Equity partners from a number of big Austrian firms have decided to go it alone, setting up boutiques over the past 12 months. Legal Business explores the impact these moves are having on the market.
In the final days of last summer in downtown Vienna, a small law firm opened its doors for the first time. Nothing unusual there, except that this firm, Benn-Ibler Rechtsanwälte, was opened by five well-respected former DLA Piper Weiss-Tessbach partners who quit in January 2010. When the partners left their old firm, they walked out with a fifth of the firm’s revenue and 40% of its equity partners.
Compared to the UK, where partners leave and rejoin rivals at a seemingly dizzying rate, it may not seem like a significant move. But this mini melodrama got the conservative and somewhat cautious Austrian legal community talking.
The DLA departures included the Vienna office’s joint managing partners Stefan Eder and Wieland Schmid-Schmidsfelden, along with finance partner Martin Geiger, litigation specialist Ivo Deskovic and projects partner Peter Solt.
Much of the blame for the DLA departures is put down to cultural differences dating back to the original merger with Weiss-Tessbach in 2003, with partners of the legacy firm, including the departees, never fully integrating with the wider firm.
‘They weren’t integrated within DLA and that was always a bit of a problem,’ says a senior source at DLA Piper in Vienna. ‘There was a real distance between the Austrian practice and the international firm.’ However despite the claim of a lack of integration, Eder served as the firm’s head of finance and projects for EMEA between 2006 and 2009.
Problems within the wider firm also played their part, with the Austrian equity partners unhappy that partner pay was squeezed last year after global PEP dropped by £100,000 following DLA’s disastrous performance in the Middle East. ‘They were not happy with the new overhead costs that are connected with being a global firm. They did not want to put in a share of their profits if the Dubai office does badly,’ says the DLA source.
Former Austria managing partner Eder says that the team left on good terms, but would not elaborate on the reasons for the departures, although he did say the team ‘felt integrated’ within the wider CEE firm.
A similar story was played out across town at another top Austrian firm in 2010, when real estate guru Alfred Nemetschke walked out of Schönherr to set up his own boutique, Nemetschke Huber Koloseus Attorneys at Law, after a 14-month spat with the firm. He left just two years after joining Schönherr with one other partner and 11 associates from Cerha Hempel Spiegelfeld Hlawati (CHSH).
As at DLA, there were cultural differences at Schönherr that meant that Nemetschke’s practice, brought in as a rare lateral team hire from CHSH, didn’t fully gel with the wider firm. As Schönherr managing partner Christoph Lindinger politely puts it: ‘There were cultural differences that meant we decided we should have a future independent of one another.’ But the most significant factor was the collapse of the real estate market across Central and Eastern Europe, which saw Schönherr’s CEE-wide real estate revenues tumble by around 15%. As the managing partner of one large Austrian firm neatly sums up: ‘The team didn’t fit with the rest of the firm but really Nemetschke’s move is a net result of the crisis in eastern Europe.’
Although many Austrian lawyers point out that the DLA and Schönherr departures have their own unique motivations, they still tell a story about the wider Austrian market. Big-hitting partners see the attraction of being in smaller, nimbler organisations and the joys of life away from the restrictions of a big firm.
‘The move of some Austrian firms to the CEE was client driven, but they are not recognised as able to compete with the proper local firms.’
Ingo Braun, Baier Böhm
Boutique firms have always been a part of the Austrian legal scene but in the past few years these niche firms have been particularly successful in competing with the larger practices (see box, ‘Star players: small firms with big names’, page 60). The departures of the DLA Piper partners and Nemetschke are the latest in a string of moves by eminent partners to set up on their own.
The attractions are obvious: lower overheads, more time with clients and potentially more money in the bank. The top Austrian firms – Wolf Theiss, Schönherr and CHSH – have changed considerably over the past decade, driven by their expansion into CEE markets such as Romania, Hungary and Bulgaria. For some, this has made small firms increasingly attractive in the Austrian market.
Struggle at the top
Compared to the US and UK, Austria’s economy is fairly stable and has emerged from the downturn relatively unscathed. While it is true that the country has seen its fair share of banking problems, such as the nationalisation of Hypo Group Alpe Adria, the economy has nevertheless been fairly resilient. According to the European Commission, Austria had a real GDP growth rate of 2% in 2010, compared to 1.8% in the UK.
The real issue for the big Austrian law firms has not been at home, but abroad. Vienna has traditionally served as a gateway to eastern European markets with Wolf Theiss, CHSH, CMS Reich-Rohrwig Hainz, DLA Piper Weiss-Tessbach and Schönherr all operating networks across the region.
