November 2008 - The successor of the UK-based international law firm Linklaters in Central and Eastern Europe (CEE), regional law firm Kinstellar, is launching operations in a troubled economic time. Even if the firm upholds continuity and top staff and service quality, competitors point out that the newcomer will need extra efforts to deal with the challenges of the Linklaters legacy.
Kinstellar started to operate under its new name Nov. 1, 2008. In Prague, it stepped in the limelight Nov. 6 when it gathered business partners at an evening charity event held in the luxurious setting of Prague’s Rudolfinum. Relaxed, former Linklaters people offered business cards with the new brand name and seemed confident about the future. Continuity was the key word of the evening.
Indeed, Kinstellar is building on the former structure of Linklaters in four countries: the Czech Republic, Slovakia, Hungary and Romania. Now with nine partners and 120 senior and junior lawyers, the firm is set to double its headcount by 2011. Part of the Linklaters inheritance, it will still work for almost 80 international corporations that cooperate with Linklaters on a global basis and have deals in the CEE region. Yet, Kinstellar is aimed to act as a regional player rather than a former international firm. Managing this transition seems to be the major challenge confronting the firm.
The name of the new firm, Kinstellar, is in fact an anagram of Linklaters carefully written with the same letter style, aimed to suggest close and cozy customer cooperation and also top, celestial quality.
In the four countries, Kinstellar will work as a single integrated firm with centralized profit pools, not a collection of franchises or independent firms working under a single brand,” Prague-based Kinstellar partner Kamil Blažek (pictured) told CBW. “There won’t be any head office, but a centralized structure of profits evenly distributed among partners across the whole firm,” he said, adding that Kinstellar decided to keep the Linklaters lockstep profit distribution model. “We believe it will help people focus on consistency, promote solidarity and an approach in which deals are the best for the whole firm and its clients, not just for individual offices.”
The Achilles’ heel of the new firm seems to be its price policy. As Linklaters charged premiums for using the brand name, the new firm might have to cut its financial expectations.
“I see the price policy as their main vulnerability. It is possible that lowering prices will be necessary. Clients paid Linklaters higher fees because it was a big-name law firm and that was part of the price. Consequently, Kinstellar will have to adjust its costs,” said Ondřej Peterka, managing partner with law firm Peterka & Partners in Prague. “We don’t see a reason to change fees in principle just as a consequence of the spin-off,” Blažek said. “We’ll deliver the same work with the same quality results. Moreover, the company will grow. However, it is true that we can be more flexible on this matter with Kinstellar than before in Linklaters,” he said.
Launch in a stormy water
Kinstellar is entering a CEE market troubled by the economic crisis. While the Czech Republic and Slovakia have been relatively spared so far and are expecting moderate growth in 2009, Hungary has been asking for financial help from the International Monetary Fund (IMF), while Romania saw its sovereign rating downgraded by rating agency Fitch at the beginning of November.
“A start of any new firm in the current circumstances would not be easy,” said Daniel Weinhold, managing partner with law firm Weinhold Legal in Prague. However, he added that “there are and will be many opportunities” for good lawyers. “But when clients have difficult times, they tend to rely on proven qualities and long relationships rather than experimenting with something new,” he said.
Peterka agreed the timing was tricky. “It is not the best time to do so, but it is not impossible,” Peterka said. As the focus is moving from finance and real estate to company restructuring and insolvency, there is still room to cash from legal services. “The important thing is to be able to provide a broad range of legal services. Small law firms too specialized in one sector or type of legal service could have problems. My advice would be to offer a broad range of services and keep the quality high,” he said.
Weinhold also emphasized scope of services. “For any larger law firm, whether new or established one, it is in my view quite crucial to have an even distribution of strength in multiple areas. During a crisis, we can’t all do restructuring and insolvency,” Weinhold said.
People above all
Kinstellar has already seen a couple of departures of managing partners such as Marian Dinu, who left to lead the 15-lawyer team of DLA Piper in Romania. A team of managing partners and junior lawyers also left the office in Bratislava.
