Pan-Baltic firms now dominate the market in the north west of Europe. How did that come to be the case and what does the future hold for the fastest growing region in the EU? IFLR1000's Jon Moore investigates.
Estonia, Latvia and Lithuania have surprisingly little in common. They have no shared language, history, culture, government or – for the time being at least – currency. Yet to the outside world the Baltic states are often seen as a single entity, both commercially and politically. In recent years that perceived unity has started to be reflected in the nations' business structures and nowhere more so than in the legal market.
Across the Baltic legal landscape the same firm names appear in every jurisdiction. These are not international firms headquartered in London or New York but local brands often operating solely within Estonia, Latvia and Lithuania. Recent years have seen a consolidation of pan-Baltic operations to the point that the entire market is now dominated by less than ten firms as partners seek closer integration between the countries.
Most agree that some form of pan-Baltic co-operation is essential in the modern marketplace. As Sven Papp, a partner with Raidla Lejins & Norcous in Estonia, says: "In today's world it's a must; you're not credible if you're not present in all the three countries."
Perhaps the biggest motivating factor in unified operations is the way the markets have developed. Despite being distinct economies it is increasingly the case that a business in one country will have operations in one or both of the other states. "Our clients' businesses are so integrated into this market that if they are present in Lithuania most of them will also be present in Latvia and Estonia," says Eugenija Sutkienė, managing partner of Tark Grunte Sutkiene's Vilnius office. "So basically the Lithuanian and Estonian markets are now very, very connected and Latvia too."
The story of the pan-Baltic firm can be traced back to period immediately following independence. With the collapse of the Soviet Union Baltic economies moved rapidly towards privatisation and integration with the global economy. Despite being three distinct nations those on the outside saw only the Baltics, a single market.
Papp recounts a transaction involving a French firm in the mid-1990s who "more or less demanded" pan-Baltic operations. "What do you mean Estonia, Latvia, Lithuania?" he recalls them saying. "It's the Baltic markets, it's the Baltic country, so go ahead and establish the relationships." And that's just what many firms did, finding partners in their neighbouring countries and forging alliances.
It was shortly after the turn of the millennium that the push for closer integration really accelerated. The catalyst for this change was the nations' accession to the EU in 2004. Potential investors weren't interested in investing in just one country as the markets were just too small. Indeed even today neighbouring Finland has a population equivalent to 85% of that of the three Baltic states combined and yet has an economy more than two and half times the size. As a standalone market, Estonia has a GDP approximately on a par with Uganda.
"We started as a joint firm in 2004," says Tark Grunte Sutkiene's Estonian partner Hannes Vallikivi. "This was following the entry of the three countries to the EU. There was an expectation from foreign investors that these were three integrated countries in a regional market so it made sense to work together. It initially started as working together but we have now developed a contractual structure. This means we have a joint decision-making process."
The overwhelming message coming from partners is that they are looking to further integrate their firms. Several have combined practice groups and many are looking to bring together the training and knowledge management systems of the firms to provide a unified quality control mechanism. "It's very much co-ordinated," says Papp. "It's a common brand; it's the knowledge management, training and the alignment of documents."
But closer co-operation does not necessarily mean operating as a single firm. Bar association rules prevent the complete unification of the teams but even without that roadblock many are reluctant to commit to profit-sharing arrangements, preferring instead to keep profit centres in their respective countries.
The differences between the markets are often cited as a reason for this separation. "Despite the fact that the Baltics appear to outsiders as one market, in truth they're very different little markets," notes Valters Kronbergs, managing partner of Krongbergs & Čukste, the Latvian branch of the Baltic Legal Solutions group. As a result the greater integration that to outsiders may appear a simple and logical step can seem much trickier with the benefit of local knowledge.
While the drive towards pan-Baltic unification has been ubiquitous there is disagreement among firms as to the best way to achieve it. Some favour structures that form the closest thing to a single firm that is legally possible, while others have opted for a tight-knit federation of national firms or a looser confederation or franchise arrangement
The firm most widely acknowledged as being closest to a truly single entity is Sorainen. Founded in Estonia, it has expanded its operations in Latvia, Lithuania and Belarus through the establishment of offices in new jurisdictions.
"We work as a regional firm and need to maintain offices everywhere to operate effectively," says Sorainen's Estonian office managing partner Toomas Prangli. "What particularly helped us to expand effectively was that we opened our own offices in new territories, rather than joining with a local firm. It's obviously worked because now pan-Baltic firms are the market standard, they all work together."
