The Slovakian legal market has, for quite some time, been a vibrant landscape of international law firms. Given the positioning of the central European country, and the proximity of major markets such as Austria, Poland, and Ukraine, Slovakia has been able to maintain the high number of international law firms, especially relative to other CEE jurisdictions. Taking a deeper dive into the reasons behind the persistence of such a high number of major international law firms, we reached out to legal professionals who work in Slovakia to get their insights.
Origins of Internationals – How Did Slovakia Become Attractive …
Location, Location, Location
“Thanks to its strategic location and close links to other CEE markets, Slovakia is consistently a natural target jurisdiction for businesses with interests across the CEE region,” shares Wolf Theiss Counsel Rudolf Pfeffer. According to him, both international clients, as well as major local players, need “high-quality legal work, deep local insights, and the ability to coordinate transactions across different jurisdictions.” In Pfeffer’s opinion, Slovakia has a synergetic quality of being “a small but vibrant legal market which generates a steady flow of legal business in most of the practice areas that international law firms typically cover.”
And, Pfeffer is not lonesome in his opinion – Taylor Wessing Partner Andrej Leontiev shares the view that Slovakia’s central location is a contributing factor: “The extraordinary proximity of Slovakia to other significant CEE markets, such as Austria, the Czech Republic, Poland, and Hungary plays a role.”
CMS Partner Michal Hutan agrees with the point. “[Slovakia’s] geographical position – right in the center of Europe and bordering Austria, Hungary, Czech Republic, and Poland – certainly makes it very appealing to an impressive range of international, CEE and European clients to base their operations in,” he says. Following that fact, Hutan believes that a high number of international law firms is a natural consequence. “This is particularly the case with major e-Commerce players, many of whom have set up logistics and distribution centers here in recent years.”
Strong Economy and the Euro
Still, it’s not just geography. Slovakia, or the ’Tatra Tiger’ as the country was called as a result of the 2002 and 2007 strong economic growth, offers a developed market for international businesses.
“After joining the EU in 2004, Slovakia experienced a period of strong economic growth and became a more attractive destination for foreign direct investment,” Pfeffer says, on the one hand. “This development was further accelerated after 2009 when Slovakia joined the Eurozone and adopted the euro as its currency, becoming the only country from the Visegrad Group to do so.”
On the other hand, Bird & Bird Managing Partner Ivan Sagal does not feel there is a sole reason for Slovakia’s allure. “There does not seem to be one universal answer applicable to all the firms with a footprint in Slovakia. Instead, each of these firms follows their own strategy in terms of international expansion, and for those who are present here, the Slovak market simply fits into that strategy,” he says.
“Of course, the strategic reasons are not rigid and may change over time, so while some firms might have initially come in the first wave of the ‘privatization harvest’ in the nineties, they have since established a sustainable local client base and are staying because their Slovak operations contribute to the success of their global business,” Sagal continues. “These later entrants sometimes paired up with or even absorbed existing local law firms whom they found appropriately large or reputable.”
Additionally, Sagal thinks that the relatively early adoption of the euro in Slovakia, compared to “most CEE jurisdictions, might have also played the role in clients’ decision to set up here and consequently in creating the client base for international law firms.”
And Slovakia’s strong economy generated a diversified market with many transnational businesses present.
“Slovakia is a significant production hub for the automotive and electronics industries in the region,” Leontiev says. “International production facilities often use group subcontractors as well as group legal and tax advisors.” Leontiev believes that this nature of the businesses themselves is a reason international law firms are present. “If a law firm does not ‘follow’ its major clients into new territories, its long-lasting relationship in its original market can be endangered,” he explains.
“Slovakia is a leader when it comes to automotive manufacturers, which value not only the country’s geography but also the green-field investment opportunities and state support Slovakia offers when choosing where to base their plants,” Hutan chimes in. “This, coupled with the stable and moderate political climate, EU membership, and relatively low labor costs, has made the country a hub for this sector and its suppliers.”
Allen & Overy Managing Partner Martin Magal agrees with the point. “Slovakia has a small but very open economy,” he says. “Most of its GDP is generated by local subsidiaries of multinational corporations rather than by local champions. This generated a demand for sophisticated international-style legal services at a time when local law firms did not yet have the required expertise and size,” Magal explains. “International firms, therefore, found quite attractive conditions for setting up their operations in Slovakia.”
