1 April 2013 | By Jonathan Ames
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With domestic stability but uncertainty in the surrounding region, Austria’s law firms are looking at fresh ways of managing the financial crisis
White-collar corruption, wholesale bank failures, an embarrassing credit rating downgrade and a topsy-turvy mergers market. It is hardly the chocolate box picture expected of genteel Austria, but upheaval is the backdrop against which business lawyers in the jurisdiction are practising and, for the most part, still thriving.
The mood of leading Austrian partners depends to a large extent on the depth and type of their exposure in the surrounding region. When the Moscow politburo headed for obscurity some 20 years ago and the eastern bloc shed its Soviet yoke, Austrian law firms were some of the early business pioneers in that liberated part of Europe.
In the boom years firms minted fees on the back of privatisations and infrastructure projects as Central and Eastern European (CEE) governments dashed to catch up with the West. But in blew the frosty wind of the global financial crisis and instructions became less frequent - and the fee notes smaller.
The CEE is a hotchpotch of jurisdictions with varying economic and political stories. Westerners generally view Poland as the poster boy for how to get it right, while vilifying Hungary and Ukraine for chaotic economic policies and political programmes that could have been penned by a 1970s commissariat.
Nonetheless, Austrian businesses and their law firms are still looking to the region. They have no choice, as the domestic market is relatively small. But it is still providing seams of work for law firms.
“Austria is doing fairly well compared with the rest of Europe,” claims Dorda Brugger Jordis managing partner Martin Brodey, in reference to the wider economy. “We have a fairly stable environment without suffering from extremes.”
His counterpart at Wolf Theiss, Erik Steger, also paints a domestic picture of relative stability “with a slight uplift in 2012, but nothing to write home about”.
Clemens Hasenaur, joint managing partner at CHSH Cerha Hempel Spiegelfeld Hlawati, agrees, saying: “There have been some difficult years, but things improved from 2011 onwards.”
Hasenaur maintains that the Social Democratic government of chancellor Werner Faymann has “handled the crisis well - we have perhaps the lowest unemployment rate in Europe and most of our economic figures are good compared to other European countries”.
Nonetheless, those comparatively positive numbers did not stop international credit ratings agency Standard & Poor’s from downgrading Austria’s ranking about a year ago by a notch from the treasured AAA. Business lawyers in the jurisdiction say the country’s politicians and business leaders alike rightly feel aggrieved by the downgrade, maintaining the agency took the decision purely on the view that Austria’s banks were overexposed in the increasingly volatile CEE.
There are other domestic troubles - not least a spate of business corruption scandals, with the most recent involving regional telecommunications giant Telekom Austria. At the end of February, three former executives were imprisoned for a share price manipulation scheme that resulted in €9m (£7.7m) of fraudulent bonuses.
While damaging for the country’s business reputation, big white-collar criminal actions are a boon to law firms with specialist teams. As fellow CHSH joint managing partner Albert Birkner says, clients entangled in high-profile business corruption cases tend not to quibble at a law firm’s headline fee rate.
Neither are bank failures the best advertisement for a jurisdiction’s business environment, but they can do a power of good for the bottom lines of top law firms. Austria has been hit by three big failures since the financial crisis kicked off, with the Vienna government having to come to the rescue.
The bailout process can be lengthy. Parts of Kommunalkredit - which required government assistance in 2008 - have been put up for sale in the past few weeks. But, says Thomas Schirmer, managing partner of Binder Grösswang, which advised on the restructuring, there has not been a clamour of interest so far. It is, quips Schirmer, a salutary tale for the UK Government and its impending attempt to offload the state-owned RBS.
More widely, restructuring is the practice area driving many Austrian business law firms. One of the biggest jobs in the past 12 months involved the country’s second largest construction company Alpine, with the local business press obsessing about the deal to save the €3.6bn annual turnover company. And there is something to obsess about, as more than 50 banks from 30 jurisdictions need to cut a deal with Alpine, which employs more than 7,500 people in Austria.
“Some firms have tried quickly to create restructuring departments, which is difficult,” comments Paul Luiki, one of the senior partners at Wratzfeld & Partner, which has taken a pivotal role in advising the bank consortia in the Alpine action.
Financial regulatory work is also on the up and litigation is a thriving field, as Austrian businesses - in common with those in just about every other European jurisdiction - are more likely to quarrel in tight economic conditions.
The M&A market is fairly flat, although, says Schönherr managing partner Christoph Lindinger, it has been on a bit of a roller coaster.
“2012 was not as good as the activity in 2011,” he says, “which was almost at pre-crisis levels. It’s a volatile picture, and who knows what 2013 will bring? There are signs M&A is gradually coming back, but I’m not convinced it will continue.”
Lawyers generally agree that big M&A deals are almost non-existent, although there is increasing work in the €10m to €50m bracket.
“We’re seeing much smaller transactions now,” explains Dorda Brugger Jordis’s Brodey. “Those focusing on energy and infrastructure work, and certain areas of industry. It’s a much more broad approach than five years ago.”
Luiki points out that while traditional M&A is well below pre-crisis levels, distressed M&A work is picking up some of the slack. “Companies are slimming down by getting rid of non-core areas,” he says.
PPP work is also providing a mini-boom. Luiki explains that the local authority for Vienna has embarked on something of a spending spree on hospital expansion.
“You can’t go to a normal corporate lawyer for advice on PPP work,” says Luiki. “You need specialist expertise on public sector procurement and general government red-tape issues.”
Another area boosting law firms is gambling. Recent changes in Austria’s licensing laws have swept away historic monopolies, with specialist lawyers having to advise on the new tendering system.
