Against a backdrop of financial and political upheaval, the established local firms in Romania are proving formidable opponents to the international players in the battle for the choicest mandates.
As the dust settles on an election marred by claims of fraud, with (at the time of writing) centre-right incumbent Traian Basescu emerging as the president of Romania, the country’s lawyers can breathe a sigh of relief.
Not that they have any particular affection for Basescu. Of course, they might, but The Lawyer respects the institution of the secret ballot too much to ask (for partners’ views on the election, see the profile boxes). Rather, they crave the stability that a president – any president – will eventually bring to the country.
When Allen & Overy (A&O), DLA Piper, Garrigues and White & Case entered Romania in 2008, the country finally had a legal market that resembled Eastern European countries’ such as Poland’s and the Czech Republic’s, which were set up years ago. But for the past year Romania has been blighted by economic and political strife, making law firms’ integration difficult to assess.
On top of the generic woes spawned by the downturn and felt equally across the world, Romania’s lawyers have had to contend with problems all their own – such as an ineffectual interim government, public employees striking and the International Monetary Fund (IMF) delaying installments on the country’s emergency loan.
Now, amid claims that a pick-up in work (more significant than the typical year-end rush can account for) has bolstered the market, and with firms dusting themselves off following a bruising recession, the jostling for market dominance can really begin.
International firms with networks and resources in abundance, local big players with the right contacts and commercial savvy and alliances that combine aspects of both - The Lawyer has taken a comprehensive look at them all.
“The market’s more competitive,” states Vilau & Mitel founding partner Dragos Vilau. “Although it’s more down to the economic downturn than the entry of the international firms.
“It’s going to be interesting to see what will happen to the local firms next year,” says Marion Dinu, DLA Piper Bucharest managing partner. “Apart from the top three [Musat & Asociaii, Nestor Nestor Diculescu Kingston Petersen (NNDKP) and Tuca Zbârcea & Asociatii], the other firms will face a lot of pressure to adjust; and right now we’re seeing some of the smaller firms quoting very low prices and I don’t know how long they can sustain that, so we may see some firms folding in the near future.”
Mihai Mares, managing partner at Garrigues’ Bucharest office, agrees that smaller firms are finding themselves in trouble.
“Except for maybe the biggest Romanian firms that have reached a critical mass and maintained themselves well [through the downturn], the rest of the local firms are suffering because they’re not connected to international networks that can provide work, and so they’re forced to bring down their fees,” explains Mares.
In contrast to the smaller domestic firms, which could find themselves surplus to requirement in their own market, the larger locals are proving a tougher foe than first expected by the international firms. Indeed, they competing for and winning their fair share of the choicest deals.
“The Romanian market is different from other Eastern European markets such as Poland because the local firms have had more time to grow and strengthen before the big international firms came in,” says Dinu. “So it’s a slow process of erosion of the market and I think this will continue. But it will take a while because the local firms are strong and they can continue to command a large market share for a while yet.”
Other international firms admit that the competition posed by the country’s long-established local rainmakers is stronger than expected. But what the global powerhouses lack in contacts, they make up for with their ample resources.
“The large local firms are occupying the same space as the large international firms here,” says Daniel Torsher, managing partner at Kinstellar’s Bucharest office. “They’re more comfortable competing on price, although where they find it more difficult is having access to the same quality referral network and the experience and knowhow of being part of a large international firm. But it’s generally true that the gap in many parts of the market isn’t as wide as it was a few years ago and we do find ourselves in cases competing with national firms you wouldn’t have considered as serious competitors for the kind of work that international firms target.”
The domestic firms’ stubborn and tenacious grip on their market share, and the resultant tighter profit margins, may well end up testing the patience of the internationals’ head offices, which struggle to understand why a firm with a global brand is being beaten to deals by a local player.
“You can’t discount the local firms in this market as you can in other regions,” says Wolf Theiss’s Bucharest managing partner Bryan Jardine. “Romania has evolved slightly differently, in that the firms with the largest numbers of fee-earners are the local firms. One reason for this is that they don’t have the same level of overheads as the larger firms and can hire and fire people relatively easily according to changing circumstances; neither do they invest the same amount of time in training and their salary structures are generally lower too.”
And the painful drop in turnover that 2009 is sure to yield after such a successful 2008 is bound to leave some firms questioning whether Romania is a strategic positioning worth hanging on to.