… and How Come Firms Are Not Leaving?
While many international firms have slowly pulled out of several CEE markets, Slovakia does not seem to have had experienced a considerable exodus. There are several potential reasons for that.
Firstly, there’s the aforementioned overall economic strength of the Slovak market. “If I had to name one common denominator which makes the Slovak market interesting for any international law firm, it would be the overall economic landscape,” Pfeffer says. “The country is an inherent part of the region that is their natural ecosystem and strategic focus.”
Secondly, there’s the calm political climate coupled with a well-diversified market. “Due to political developments and separation from the Czech Republic – a much larger market – Slovakia has never been considered to be a major market, so there was no significant pullback after most important privatization deals were concluded,” Leontiev explains. “Being a small market has some advantages. Among others, the expectations of an international law firm vis-a-vis its subsidiary on a small market are rather moderate. This gives the local management considerable ‘freedom’ in doing business.”
Thirdly, there’s the legal expertise of local lawyers. “For CMS, Slovakia is considered a dynamic and growing market, and we are seeing more instructions from local clients seeking a high level of service and legal support, especially as they grow,” Hutan reports. “Another factor is that the best local lawyers are more than happy to work for international law firms rather than setting up their own boutique firms,” Magal adds. “That trend may not last forever but it is certainly bound to continue for at least another decade.”
Fourthly, there is a strongly developing business habitat. “ I would emphasize our ever more transparent business environment – there is a real commitment from companies and our government to fight corruption and ease the processes for international businesses that wish to operate and invest in the country,” Hutan says.
That said, “to be fair, over the years, Slovakia had its fair share of exits,” Sagal notes, adding “but I would agree that there was no significant exodus and in fact, international law firms successfully dealt with multiple spin-offs, former regulatory challenges, initial distrust of some client segments and growing sophistication of clients’ management of external legal budgets.”
Sagal trusts that global law firms each have their own strategy and that they are “regularly evaluating whether their presence at certain markets fits into that strategy. Similar to other jurisdictions’ exits, those firms that pulled out of Slovakia each had their own different reasons, often purely internal, rather than collectively reacting to some adverse market change.”
Of course, Sagal too considers there to be advantages of the Slovakian economy that sets it apart, if only just: “Cost of labor, geographic location, and strength in certain industrial segments are among the factors that are sometimes considered as advantages of the Slovak market – but specifically in the market of legal services, none of them has a sufficiently significant impact to be the driver behind strategic decisions. The fact that some firms that closed their offices in other CEE jurisdictions still stayed in Slovakia is, in my view, therefore driven by their internal reasons rather than some uniqueness of the Slovak market.”
After the privatization waves that saw international firms come in, many international offices saw a lot of spin-offs that strengthened the offering of local firms across the region. But has this been a case in Slovakia as well?
“The ‘privatization’ time required for the development of deep-rooted international firms leaving Slovakia was relatively short, and that has also reflected on the spin-offs,” Leontiev explains. “Our experience is that if an international firm trusts the local management, which often manages the office as ‘its own,’ self-sufficient in business development and commercial strategy, the spin-off intentions are less frequent.”
“Spin-offs are an inevitable feature of any maturing legal market, and Slovakia is no exception in this respect,” Pfeffer adds. “Many of these spin-offs are well-run, adhere to high professional standards, and possess a solid portfolio of clients. I believe they are a welcome complement to the local service offering, although, for big, complex or multijurisdictional mandates, the clients may still prefer international law firms.”
Magal, on the one hand, believes that there were fewer spin-offs in Slovakia. “It is true that local spin-offs are a less frequent phenomenon than in other CEE countries,” he says. “This could be down to people looking for more stability – something an international platform can provide – as well as local lawyers being given more managerial responsibilities early on.”
Sagal, on the other hand, believes there were more spin-offs. “Actually, there might have been more spin-offs in Slovakia than in some other CEE jurisdictions, but given the size of the market, they have been less visible. It has been a typical feature at the Slovak market for quite some time that experienced individuals or mini teams were leaving their original firms to either set up their own boutique operations or team up with other ‘leavers’ to do so at a larger scale, often initially serving predominantly one big client or a client group and then later evolving into more established local firms,” he explains. “As opposed to some other (bigger) markets, such departures often involved individuals below the partner level (i.e. early career moves), and that might be why they sometimes have not been recognized as traditional spin-offs.”
