During the past three years, Central and Eastern Europe (CEE), including Russia, generated 15 deals, each with a value exceeding E3.5bn (£2.8bn), according to Mergermarket. In the same period, Clifford Chance acted on 98 CEE deals with a total value of more than E48bn (£38bn), Baker & McKenzie acted on 95 deals while White & Case acted on 85. This is a stark contrast with 15 years ago when the deal volumes in the CEE region were among the lowest in the world and the local independent law firms typically consisted of two people sharing a desk in an apartment building somewhere in a dusty capital city. Now the local lawyers are no longer the poor relatives: Ion Nestor was on the cover of Business Week Romania. His firm, the 182-people strong Nestor Nestor Diculescu Kingston Petersen, was recognized as one of the Business Superbrands Romania 2007-08.

During the past 15 years, CEE has emerged as an interesting market for the global multinationals. The foreign lawyers servicing the deals, headquartered in London or New York, have started to work even more closely with the local lawyers. But despite all their work together, the relationships have had their share of problems. Part of the answer to the question of how to avoid such problems lies in the need for increased understanding of two very different business models for law firms: the Anglo-Saxon partnership and the CEE entrepreneurial model.

The Anglo-Saxon law firm model is a partnership; a flat structure where partners specialise narrowly across a spectrum of legal disciplines and are responsible for business development regardless of their location or practice area. The Anglo-Saxon partnership model is consensual, conservative and management-resistant, most often described by insiders as 'herding cats'. In 2005 the Financial Times wrote about the drawbacks of the Anglo-Saxon partnership model. It described management as "often weak" and continued that "compared with the best companies, [law firms] are often bad at marketing, customer relations, innovation, use of information technology and process management."

In contrast, the CEE law firm model is an entrepreneurial business, a vertical structure where the managing partner is the boss, primary equity holder and the major rainmaker who has attracted close to 90% of the business across the entire firm. The CEE model is often autocratic, risk-taking, management-obedient and most commonly described by insiders as "the owner says so". In the CEE model, management is centralised and strong and decisions are made economically.

From the outside, CEE law firms may look like an Anglo-Saxon partnership, especially because the professional and management terminology is shared. Both business models: (1) rely on professionals with titles such as 'managing partner' and 'partner'; (2) refer to an internal rigid structure of 'departments'; and (3) the best ones, have an impressive roster of bluechip clients.

In practice, the substance behind the shared terminology is often different. Managing partners in CEE firms are entrepreneurial, self-made millionaires who often started not only their professional careers but the firms as well without any contacts or clients and then, bit-by-bit, won business and expanded the firm. Right from the start, the lawyers in CEE were generalists, a trend which persists in the still-loose separation among the various departments. Finally, the roster of bluechip clients sometimes does not reflect the current client list because the roster is, substantially, a result of past referrals.

A London or US-based firm instructing a local law firm may stumble on problems in all of these three areas. Sometimes talking to a 'partner' in the local law firm may not be sufficient because he is not the decision-maker. For example, it is better to speak with the managing partner on issues such as fee questions (discounts, caps, etc.), conflicts (where the local law firm has to choose in which bidding consortium to act), or client relationship or responsiveness problems and other important commercial issues outside the scope of day-to-day legal work.

The problem with lawyer specialisation, in turn, arises when a foreign law firm, for example, instructs a local law firm on such varied matters as real estate finance and intellectual property or securitisation and product liability and ends up being serviced by the same lawyer. What some foreign firms have come to realise by experience is that this does not reflect on the quality of the local legal work and is accounted for by education (generalist in nature in CEE countries), training (lack of strict departmental separation upon entry into a law firm), and market forces (the aim to capture as much work as possible because there is not enough work for narrowly specialised lawyers). Sometimes the multi-disciplinary work done by one lawyer is a carefully guarded secret by local law firms and the internal organisation by departments is more reflective of marketing rather than business needs, especially as Western firms and their clients tend to find departmental organisation and proficiency within one area more credible.

Finally, in the context of a client list, what London and US-based firms should realise is that a local law firm's client list is often largely a product of referrals from other foreign law firms. It is often not possible for the local law firm to facilitate client introductions to a foreign firm because that client is already serviced by another and the local law firm cannot risk damaging its existing good referral relations. This is the reason why sometimes even with new work, the local law firm still feels obliged to offer the client to the foreign law firm with which it enjoys a good referral relationship.

These complex relations are evolving not only towards a better understanding of each other's business models, but they are influencing the power balance in the relationship. In the early days, CEE law firms looked up to London and US-based firms in a dual role – firstly, as big brothers worthy of emulation in almost all respects (which is the reason why we have shared management terminology, for example), and secondly, as some of the most important clients who can supply a steady stream of referral work from the main global financial centres. London and US-based firms were often perceived as efficient and aggressive profit-pursuing machines that commanded a vast array of client contacts. Compared to this perceived superiority, often local lawyers saw themselves as service providers in a relationship of non-equals where the locals were on the 'receiving end' of a food chain which originated in a global financial centre and occasionally trickled down to a CEE country. Local lawyers thought they added value to the food chain when they serviced the client well and, in line with an entrepreneurial streak, when they provided business leads up the chain.

Nowadays things have changed substantially. In many CEE countries only a handful of local law firms have earned the credibility to receive clients with lucrative and sophisticated work from foreign law firms. As economics teaches us, those who have a unique resource tend to profit most out of it.

For example, this has led to a local law firm being the recipient of mutually exclusive offers to service clients on a particular deal which, in turn, has put the firm into the position to command higher fees and to become picky in its choice of referral partners. Sometimes this even extends to turning down transactions by a local law firm when the opportunity cost of doing the work is too high and the firm makes a decision that it will do another piece of work, but not this one.

These developments have put some foreign law firms in a position in which they not only have to find a good local law firm to refer the work to, but also to make a good business case as to why this work has to be done. In an environment where the CEE deal volume has continued to be strong and lucrative, as evidenced by the facts over the past three years, some foreign firms have found an alternative to referring a stream of work and justifying why it needs to be done by opening an office themselves in CEE.

London and US-based and CEE local law firms can work better together by understanding each other's business models and responding to the changing balance in the relationship. This often requires adopting a business-oriented, win-win approach and understanding that there are far more complex relationships behind, as it turns out, not so simple decisions.

Valeria Mancheva is international relationships manager at Berwin Leighton Paisner.

LawFirmNetworksMay2008