“The big question is whether the other [international] firms will decide to remain in the country,” says Torsher. “It’s now more and more difficult for large firms to do well in markets like this one, especially where there’s a central, driving-force office that everyone has to keep up with, which creates issues of sustainability.”
“I think this market could present a challenge,” agrees Dinu, “especially for the magic circle and American firms that are trying to mirror their international offices. This isn’t a market where you can have the same gearing and get the same profitability as international firms in other jurisdictions.”
Not everyone thinks that the locals firms have the edge, however.
“In both recessionary markets and developing growth markets foreign firms are in a better position to develop than local firms because the local firms have to reinvent the wheel,” says Clifford Chance Bucharest managing partner Daniel Badea. “Whereas I can just call partners from across Europe if I want to find out about something that I haven’t come across before, it’s very difficult for the local firms to do that.
“There’s been a rebalancing of power between domestic and foreign firms. Previously the market has always been dominated by local firms, but this is no longer the case. Even though the local firms are bigger, between the top 10 or 20 it’s about a 50-50 split between international and local firms.”
And for now at least no international firm looks likely to pull out. This may be due to a “double-down Vegas attitude”, according to one partner at a large international player, as firms that joined the market only last year would rather sustain a loss than admit defeat and pull out of Romania so soon.
Cash cowedIndeed, according to a number of sources there are firms that have done everything in their power to avoid showing weakness and making redundancies, reducing salaries, rebranding lawyers or moving them to other jurisdictions. Only two firms have undergone significant – or public – restructurings this past year, and they were White & Case and Wolf Theiss.
White & Case is rumored to be replacing Bucharest managing partner Tom Shollenbarger only one year after hiring the former Linklaters partner; and it was widely reported that Wolf Theiss had slashed as much as half of its staff in the region. Although Jardine admits that Wolf Theiss had to make some painful decisions, he claims the cuts were exaggerated and that the firm actually shrunk from around 30 to 23 lawyers.
“Obviously it’s been a volatile year,” says Jardine. “Due to the downturn in banking and finance we had to downsize because we’d had such rapid growth since opening in 2005, growing by around 50 per cent each year. 2008 was particularly good, but in 2009 the dealflow just wasn’t there and we had to react by letting lawyers go – from the real estate and banking and finance departments predominantly.
Although Jardine does admit that there are still obstacles to the international firms controlling the market in Romania like in other jurisdictions.
“The local firms here have always been able to get on the bigger projects because they’ve been here so long and they’ve developed,” explains Jardine. “They have the same quality of clients but they have the advantage of being able to be more flexible in adjusting their fees. Even if we want to offer a discount to a client here, it’s possible it will come back and bite us if the same client wanted the same deal somewhere else where we have an office. And [a big local firm] can offer a similar level of quality, so if it’s not too complicated a project then a client may be motivated more by price.”
Added to the stiff competition posed by local firms are the problems for international firms thrown up by the recession. Like markets across the world, banking and finance and M&A deals are down (the latter as much as 92 per cent compared with the same quarter last year, according to one partner), with restructuring and insolvency and litigation filling the gap. Nor does it help that, after 10 years of uninterrupted growth, this is the first downturn that most lawyers practising in the country have had to deal with.
“I was speaking with a head of a bank,” relates Torsher, “and he was saying how things have become difficult because there are very few people who’ve been through this before. It’s the first downturn in a long time and the first time it’s been experienced since the free market. There are maybe a few firms with ex-patriot lawyers who’ve seen this before, but most people here are used to rapid growth, so it’s been challenging in many respects.”
Romania’s economic woes were compounded by a political crisis that saw its government collapse and public employees, including the judiciary, strike. Judges were aggrieved by a proposed salary reduction that would have seen their stress bonus (50 per cent of their, on average, e1,000 (£905)-a-month earnings) reduced to 5 per cent.
Although the judges have returned to work the effects of the protest are still being felt and will continue to be for some time to come.
“Many cases have been postponed and this has affected the business of our clients and an indirect consequence of this is that we cannot charge our fees, especially in relation to litigation, at least not success fees, since the cases cannot be formalised,” says BPV Grigorescu managing partner Anca Grigorescu. “Even if a company just wants to change its administrator, they’re being given deadlines of September 2010.”