When most of these firms expanded eastwards in the early 2000s, they banked on growing economies in the likes of Hungary and Romania and a boom in privatisation work. But as growth in these countries has dipped and privatisation work has failed to materialise, it has been increasingly tricky for firms with big networks to turn a healthy profit. ‘Investments in the CEE are not as they used to be,’ says Irene Welser, managing partner of CHSH, which has eight offices across the region. ‘You have to have local business in order to succeed,’ she adds.
The difficulties in the eastern European markets have hit the big firms the hardest, resulting in a rash of office closures over the past few years. DLA, Gide Loyrette Nouel, Garrigues, Clifford Chance and Linklaters have all closed offices in the region (see box, ‘Recent CEE office closures’, page 58). At e|n|w|c Natlacen Walderdorff Cancola, which has six offices across the region, corporate partner Raimund Cancola admits that it’s been tough to turn a profit across the CEE. ‘In the Czech Republic our turnover is down 25%. While in the Ukraine we don’t make a loss, but we don’t make a profit either,’ he says.
But at Schönherr, Lindinger insists that Austrian firms are better placed to weather the downturn in the CEE than other European firms. ‘The big Anglo-Saxon and European firms need to go for the big-ticket work because of their cost structure. But we are able to go forthe medium and smaller work along with big-ticket work.’ Despite the difficulties the firm is expecting good things from the region over the next ten years. ‘I think the region will integrate more and there will be greater demand for cross-border work. We will be able to capitalise on that,’ says Lindinger.
But at the other end of the spectrum, for small and medium-sized firms who are not as exposed to the downturn in the CEE and don’t have expensive offices sitting idle, the past few years have been relatively lucrative.
‘We have had a great two years with record turnover because we are not exposed in the CEE,’ explains name partner Peter Polak of Fiebinger, Polak, Leon & Partner (FPLP), a 20 fee-earner firm based in Vienna. ‘It’s pretty harsh and grim operating in the CEE. We are more cost conscious than the bigger firms, have no big marketing overheads, and are more flexible with clients.’
‘There are international firms that prioritise Dubai or Shanghai rather than the CEE, but that’s not us.’
Erik Steger, Wolf Theiss
That’s a sentiment echoed at Kerres | Partners, a nine fee-earner dispute resolution and private client firm. ‘The business model of the two or three biggest firms to establish themselves as CEE firms has, in my opinion, failed,’ says managing partner Christoph Kerres. ‘If you look at the larger firms, they have not succeeded in driving the business in a way that makes enough money. If you are an Austrian firm establishing an office in Romania there is a lot of investment needed and it’s difficult attracting new clients when you don’t have the local knowledge. If I were, say, a British investor, why would I go to an Austrian firm in Romania?’ he adds.
At Baier Böhm, a seven-partner firm that does not operate a CEE network, banking and finance partner Ingo Braun believes that the cultural difficulties of operating a network have made it difficult for Austrian firms to succeed. ‘Austria is still a hub for eastern markets. The move of some UK and Austrian firms into CEE markets was largely client driven, but these firms have never come to be recognised as truly local firms who can compete with the proper local firms,’ he says.
Notably, Freshfields Bruckhaus Deringer is the only large UK firm to have a Vienna office but not to have offices in the CEE. Over the past ten years it has closed its Bratislava, Prague and Budapest offices and now services clients through a best-friend network across eastern Europe. ‘We spun off the local offices because the markets did not seem deep enough to ensure sufficient profitability – we tried and it’s just not possible,’ explains Willibald Plesser, the Vienna-based co-head of Freshfields’ CEE practice.
‘We can be flexible at finding innovative fee structures because our policies aren’t set in stone. We can adapt.’
Robert Bachner, Hausmaninger Kletter
But at Wolf Theiss, which has 12 offices across Europe, management board member Erik Steger disagrees that the CEE network model is unworkable while admitting that it’s been a tough few years for the firm. ‘It’s a region we need to manage, not pull out of,’ he says. ‘There are international firms that prioritise Dubai or Shanghai rather than the CEE, but that’s not us.’ Steger adds that because the firm has invested heavily in its CEE offices, closing branches is not an option – indeed the firm is now looking to expand its network with a new office in Warsaw. ‘The Polish have had a terrific time throughout the crisis and are now in a position of real strength. We are looking to bring in a big lateral team,’ he adds.