This approach is particularly suited to close integration because there is a single head office, in Sorainen's case both senior partner Aku Sorainen and managing partner Pekka Puolakka operate out of Estonia. But functioning in this way presents challenges when looking to set up offices in new territories. Establishing a new operation from scratch is a costly and difficult affair and there is no guarantee of success. It also makes expansion into well-established markets like Scandinavia extremely difficult.
Instead the preferred approach for many firms has been to come together through a merger of existing operations under a single brand. The appeal of operating in this way is that it is relatively straightforward and - barring some marketing and procedural changes - allows firms to continue existing operations with the benefit of additional resources. Expansion into new territories is easier too. A firm in a new jurisdiction can easily be absorbed into the existing structure with the minimum of fuss.
The path for firms towards a merger has generally followed one of two courses. The most common has been a merger between three firms in the respective Baltic states, examples being Lawin, Raidla Lejins & Norcous and Tark Grunte Sutkiene.
"Integration is definitely the best way forward because that means that all the work for a client can be done from one office and then specialists can be brought in from the other countries to advise on their local differences," says Martin Simovart, a partner in Lawin's Tallinn office. "It also means you can pool training to provide a consistent service across the board. Those firms which are only connected superficially will lose out in the long term. If they don't have the essence [of a single firm] behind them they might fall behind those that do."
The challenge in coming together in this way is the question of where the overall firm's decision-making power lies if, unlike Sorainen, there is no clearly defined head office. Some have sought to circumvent this issue through the development of cross-border practice groups with rotating leaderships that allow for a unified approach, while others have looked to put in place a neutral figurehead for regional operations. For example, Tark Grunte Sutkiene has appointed Carl Magnus Pousette, a former partner at Finnish firm Hannes Snellman who was instrumental in its expansion across the Nordic region, as its managing partner for Baltic operations. His brief is to offer an impartial voice for operational decisions.
The other model for mergers, favoured by firms such as Borenius and Magnusson, has seen a larger firm with a strong brand, most often from Scandinavia, merge with Estonian, Latvian and Lithuanian firms which all then take the name of the larger firm.
Joining together in this way presents a different set of challenges. The loss of brand recognition can have an impact for local clients. While the firms benefit internationally from a recognised name, if they have a strong local name the reputation they have built up can be lost in the merger. There are also questions of autonomy and a loss of work arising from conflicts of interest. Working with a partner in a larger, more developed economy naturally means the relationship is weighted heavily in the larger firm's favour, limiting the ability to make operational decisions based on local factors. In addition because of the level of referral work that comes from the larger jurisdictions (the case with Scandinavia and the Baltics), being formally aligned to one firm can restrict the amount of work coming from the larger market.
Some firms keen to move towards a single brand have specifically sought to avoid that issue. By working only in co-operation, rather than coming together as a single firm, they seek to gain the benefits of a singular recognisable brand and the ability to share knowledge while retaining the freedom of independence. This approach has most notably been adopted by firms such as Glimstedt and the Baltic Legal Solutions group. "I'm not going to say that we're the most integrated firm, we're not, but I think we get the job done and our clients seem to like what we have to offer," says Baltic Kronbergs, whose firm is a Baltic Legal Solutions member. "I think it has been a conscious choice [to work in this way] because our evaluation of this question has been: what do clients really want? It perhaps is easier for the market to absorb one name; I think that's clearly the case."
That message is echoed by Glimstedt's Latvian partner Eriks Blumbergs. "[Our different offices] realised the markets are not similar, the style of work cannot be locked into certain financial standards and we now only run a kind of franchise," he says. "Professionally it gives us the freedom to act on the demands of the client when it matters. It may be that historically there is a client that the other office would not be able to drop, or somehow would not [be able to] take the case, but we declare we do not share client information on the Baltic scale so we are still running independent offices."
The next step
Having been hit harder by the global financial crisis than any other EU countries, the Baltic nations have since become the quickest on the road to recovery. Having endured stringent austerity measures all three now have strong levels of growth far in excess of any others in Europe. With the Latvians scheduled to join the euro in 2014 and Lithuania hoping to follow suit in 2015 there is also scope for increased co-operation and investment with Eurozone countries. As they look to the future many partners feel the time has come to expand their operations. As name partner of Vilgerts in Latvia (and former partner of Magnusson) Gints Vilgerts says: "It's not enough to be pan-Baltic anymore."