The situation has led to a trend of companies establishing central offices in districts other than Bucharest, according to Grigorescu. And the ineffective rule of an interim government, which was established in October following a vote of no confidence in the government in power at the time after it tried to pass economic and social reforms in line with IMF conditions, has also meant that publicly funded project work has ground to a halt.
“Each time you have a situation like this it tends to slow things down because the projects are contingent on government investment – and not only decisions at the highest level of government, but also at the bureaucratic level,” says Torsher.
“We’ve seen better times,” says Catalin Biculescu, co-managing partner at Musat. “It’s been a strange combination of the worldwide financial crisis and political turmoil that have seen state projects such as PPPs being put on hold.”
One positive sign is that the private sector has not been crippled by the political uncertainty the way it might have been a few years ago. And despite the press still being determined to paint Romania as “the wild East”, as one partner puts it, investors are showing fewer signs of the jumpy feintheartedness that used to characterise Eastern European investment.
“It used to be that, whenever there were elections coming, investors would put everything on hold because they were worried about unrest, but that’s very much something associated with an emerging market and the approach seems to have declined this decade,” says Christopher Berlew, managing partner at Salans’ Bucharest office. “We would hope it’s because Romania is such a mature market and the effect of an election wouldn’t affect business decisions.”
And while the recent presidential elections were an indication that things were returning to normal, the forthcoming (at the time of writing) government elections will have a far greater impact on the country’s recovery. The initial concern among lawyers is to do with getting publicly funded projects back on track.
“When the economy is booming no one cares what the public sector’s doing,” says Badea at Clifford Chance. “But when you’re in a recession you just wish they’d get it together.”
The slim margin of victory by which Basescu won the election (50.3 per cent) and the ensuing challenge by the Social Democrat Party in the country’s constitutional court, makes it unlikely that he will be able to push through many of the needed reforms.
In the past a political furore would have been disastrous for the legal market, but (tentatively at least) this no longer appears to be the case, leaving firms to confront a much more pressing challenge – each other.
“What we’ve seen in the past eight years is that it doesn’t really matter who’s in power because things will keep moving anyway,” says Vilau. “Business here moves politics, not the other way around like it was 10 years ago. It’s very much a positive thing.”
Read the article on The Lawyer
Eastern block
Against a backdrop of financial and political upheaval, the established local firms in Romania are proving formidable opponents to the international players in the battle for the choicest mandates.
As the dust settles on an election marred by claims of fraud, with (at the time of writing) centre-right incumbent Traian Basescu emerging as the president of Romania, the country’s lawyers can breathe a sigh of relief.
Not that they have any particular affection for Basescu. Of course, they might, but The Lawyer respects the institution of the secret ballot too much to ask (for partners’ views on the election, see the profile boxes). Rather, they crave the stability that a president – any president – will eventually bring to the country.
When Allen & Overy (A&O), DLA Piper, Garrigues and White & Case entered Romania in 2008, the country finally had a legal market that resembled Eastern European countries’ such as Poland’s and the Czech Republic’s, which were set up years ago. But for the past year Romania has been blighted by economic and political strife, making law firms’ integration difficult to assess.
On top of the generic woes spawned by the downturn and felt equally across the world, Romania’s lawyers have had to contend with problems all their own – such as an ineffectual interim government, public employees striking and the International Monetary Fund (IMF) delaying installments on the country’s emergency loan.
Now, amid claims that a pick-up in work (more significant than the typical year-end rush can account for) has bolstered the market, and with firms dusting themselves off following a bruising recession, the jostling for market dominance can really begin.
International firms with networks and resources in abundance, local big players with the right contacts and commercial savvy and alliances that combine aspects of both - The Lawyer has taken a comprehensive look at them all.
“The market’s more competitive,” states Vilau & Mitel founding partner Dragos Vilau. “Although it’s more down to the economic downturn than the entry of the international firms.
“It’s going to be interesting to see what will happen to the local firms next year,” says Marion Dinu, DLA Piper Bucharest managing partner. “Apart from the top three [Musat & Asociaii, Nestor Nestor Diculescu Kingston Petersen (NNDKP) and Tuca Zbârcea & Asociatii], the other firms will face a lot of pressure to adjust; and right now we’re seeing some of the smaller firms quoting very low prices and I don’t know how long they can sustain that, so we may see some firms folding in the near future.”