Little impact
The suffering of larger firms has made the performance of the smaller firms look relatively healthy but also created an opportunity to bring in new talent: as the big firms hesitate to make up new partners, younger associates and salaried partners are looking to jump ship.
‘In the late ‘90s the Austrian firms had enormous rates of growth, they grew by 50% and hired many young people,’ explains Christian Klausegger, a disputes partner at large independent Binder Grösswang Rechtsanwälte. ‘Good lawyers in the large firms would have made partner a few years ago but they don’t necessarily make partner these days. It means there are incentives for smart young lawyers to set up boutiques.’
This is a trend recognised by the management at Freshfields. ‘That movement is a natural phenomenon as we can’t make every associate a partner,’ says Plesser. In 2005 eight partners and senior associates left for the little-known Eisenberger & Herzog. Young talent has continued to trickle from Freshfields to this aggressive and talented firm that, as one Austrian partner put it, now operates as ‘Freshfields’ outsourcing department’. However, Plesser is relatively relaxed about the departures. ‘These people are well trained and often if associates can’t make partner at one of the larger firms they move elsewhere,’ he says.
Besides the movement of young talent from the bigger firms, the recession has also made the flexibility of compact firms more attractive – niche firms can stick to their target sectors, offer more flexible fees and have lower overheads than their bigger rivals.
‘We spun off the local offices because the markets did not seem deep enough to ensure sufficient profitability.’
Willibald Plesser, Freshfields
Few other Austrian firms are as focused as Schramm Öhler Rechtsanwälte, a niche public procurement boutique that is the only firm rated as tier one by The Legal 500 EMEA in that area. Competition law specialist Georg Zellhoffer enthuses about the advantages of operating in a small firm. ‘We see a real marketing advantage. It’s much easier to get the edge. We can focus on one area and try to be brilliant at it. It would be much more difficult if we were at a full-service firm,’ he says. The firm has consistently picked up heavyweight mandates and this year advised several subsidiaries of the Austrian Railway Group on a raft of projects, including the procurement of E2bn worth of train infrastructure and safety equipment. Not bad for a four-partner practice.
At the 13 fee-earner Hausmaninger Kletter, corporate specialist Robert Bachner, an ex-Schönherr partner, believes the success of smaller firms is partly due to the speed at which they can adapt. ‘We can be more flexible at finding innovative fee structures because our policies aren’t set in stone. We can adapt,’ he says. ‘Rather than having to convene a formal partnership process we can just go to lunch and redefine our firm policies.’
Fellner Wratzfeld & Partner is another small firm that has done particularly well out of the downturn. The 12-partner banking and finance specialist firm has had a great run over the past few years and is currently advising Erste Bank on the insolvency and restructuring of machinery maker A-Tec’s AE&E construction unit. The subsidiary of A-Tec, which had a turnover of E3bn last year, went into administration after it failed to sell the company or unfreeze its E798m credit line in November 2010. In addition, the firm managed to pick up some choice mandates, including a major role in the Constantia bank rescue (for more see ‘Eine kleine Nachtmusik’, page 64). The firm was selected to advise UniCredit Bank on the rescue, while other mid-sized firms like bpv Hügel and FPLP also picked up key roles over their larger and more established Austrian rivals.
The success of these firms is in part due to well-known practitioners who have good client followings. bpv Hügel has the legendary banking specialist Hanns Hügel and Fellner Wratzfeld has the respected Markus Fellner, another banking expert. At the mid-sized Lansky, Ganzger + partner, founding partner Gabriel Lansky believes that big name personalities are key to driving a firm. ‘We are in a world in which the personalities are more important than the corporate entity,’ he says. ‘We are a 45 fee-earner firm but only have two equity partners, which is very rare. Our business depends on personal relationships that I have,’ he adds.
Kerres agrees: ‘Strong personalities have their clients, it doesn’t matter about the letterhead. Brands are losing their competitive advantage. Companies want to know the person and have direct contact. Like a doctor, you choose one for the reputation. That’s why the best lawyers have no problems setting up small individual boutiques.’
Over-exposed to the CEE markets, it’s been a tough few years for some of the biggest Austrian firms. This has made the performance of many of the smaller law firms look all the more impressive and encouraged partners, like those at Schönherr and DLA Piper to set up their own boutiques. Much of this is cyclical and as the Austrian and European economies bounce back and big-ticket M&A work starts to trickle through, the Austrian giants will rebound. But as the recession continues to bite and small firms enjoy their place in the sun, there may well be more defections of big-hitting partners and more lawyers who see the benefit of going it alone. LB