“In Romania we would have needed to restructure the office anyway and make some changes, not all of them very popular, but necessary to make the business successful and sustainable,” Blažek said. In Bratislava, new people have been brought in and the headcount is at the same level. “Our people will deliver the same high quality,” he said.
“Departures of managing partners are something that happens all the time. For example, three managing partners left us recently in Warsaw where we had no spin-off, so you’d expect this would happen all the time,” Nick Eastwell, head of Linklaters’ new emerging Europe, Middle East and North Africa group, told CBW.
Blažek said that the new start won’t mean much change in terms of salary level, IT and know-how access for the staff as the cooperation with Linklaters is still there. “The future will be more challenging, but also more satisfactory because we’ll be able to direct our strategy and adapt policies based on the needs of this region, yet we’ll be able to do the same work,” he said.
Kinstellar staff will continue to be trained in London, while Linklaters will work on a best-friend relationship with Kinstellar in CEE. Eastwell said that the future retention of clients will depend on the Kinstellar people, but this shouldn’t be a problem as they’ll have the same know-how, training and access to secondments in London. “There will be no fees for Kinstellar trainees sent to London to courses we would organize anyway,” he said. “Their success is unconditional for us because they will continue to serve our clients in these countries.”
Reasons for the cut
The creation of the new firm follows Linklaters’ global strategy, with the firm focusing on certain core practice areas and key clients. This has already led to streamlining in Germany and the shedding of a number of partners in Sweden, where the Magic Circle giant has been the most significant international firm in the Swedish legal market during this decade. By the end of 2008 Linklaters’ Stockholm office will contain only 14 partners, down from 35 in 2001.
“I wouldn’t wish to speculate about Linklaters’ motivation to pull out of Prague and the other cities; I could only ask a rhetorical question: have you ever seen an international firm abandoning a profitable team of promising lawyers with the capability of selling substantial work to local buyers independently? And this is exactly what any such ‘new’ firm would need to be able to take off and survive,” said a market competitor who declined to be identified.
Eastwell declined to accept such an explanation for the strategy revamp. “The whole bloc was consistently profitable and extremely profitable as the last financial year ended in April 2008. The decision had nothing to do with profit,” he said. He explained that, in the last 10 years since Linklaters entered the CEE region, these markets moved on, and now Hungary, the Czech Republic and Romania are seen as more mature and close to middle European Union economies.
“Clients saw there were no more large privatizations in these countries. Instead, they started to look at China, Russia or India and the Middle East. So, there was a change in focus, and in order to follow them we had to change our focus as well,” he said, adding that Linklaters had to use more resources for offices in the new emerging parts of the world. As these markets are larger, smaller offices entered a shadow angle, as they couldn’t cash on the same revenues and thus promote their bright people in the top Linklaters partnership league. “At the end of the day, continuation wouldn’t have brought sustainable prospects for the future careers. Now, their prospects are much better in a self-managed firm,” he said.
On the other hand, Eastwell emphasized a conflict between Linklaters headquarters and its CEE offices. “[At a global level] we are more integrated and have a narrow client base, so it’s difficult to work for a broad range of clients. Our colleagues in CEE were getting instructions from companies that were different from our core focus or from local blue chip corporations that weren’t yet included in our target. This led to a certain conflict,” he said, adding that, for example it wouldn’t have been possible for Linklaters to work for oil and gas company MOL in Hungary or oil group Petrom in Romania because of commitments to competition in other parts of the world. “Now all such conflicts are eliminated,” he said.
Work on a best-friend relationship means former Linklaters clients will go on with Kinstellar and new clients with an interest in CEE will be recommended to turn to Kinstellar. “The relation is unconditionally excellent. We have no other close friend relationships with other law firms in these countries. Our current clients will remain to work with Kinstellar unless they express a will to do otherwise. So far, I’m not aware of any client withdrawing from contracts because of the spin-off,” he said.
Not the only one
The international legal affairs server TheLawyer.com noted that there are two types of breakaway firms—niche or general—depending on whether lawyers jump or are pushed. The first is a small boutique operation set up by highly specialized lawyers who are dissatisfied with the big firm business structure; the second type generally leads to a bigger firm with a more varied client base. A model of such split happened in Allan & Overy in Turin, Italy, in 2006, when the firm gave the local office to the managing partner.