Mihai Mares, managing partner at Garrigues’ Bucharest office, agrees that smaller firms are finding themselves in trouble.
“Except for maybe the biggest Romanian firms that have reached a critical mass and maintained themselves well [through the downturn], the rest of the local firms are suffering because they’re not connected to international networks that can provide work, and so they’re forced to bring down their fees,” explains Mares.
In contrast to the smaller domestic firms, which could find themselves surplus to requirement in their own market, the larger locals are proving a tougher foe than first expected by the international firms. Indeed, they competing for and winning their fair share of the choicest deals.
“The Romanian market is different from other Eastern European markets such as Poland because the local firms have had more time to grow and strengthen before the big international firms came in,” says Dinu. “So it’s a slow process of erosion of the market and I think this will continue. But it will take a while because the local firms are strong and they can continue to command a large market share for a while yet.”
Other international firms admit that the competition posed by the country’s long-established local rainmakers is stronger than expected. But what the global powerhouses lack in contacts, they make up for with their ample resources.
“The large local firms are occupying the same space as the large international firms here,” says Daniel Torsher, managing partner at Kinstellar’s Bucharest office. “They’re more comfortable competing on price, although where they find it more difficult is having access to the same quality referral network and the experience and knowhow of being part of a large international firm. But it’s generally true that the gap in many parts of the market isn’t as wide as it was a few years ago and we do find ourselves in cases competing with national firms you wouldn’t have considered as serious competitors for the kind of work that international firms target.”
The domestic firms’ stubborn and tenacious grip on their market share, and the resultant tighter profit margins, may well end up testing the patience of the internationals’ head offices, which struggle to understand why a firm with a global brand is being beaten to deals by a local player.
“You can’t discount the local firms in this market as you can in other regions,” says Wolf Theiss’s Bucharest managing partner Bryan Jardine. “Romania has evolved slightly differently, in that the firms with the largest numbers of fee-earners are the local firms. One reason for this is that they don’t have the same level of overheads as the larger firms and can hire and fire people relatively easily according to changing circumstances; neither do they invest the same amount of time in training and their salary structures are generally lower too.”
And the painful drop in turnover that 2009 is sure to yield after such a successful 2008 is bound to leave some firms questioning whether Romania is a strategic positioning worth hanging on to.
“The big question is whether the other [international] firms will decide to remain in the country,” says Torsher. “It’s now more and more difficult for large firms to do well in markets like this one, especially where there’s a central, driving-force office that everyone has to keep up with, which creates issues of sustainability.”
“I think this market could present a challenge,” agrees Dinu, “especially for the magic circle and American firms that are trying to mirror their international offices. This isn’t a market where you can have the same gearing and get the same profitability as international firms in other jurisdictions.”
Not everyone thinks that the locals firms have the edge, however.
“In both recessionary markets and developing growth markets foreign firms are in a better position to develop than local firms because the local firms have to reinvent the wheel,” says Clifford Chance Bucharest managing partner Daniel Badea. “Whereas I can just call partners from across Europe if I want to find out about something that I haven’t come across before, it’s very difficult for the local firms to do that.
“There’s been a rebalancing of power between domestic and foreign firms. Previously the market has always been dominated by local firms, but this is no longer the case. Even though the local firms are bigger, between the top 10 or 20 it’s about a 50-50 split between international and local firms.”
And for now at least no international firm looks likely to pull out. This may be due to a “double-down Vegas attitude”, according to one partner at a large international player, as firms that joined the market only last year would rather sustain a loss than admit defeat and pull out of Romania so soon.
Cash cowedIndeed, according to a number of sources there are firms that have done everything in their power to avoid showing weakness and making redundancies, reducing salaries, rebranding lawyers or moving them to other jurisdictions. Only two firms have undergone significant – or public – restructurings this past year, and they were White & Case and Wolf Theiss.
White & Case is rumored to be replacing Bucharest managing partner Tom Shollenbarger only one year after hiring the former Linklaters partner; and it was widely reported that Wolf Theiss had slashed as much as half of its staff in the region. Although Jardine admits that Wolf Theiss had to make some painful decisions, he claims the cuts were exaggerated and that the firm actually shrunk from around 30 to 23 lawyers.
“Obviously it’s been a volatile year,” says Jardine. “Due to the downturn in banking and finance we had to downsize because we’d had such rapid growth since opening in 2005, growing by around 50 per cent each year. 2008 was particularly good, but in 2009 the dealflow just wasn’t there and we had to react by letting lawyers go – from the real estate and banking and finance departments predominantly.
