The general picture is one of uncertainty across the diverse CEE region; while there was an initial slowdown last year across the board, transactions did pick up towards the end of 2020 in certain sectors. Lawyers report having been busy throughout the year, with Q2 necessitating more of a focus on restructurings and Q4 seeing a return to more usual flows of activity.
Overall, the year can be said to have been defined by volatility. Observing the pace of change, Dragan Karanović, the Serbian-based managing partner of Karanovic & Partners, reflects: ‘It used to be year-on-year, then quarter-on-quarter, and now it’s almost week-by-week.’
Responses to Covid-19 varied throughout the region as governments and central banks worked to stabilise the market. In Poland, where the World Bank expected a 3.9% contraction in 2020, it forecast that, with the support of the Polish Development Fund’s Covid-19 business relief scheme, there will be a moderate recovery in 2021. The picture is very similar for Hungary and Romania.
Across the western Balkans, the OECD estimates that GDP fell by 2.5% to 12% in 2020; jurisdictions more reliant on hospitality and tourism, notably Croatia, bore the brunt and those with more mixed economies, such as Serbia, fared much better. What is unclear is whether the immediate uncertainty has had much of a lasting impact on law firms generally.
‘Change used to be year-on-year, then quarter-on-quarter, and now it’s almost week-by-week.’ Dragan Karanović, Karanovic & Partners
In March 2020, governments started implementing public health measures, encouraging businesses that could to start moving to home working. The initial economic concerns also led to firms reducing salaries and profit shares, albeit temporarily. For law firms in the CEE region, this process was largely smooth; most firms were already equipped to tackle the new environment technologically. Wolf Theiss’ managing partner in Hungary, Zoltán Faludi, does not believe home working will be a permanent change however: ‘We miss the community feeling, the camaraderie here, we miss the teamwork, although we can technically operate online.’
Kinstellar’s Romanian managing partner Victor Constantinescu believes that it was the structural flexibility of local firms that allowed them to adapt: ‘Local firms generally tended to be the first movers when it came to things such as salary cuts… because [they] do not have to respond to some hierarchy elsewhere, they were able to move quickly.’ More internationally-focused firms acted later, but Constantinescu emphasises the temporary nature of financial measures. ‘We made a few adjustments internally, but we made good on all those adjustments by the end of the year.’
In the longer term, the pandemic has catalysed broader trends within the regional legal market. Over the last few years, international firms have been scaling back their operations across the region. Profitability is one reason for this according to Krzysztof Zakrzewski, managing partner of the Polish firm DZP: ‘The comparison between revenues generated by a London partner and the Warsaw partners – it’s different worlds. Firms accept that obviously the rates in Poland are lower.’
He also notes that lawyers with international experience are now moving to domestic firms or starting up new operations. In Hungary and Poland in particular, where there are existing rule-of-law issues, big-ticket inbound investment has been slowing anyway, a process only accelerated by the pandemic.
‘Some smaller firms need to be merging and that way we can ask for better fees… and it should happen this year because Covid-19 showed what vulnerabilities certain local firms have.’ Victor Constantinescu, Kinstellar
In Romania, Constantinescu believes that market fragmentation over the last 10 to 15 years and related fee pressures make the case for consolidation. ‘Some of these smaller firms need to be merging and that way we can ask for better fees… and it should happen this year because Covid-19 showed what vulnerabilities certain local firms have.’ He believes that firms with more international exposure are better-placed to stay economically viable.
In the western Balkans, where international firms have been largely absent, Karanović believes that although some boutiques will have been disadvantaged, the biggest impact of the pandemic will be innovation. ‘Seeing how you can respond to client needs in an efficient and productive manner will be really something that has to be the focus of every law firm.’
Innovation is an overarching theme across the region. Of the increased use of legal tech during the pandemic, the next question will be, according to Faludi, ‘Why we don’t do document analysis in a digital way, and why we don’t use digital resources for law, for case law, for industrial data information and data processing?’ This is a sentiment shared by Zakrzewski in more measured tones: ‘More people are talking about it than it is really happening, but it always starts with talking.’ LB