Features
2 Sep 2015 09:49am

Profile of a merger: Moore Stephens

Simon Gallagher and Jon Randall are steering century-old Moore Stephens through a period of growth, change and merger with venerable institution Chantrey Vellacott. They tell Julia Irvine how they are doing it

It takes a certain kind of courage and insight to recognise that if your long-established, traditional family firm is to survive and grow, it needs to change pace and transform itself. Even more so, if you have been at the helm as its managing partner and, more recently, its senior partner, and just seen it through the worst recession since the 1920s.

But this is precisely what Richard Moore, latest scion of the family that gave its name to mid-tier firm Moore Stephens (MS), did two years ago as the recovery began to strengthen. He instigated a strategic review with a view to building on the 107-year-old firm’s strengths as a shipping, insurance, financial services and public sector practice, broadening its offering and placing it firmly in the centre of the top 10 accountancy firms rather than “hanging on the end” in 10th place.

And then he placed the responsibility for implementing it largely in the hands of two “newbies”, Simon Gallagher, newly-elected managing partner, and Jon Randall, who joined MS from Baker Tilly as chief operating officer on 3 November 2014 — the day Gallagher started in his new role.

The two have complementary skills: Gallagher, whose background is in insurance (including a stint working in a line finance role in an insurance company), joined the firm from KPMG in 1999 and brings with him external experience as well as an insider’s in-depth knowledge of the firm, while Randall offers the outsider’s perspective, having moved across after 18 years at BT advising professional services practices on growth strategies before becoming the firm’s COO in 2010.

We have to make sure that we can reward partners and staff and continue to reinvest

Gallagher says that during his time at MS, the firm had grown, bringing in new people and partners. In 2010, as the recession was showing signs of ending, the London practice moved into 150 Aldersgate Street which had some 17,000 extra sq ft of space. “It was part of the expansion plan,” he says. “We created some capacity here. We just never quite managed to marry the market opportunity up to the capacity we were carrying.”

SHAKE UP

Part of the problem was that the recession lasted longer than anyone expected. “I don’t think we consciously hunkered down but in reality, that is what we ended up doing,” he continues. “I think your strategic investment slows down, the risks you are prepared to take are less. Nevertheless, we did very well throughout that period. We managed to keep the headcount stable but yes, we didn’t make the great strides that we might have hoped for.” The firm did, however, maintain its niche markets and its client base and it invested in an IT practice which has proved so successful that it regularly competes at the top end of the market.

Gallagher sees this as a “great strength for us to play on because a lot of the services that we deliver will undoubtedly be affected by new ways of doing things deploying new technology”.

The realisation that the growth the firm wanted was not going to happen without a serious step change led to the strategic review. Gallagher was a member of the team tasked with developing a vision for the future. “Two years ago we really started to look into the market and understand what our competition was doing. It was quite a structured process – we went through a lot of consultations with partners about what we wanted to be, what the vision looked like.”

At the core of the vision are, of course, clients and the firm’s strong client care principles. But Gallagher and Randall are only too well aware of the problems firms face in retaining professional staff as the economy grows. Competition is already intensifying, with larger firms boosting their own headcounts by poaching from a shrinking pool of talent. MS decided to fight back with better staff incentives such as an improved learning and development platform, faster access to promotion and reward schemes.

“What we are dealing with here is really a significant evolution with some fundamental changes,” Gallagher says. “We are looking at reshaping the firm. That requires a cultural change because we’re saying well actually we want to be more proactive, more outward-looking, more deliberate about what we do. You’ve got to bring along certain behaviours to make that happen. So we’ve been working on reshaping the culture and redefining the reward mechanisms, starting to work on new processes for staff and partner appraisal, all the things that are quite basic but essential to make a professional firm work really well.”

We had a vision that we wanted to change the firm in a certain way, and CV was very much in line with that

So far, the firm has shaken up its governance structure, introducing an oversight board, a management board and a matrix structure with service lines running clearly through it. This is designed to open up the organisation to a larger number of people and to expand the number of leadership positions. “When you create a more complex structure with more nodes of responsibility on it, it creates an energy and empowers people to do things,” he explains. “In return, it has to deliver back the right economics. We have to make sure that we can reward partners and staff and continue to reinvest.”

There are new staff benefits, individual and group incentives, a pay review to ensure all are in line with market rates, a job title review and a firm-wide profit share for staff (not partners). Aldersgate is being refurbished to accommodate a more open-plan arrangement and this month the former London office of Chantrey Vellacott (CV) will move into the spare space.

MERGER OPPORTUNITY

The 1 May merger of these two old firms (CV was founded in 1788) was the step change the firm was looking for, says Gallagher. “I’m not sure you can ever really plan a merger in the true sense. It’s always going to be partly opportunistic because you could never define exactly the characteristics of the firm we would want to merge with and attain them all. But I have to say the CV merger presented itself as the perfect opportunity – the size, the scale, the shape, just worked really well.”