When looking at the future of pan-Baltic firms the one area that cannot be ignored is Belarus. Several firms have already established an office in Minsk while all the other major names have some kind of working relationship with lawyers there.
Everyone recognises the potential of the market. With a population of almost 9.5 million, an established industrial base, vast tracts of agricultural land and forestry and about 80% of industry in state hands there are prospective opportunities everywhere. The challenge, of course, is the political situation.
While perhaps Russia is the most obvious source for Belarusian development there are several factors which the Baltic firms believe play into their hands, namely shared experience and geography.
"We are saying, looking at our Belarus colleagues and comparing everything, that we feel we were there, we were like them 15 years ago," says Girts Lejins, a Latvian partner with Raidla Lejins & Norcous. "We have to raise the competency, raise their knowledge and if - and no doubt that will come - the country will open up we will be in the front row."
The proximity of Vilnius to Minsk is also a key factor in the potential for Baltic firms' involvement in Belarus. The two capitals are approximately as close as London is to Birmingham while Minsk and Moscow are farther apart than London and Glasgow. While large-scale investments have yet to materialise, at the local level there is already lots of economic activity. Many Belarusians can be found enjoying the Lithuanian capital's shopping opportunities at the weekend while many small- and medium-sized Lithuanian companies are already doing business in Belarus, according to partners working in the area.
Despite there being a consensus of opinion that the Belarusian market will open up and that Baltic involvement could play a large part in its development there remains a lot of scepticism. "Belarus is too different," says Vallikivi. "We do work with a firm in Belarus but it's not an exclusive relationship. The issue is that Belarus is not really tied to the Baltics in any cultural or political sense." Vilgerts agrees, "the Belarus legal market is so different, the culture is so different." Gediminas Rečiūnas, a partner with Lawin in Lithuania, says that any firms looking to break into the market "need huge resources to be allocated over there in order to create some result".
Undoubtedly the most prominent influence on the Baltic market is Scandinavia, there is an acknowledgement among some partners that the way forward may involve the establishment of regional firms with Scandinavian partners. "Part of the future will be with regional firms," says Papp. "It's small markets and a lot of players so it's sort of difficult to put that together. But 15 years ago we were very pessimistic about pan-Baltic developments as well."
There is as strong a belief in the other direction, however, with many believing any further integration with Scandinavian firms could be harmful to business. "There's no advantage in having a direct alliance to Scandinavia," says Simovart. "In fact, you can suffer from not receiving referrals from other firms. There's not really enough business for an exclusive alliance." One partner recalls being warned against an exclusive Scandinavian alliance by some Finnish companies who summed up their position by saying "you don't want one wife but need five girlfriends".
A new possibility in terms of future expansion may occur is the development of relationships with Polish firms. While this idea is clearly strongest in Vilnius (for historical reasons if nothing else), the Lithuanians certainly see the potential of the relationship.
"If you compare Lithuania and Estonia, Estonia is very much integrated with Scandinavia," says Sutkiene. "In our case we are much closer to Poland." Gediminas Lisauskas, a partner with Baltic Legal Solutions Lithuania, says that despite some political quarrels with their neighbours to the south west there is a strong commercial connection. "When it comes to business it's different. Polish businessmen want to be here and Lithuanians also [want to work in Poland]. With the Poles we understand each other quite well, we have the same mentality."
One quirk of the Baltic legal market is the absence of any major international firms. With transaction sizes too small to appeal to the larger firms and the fees of, for example, magic circle firms far beyond all but the very richest of Baltic clients there is little incentive from either side for them to get involved. As Daivis Švirinas, Lithuanian partner with Borenius, says: "You cannot simply come into a new market, apply rates which you apply, let's say, in the US and then have companies willing to pay those amounts."
The one exception to this is UK firm Eversheds which does have an office in all three countries. And Latvian partner Māris Vainovskis highlights one reason why international firms may yet play a part in the future of the Baltic legal market. "It's helpful we now have offices in Hong Kong, Shanghai and also Beijing," he says. "What's been very, very helpful is our expansion to Asia. Chinese investors have been interested in the past 10 years and now this interest is starting to materialise and they're starting to really think about investing into the Baltics."
Whatever the direction, the future of the Baltic legal market looks certain to revolve around consolidation and closer integration. Whether it will involve expansion by Baltic firms themselves into new markets or the development of larger regional outfits is not clear, but what does appear certain is that the legal markets will continue to move closer together