago than today. We are now working in smaller legal departments, instead of having 20 lawyers around, now we are working with six or eight. In some companies only three. But they are highly-qualified, because now the CEOs or the owners are thinking, “Okay, I can buy legal services, consultancy services, with more competitive prices from the market, because there are more actors, so I don’t need that many lawyers in my company, what I need is few businessmen with legal backgrounds who have sound judgment and integrity.”

This Article was originally published in Issue 4.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.