Eastwell said that Linklaters might well be followed by other firms from the Magic Circle with similar strategies. “It can be expected that other firms such as Clifford Chance or Allan & Overy might want to focus on the new economies one day.
I’m not sure if they will do the same, but I’m certain that these days they are probably going through the same processes and challenges we did prior to this decision,” he said. “We are determined to make sure Kinstellar is successful, as more than 80 clients that work with us worldwide deal with them in the four countries. We’ll give them all the support that we can,” he said.
Linklaters isn’t the first international law firm to leave the Czech Republic. Other international law firms such as UK-based Freshfields Bruckhaus Deringer and U.S.-based firms Dewey Ballantine (now Dewey & LeBoeuf) and Hogan & Hartson already left the Czech market in 2005–06 because of downward-bound fees and tough competition.
A partnership matter
Blažek said the firm will continue appointing partners in 2009, but he didn’t reveal a concrete number. Kinstellar specializes in corporate law, mergers and acquisitions, private equity, tax, banking and finance; real estate; litigation; project and competition and anti-trust law.
Clients such as financial institutions Axa, BNP Paribas, Credit Suisse and the German energy company E.ON worked with Linklaters in the past. Now the question is whether they will ask for Kinstellar when they need legal services in the future. “The challenges will be to maintain the firm’s unity and keep clients,” Peterka said, adding that now Kinstellar comprises four quite separate offices that had a name and culture in common with the headquarters, which kept them together. “The structure above them is now unclear, but they must cooperate closely. How efficiently they are able to do so is the first question. The second is whether clients will stay or go with the firm’s name. What is more important to them—the people who provided services or the Linklaters name? Kinstellar must prove it was the people,” he said.
“We’re working with several law firms for our projects, and Linklaters was just one of them,” said Jakub Mikulášek, project manager with real estate developer Hochtief in Prague. “In some cases we know whom we want to work with; in other cases we launch a tender and choose the best offer. Changing the name and juridical status doesn’t influence our perspective. The most important are the people and individual lawyers working on a case,” he said.
A regional touch
The new firm is entering a regional market where competition is booming, mainly from growing domestic law firms. For Kinstellar, Romania might be a key engine growth, while the Czech Republic, Slovakia and Hungary are expected to remain constant. “We do expect growth and expansion in emerging Europe which includes Bulgaria and former Yugoslavia,” Blažek said. In the future, the firm plans to expand to Ukraine, Turkey and Kazakhstan. “In my view, they’ll need to spend the next six to 12 months on consolidating what they have because they are aware we need to have a first-class law firm to work with our clients,” Eastwell said.
The new entrant didn’t challenge waves in Slovakia, Hungary or Romania. However, competition is fierce. In Slovakia, a late entry of international law firms allowed a solid growth of local law firms now willing to expand abroad. Czech names such as Peterka & Partners, Kocián Šolc Balaštík, Brzobohatý Brož & Honsa and Konečná & Šafář are already in Ukraine, Bulgaria, Russia and Romania. In Hungary, the entry of Kinstellar is “rather a rebranded continuation of a presence, which had to be marketed in order to outweigh any potential negative effects that might have been caused by Linklaters leaving the region,” said András Szecskay, founding partner of Szecskay Attorneys at Law in Hungary. However, Kinstellar remains competition, he said.
Florentin Tuca, managing partner with Ţuca Zbârcea & Asociaţii in Bucharest said that the presence of international law firms in Romania grew in the past two years. “The new Kinstellar is obviously a strong competitor of ours. It is yet to be seen how they would develop the firm, in terms of staffing and relevant projects,” he said.
“In terms of competition, Kinstellar doesn’t mean a change for us, nor does the fact that they are heading to Ukraine. It only confirms our opinion that regional law firms are better suited to provide services in CEE than global law firms,” Peterka said.
Linklaters hasn’t been publishing financial results for individual offices. Blažek said that in principle every year was better than the year before. “As economies were growing, we followed the same trend. We do expect some worse results in 2009, as economies slow,” he said.
From the Czech Business Weekly, 17 November 2008