While workloads are holding up for the most part domestically, negotiating fees in the Austrian business law sector is increasingly tough. Local law firms are also getting their first dose of procurement department scrutiny, a phenomenon that hit the US and UK some time ago.
“There are beauty parades, where price is the only thing that counts,” says Binder Grösswang’s Schirmer. “Procurement departments don’t have a feel for what high quality means. Corporations instruct on the basis of low price and then complain that the law firms allocate inexperienced junior lawyers to their deals and matters don’t run as they have been used to.”
Steger also worries about the combative nature of relations with procurement departments.
“They have one aim,” he says, “to bring the expenditure down. Just like coffee or paper clips, they buy on price. And since many are new to sourcing legal advice we must help them understand quality differentials and that law firms are different from other areas.”
He describes that education process as a “huge challenge”. “Procurement departments don’t necessarily negotiate - they send out RFPs [request for proposals] and then take a decision based only on price. Yet these RFPs run to more than 80 pages - you’ve got to answer questions relating to staff diversity, and this and that,” he says. “But the filter you must pass - and the most important one - is price.”
Brodey agrees. “Competition is keen,” he says. “We’re often invited by general counsel to participate in pitches that are very demanding, in which the lawyers have to go into a great deal of detail, and where the clients are very cost-conscious.”
Billing structures depend on areas of law, with legal heads often demanding flat fees in banking, finance and capital markets. In M&A there is a trend towards fee estimates and in some cases fee caps.
“The caps are agreed in situations where neither the client nor us knows how complicated the whole deal will become or what services will be required,” complains one leading partner.
Lindinger is dismissive of the concept of ‘alternative billing structures’. “It’s a strange term,” he says. “I’ve been to so many seminars on the subject and ultimately what all these wise men tell me is that I can charge less. And that’s the bottom line. It all comes down to offering a lower hourly rate.”
Still, he and other top Austrian lawyers agree that headline hourly rates can be achieved in some areas.
“We try to focus on high-end work, for which we don’t have trouble billing and getting paid,” says Birkner. “There’s considerable pressure on fees and on billing structures in commodity work. So at this firm we’ve taken the decision to concentrate on complex work.”
The big issue separating law firms in Austria is the approach to the wider CEE and debate over who are the players there. Schönherr and Wolf Theiss see themselves as the two with regional footprints, and they are disparaging about CHSH’s attempts to join the club.
But with seven offices in the region, CHSH is more than an upstart.
But a wider question is whether the strategy of opening offices around the CEE was wise in light of the economic downturn. Those firms that stuck with a best friends network policy exude an unsubtle smugness, claiming their counterparts with boots on the ground in the CEE have had to trim lawyer numbers significantly.
“Firms that set up offices in Eastern Europe are under more strain because you have to feed those people,” says Brodey. “With business in that region on the retreat, that’s becoming more difficult.”
Brodey maintains that while Dorda Brugger Jordis has seen a “significant decrease” of business into Eastern Europe, there has been a spike in cross-border transactions with more established trading partners to the west such as Germany, the UK, and even France and Italy.
“While I wouldn’t say the focus has completely shifted, we are giving much more weight to our old routes to business - Western Europe,” he says. “This is definitely a result of the crisis.”
Binder Grösswang is another firm maintaining a best friends policy. Schirmer says his management team is content to stand by that.
“In the past four years we’ve been happy not to have to run local offices in the region,” he says. “The inbound market to those countries has not recovered, and many Austrian businesses are either consolidating or moving out of the region.”
Schirmer claims that law firms with regional offices are suffering.
“Perhaps not in each and every office,” he adds, “but if you want to provide top quality advice you need more than a representative office in those jurisdictions, which means having strong people. And strong people only stay if you have good work matters, pay well and integrate them into your partnership.
“Also, if you maintain you are not an Austrian firm but a CEE one you need to keep those offices regardless of economic conditions.”
Unsurprisingly, the firms that have coughed up the cash to create networks of regional offices are bullish in their responses.
“Of course, if I had a choice of just having the profits and not the overheads I would go for that,” says Lindinger. “But given that profits are connected to overheads, I’m quite glad I have the overheads.”
That view is reflected by Steger.
“Yes, there are huge economics involved,” he says. “If you have your own offices, you need to make sure you have consistent quality and enforce stringent rules to protect the brand. Whereas if your best friend turns out to be a bit sloppy, you just find a new best friend.”
But he goes on to explain: “Looking at it from a client perspective, it’s a philosophical question for a law firm to ask itself whether it believes it has something better to offer if it offers its best friend or if it offers itself.”
Both acknowledge that the harsh economic climate has affected their numbers in the region.
“We’re constantly working at improving our efficiency,” says Lindinger. “And that means you do more work with the same number of lawyers, or the same work with fewer lawyers. That means that our expansion period - where we had headcount growth in double digits - lasted until 2009. Since then, we’re either stable or reducing slightly to improve efficiency.”
Wolf Theiss experienced a well-reported slimming of lawyer numbers in 2009/10 for which, says Steger, “we took a lot of heat”. But now the firm claims to be growing again in the region, having launched in Warsaw at the beginning of this year. This alone added 36 lawyers to the firm’s CEE headcount.
“We wouldn’t do that unless we were sure of our strategy,” says Steger. “When we started this strategy we were the new kids on the block without much of an international client base. Opening offices abroad brought many clients to the firm that we wouldn’t have otherwise picked up. So we’re here to stay.”
Key figures: Austria
Annual inflation (Jan 2013)
Life expectancy at birth
Unemployment (Q3 2012)
Source: World Bank, Statistics Austria