With so Many Internationals – Is there Enough Work for All?
Traditionally, international firms usually position themselves as targeting complex, big-ticket work. Given the size of the Slovak market, a logical question begs to be asked: Is there enough such work in the country to sustain the current number of international firms present?
“If big-ticket work is a synonym for cross-border and multi-jurisdiction work then Slovakia is not and will never be very attractive,” Leontiev says. “However, many local businesses, mainly because of their commercial ties to foreign markets or foreign partners, appreciate international law firms’ standard of work. Acquiring this higher standard of legal services is often considered key to international success or attractive divesture of the shareholding.”
Magal, too, believes that, while there isn’t a growth in these types of engagements – there are enough of them for the time being. “There is enough work to keep the firms that are already on the ground reasonably busy. Plus, there is a growing appetite from purely local clients to instruct international firms with their cross-border transactions,” he says. “I can even imagine existing international firms expanding further. See the example of Eversheds [Sutherland] opening an office last year, Dentons and Bird & Bird hiring more lawyers, and Allen & Overy and White & Case continue to record impressive results.”
Hutan, as well, thinks that, while there might not necessarily be a lot of big-ticket work, this is not an issue. “In my view, a good international law firm should, as we do, care about more than just the complex/big-ticket work and invest time and energy into working for a range of clients and across a range of practice areas,” he says. “A lot depends on the market in terms of the number of these types of deals we might see. However, if an international firm solely chases big-ticket work and only focuses on those projects that will attract attention rather than taking a client-centric approach, they could potentially struggle,” he explains.
Building on this view, Sagal shares his opinion that there isn’t, really, any work within the exclusive purview of international firms. “Given the development of the Slovak market over the last decade, there is hardly any area of service that would be reserved exclusively for international law firms, but equally, hardly any area that would be reserved exclusively for local firms either,” he argues. “The question, therefore, is no longer whether there is enough big-ticket work on the market for the internationals to sustain, but rather whether the particular firm’s quality of service and the ability to cultivate its base of clients and contacts is strong enough to maintain a healthy business operation. This applies equally to international as well as to local firms.”
Looking into the future, “on the one hand, the Slovak market of legal services is certainly more saturated than it was, let’s say, ten years ago,” Sagal comments, adding: “However, this statement was also true ten, 15, and 20 years ago – and in each case, it was followed by a trickle of further arrivals. Therefore, the straight answer is that it could go either way: it largely depends on a combination of the future performance of the Slovak economy and the degree of success of individual law firms in executing their international strategy with respect to Slovakia. There is definitely no universal factor present at the current Slovak legal market that would give an indication either way.”
“I do not have a crystal ball, but there may be, as there often are, changes in the legal market,” Hutan adds. “Some firms with smaller offices dependent on doing the Slovak part of regional transactions could think at some future point that they do not need a presence here or others that are less established in the market or may struggle due to the competition.” Still, he does believe that Slovakia has many attractive qualities and is a dynamic market. For this reason, Hutan says that “CMS is certainly very committed to Slovakia and our clients here and is investing in our office due to a growing volume of work we are seeing, so we are without a doubt here to stay”
“In my opinion, the legal market in Slovakia is relatively stable,” Pfeffer says, with a note of optimism. “Therefore, in the absence of any significant unforeseen circumstances, I don’t expect any major developments in this regard in the short to medium-term.”
Finally, Leontiev is confident that Slovakia will continue on the path of being an attractive destination among international investors. “The geographical location, skilled workforce, and euro currency provide a fair comparative advantage to other similar jurisdictions,” he concludes, while remaining conscious of “larger geopolitical factors at play as well.”
This article was written before the advent of the war in Ukraine and was originally published in Issue 9.2 of the CEE Legal Matters Magazine on March 1, 2022. More current articles on developments in Ukraine can be found in our #StandWithUkraine section. If you would like to receive a hard copy of the magazine, you can subscribe here.