Early planning was critical in ensuring that the merger came off. Much of this, he says, was down to Randall, who joined MS just as the two firms were beginning discussions. Randall says he chose MS because he saw “a fantastic opportunity to grow something and to put into practice at another firm all those things that I had been doing for clients and for Baker Tilly”.

His priority as the new COO was to take the discussions forward. “That’s what I spent most of my first six months doing, but alongside that we had started to put flesh on the bones of the strategy and initiated changes. The merger became a catalyst. The two things have tied in together phenomenally well. It’s not quite which came first, the chicken or the egg, but we had a vision that we wanted to change the firm in a certain way and CV was very much in line with that, and because of the merger we were able to accelerate the changes.”

ON TRACK

It would be wrong to focus on the London office alone (even though it is by far the largest element of the combined firm) because a major strength of the merger is what it brings to MS both in the UK and internationally – a stronger UK network.

The firms had little overlap in terms of services; CV has one of the leading owner/managed business practices in the country as well as a significant tax advisory service and not-for-profit client base. It was also particularly strong in the Midlands and Thames Valley, two locations regarded as key by MS. And both firms have similar philosophies, particularly about the value of the partnership model.

Both Gallagher and Randall think that it will take around three years to fully embed the changes, at the end of which, they say, they want to be the leading mid-tier practice. Randall explains: “We see the market as being the Big Four, then the next three and then we want to be top of the next level, but actually competing against the top four and the next three in our chosen markets and sectors and services. So in sectors such as shipping, insurance and financial services, we will happily compete with the top four. Public sector, happy to compete with the top four, and in some of the areas, like property and construction, we can compete with any of the four plus three.”

If there’s a problem, he adds, it’s that the partners are so excited about the future, they want everything to happen at once. “I thought we were going too fast but the partners and staff would like us to go even faster. It’s not physically possible. We need this period of integration to consolidate the changes we have prioritised for this year. We can’t do it all at once.”

Gallagher agrees. There is more change in the pipeline longer term but the firm needs the economics to support any further investment. He doesn’t rule out doing further M&A transactions, for example. “The reality is that, if we do want to be a leading mid-tier player, we have to be firmly at the upper end of that mid-tier, and that means further investment. I don’t think you can do all of it organically.

“The current merger has helped us enormously because it has given us a leap up. It’s only changed our UK ranking by one position but I think mentally we are on that path now, we feel as though we’re travelling.”

CHANTREY VELLACOT

It’s not often that accountancy firms are described as “the attractive girl on the dance floor with partners queuing up to dance” but that’s how Mike Tovey [below], former managing partner of Chantrey Vellacott (CV), remembers the heady days before the firm agreed to merge with Moore Stephens.

Boosting morale

The firm had just come through a really tough recession and was in the process of transforming itself into a streamlined, focused and profitable business when it found itself suddenly in great demand. For Tovey, it was the culmination of a rollercoaster ride as managing partner, a role he took over in 2003. At the time, the firm was in a bad way – unprofitable, tight cash flow and low partner morale – but he was convinced it could do better. “I wanted partners to be able to lift their heads and look the world in the eye.”

Changing world

His way of fixing the problem involved common sense plus a more collegiate approach. It worked. Profits grew every year over the next five years and in 2008 CV produced its best results so far (£25.3m fee income). “But the world had changed by then. In 2008 when Lehman Brothers collapsed, we didn’t think it was affecting us much. The bank squeeze hadn’t really shown itself to have long legs and we thought this is good because we have got some long-standing clients who weren’t dependent on the capital markets. But it was just a lag and the recession caught up with us with a bang. Our 2009 results were very poor, 2010 also. That was a very challenging time.”

The perfect partner

Tovey admits that the firm was slow to respond and it took some tough action to get back on track. “By 2011 we could see light at the end of the tunnel. It seemed the right time to embark on some strategic thinking and planning.”

The five-year plan (2012-2017), he says, was about growth, playing to the firm’s strengths geographically (London, the Thames Valley and the Midlands) and sectorally (owner/managed businesses and not-for-profits), and discarding peripheral activities. “If we didn’t grow, we couldn’t remain independent. We always acknowledged Plan B, which was to seek a merger.”

Fortunately, the second half of 2012 saw a return to form: in 2013 CV once again generated record profits (£30.8m) and in 2014 underwent a rebranding exercise (“It was terrific. We started making a lot more noise in the market. We could afford ourselves a little smile”).

In spring 2014, CV was approached about a possible merger and the wooing began. At one stage most of the larger mid-tier firms were lining up but it was 10th-ranked MS which proved to be the perfect partner.

Julia Irvine

 

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