Although Jardine does admit that there are still obstacles to the international firms controlling the market in Romania like in other jurisdictions.
“The local firms here have always been able to get on the bigger projects because they’ve been here so long and they’ve developed,” explains Jardine. “They have the same quality of clients but they have the advantage of being able to be more flexible in adjusting their fees. Even if we want to offer a discount to a client here, it’s possible it will come back and bite us if the same client wanted the same deal somewhere else where we have an office. And [a big local firm] can offer a similar level of quality, so if it’s not too complicated a project then a client may be motivated more by price.”
Added to the stiff competition posed by local firms are the problems for international firms thrown up by the recession. Like markets across the world, banking and finance and M&A deals are down (the latter as much as 92 per cent compared with the same quarter last year, according to one partner), with restructuring and insolvency and litigation filling the gap. Nor does it help that, after 10 years of uninterrupted growth, this is the first downturn that most lawyers practising in the country have had to deal with.
“I was speaking with a head of a bank,” relates Torsher, “and he was saying how things have become difficult because there are very few people who’ve been through this before. It’s the first downturn in a long time and the first time it’s been experienced since the free market. There are maybe a few firms with ex-patriot lawyers who’ve seen this before, but most people here are used to rapid growth, so it’s been challenging in many respects.”
Romania’s economic woes were compounded by a political crisis that saw its government collapse and public employees, including the judiciary, strike. Judges were aggrieved by a proposed salary reduction that would have seen their stress bonus (50 per cent of their, on average, e1,000 (£905)-a-month earnings) reduced to 5 per cent.
Although the judges have returned to work the effects of the protest are still being felt and will continue to be for some time to come.
“Many cases have been postponed and this has affected the business of our clients and an indirect consequence of this is that we cannot charge our fees, especially in relation to litigation, at least not success fees, since the cases cannot be formalised,” says BPV Grigorescu managing partner Anca Grigorescu. “Even if a company just wants to change its administrator, they’re being given deadlines of September 2010.”
The situation has led to a trend of companies establishing central offices in districts other than Bucharest, according to Grigorescu. And the ineffective rule of an interim government, which was established in October following a vote of no confidence in the government in power at the time after it tried to pass economic and social reforms in line with IMF conditions, has also meant that publicly funded project work has ground to a halt.
“Each time you have a situation like this it tends to slow things down because the projects are contingent on government investment – and not only decisions at the highest level of government, but also at the bureaucratic level,” says Torsher.
“We’ve seen better times,” says Catalin Biculescu, co-managing partner at Musat. “It’s been a strange combination of the worldwide financial crisis and political turmoil that have seen state projects such as PPPs being put on hold.”
One positive sign is that the private sector has not been crippled by the political uncertainty the way it might have been a few years ago. And despite the press still being determined to paint Romania as “the wild East”, as one partner puts it, investors are showing fewer signs of the jumpy feintheartedness that used to characterise Eastern European investment.
“It used to be that, whenever there were elections coming, investors would put everything on hold because they were worried about unrest, but that’s very much something associated with an emerging market and the approach seems to have declined this decade,” says Christopher Berlew, managing partner at Salans’ Bucharest office. “We would hope it’s because Romania is such a mature market and the effect of an election wouldn’t affect business decisions.”
And while the recent presidential elections were an indication that things were returning to normal, the forthcoming (at the time of writing) government elections will have a far greater impact on the country’s recovery. The initial concern among lawyers is to do with getting publicly funded projects back on track.
“When the economy is booming no one cares what the public sector’s doing,” says Badea at Clifford Chance. “But when you’re in a recession you just wish they’d get it together.”
The slim margin of victory by which Basescu won the election (50.3 per cent) and the ensuing challenge by the Social Democrat Party in the country’s constitutional court, makes it unlikely that he will be able to push through many of the needed reforms.
In the past a political furore would have been disastrous for the legal market, but (tentatively at least) this no longer appears to be the case, leaving firms to confront a much more pressing challenge – each other.
“What we’ve seen in the past eight years is that it doesn’t really matter who’s in power because things will keep moving anyway,” says Vilau. “Business here moves politics, not the other way around like it was 10 years ago. It’s very much a positive thing.”
