Not sure if anyone has posted this but anyway:
Interview: Slater and Gordon: Not for the faint-hearted
Despite some setbacks, the Slater and Gordon management team remain committed to an international business plan rooted in consolidation and competition.
Having acquired the professional services arm of Quindell in March 2015, the Australian law firm has faced a run of negative headlines from overpaying for the business to accounting errors, culminating in its share price dropping below its 2007 float value of A$1 on news that the UK government plans to raise the small claims track limit.
But sitting in the boardroom of the Slater and Gordon office on Chancery Lane, group managing director Andrew Grech and his UK and European counterpart Ken Fowlie look positively relaxed. For Grech this may be because he is set to return to Australia and sunnier climes within days, while for Fowlie, Lapland and a trip to see Father Christmas beckons for his family.
However, despite the events of the year, Grech and Fowlie note that having joined Slater and Gordon within a year of each other in 1994 and 1995 respectively, change is part and parcel of managing a business in the legal sector. And something they have already seen plenty of down under.
“There will be many short-term challenges, and we are not delusional or kidding ourselves about them. But we are up for them and have faced them before over a long period of time – there is nothing new in this for us. This is just a time for cool-headed resolve and for people not to panic and lose their sense of purpose,” says Grech.
“The reform to the system in which people’s rights are adjudicated has been a keen diver for consolidation in Australia and there is already evidence of that happening in the UK too. One would expect whatever happens to the proposals put forward by the government it will drive further consolidation.
“So there is an opportunity for Slater and Gordon to position itself to take advantage of whatever the environment looks like, subsequent to those changes. Because we have built a business in the UK, which – while not perfect – is broad and deep enough to take advantage of that.”
Institutional concerns
Despite Grech’s confidence in the UK – which, as a larger market than Australia, offers his business significant growth opportunities – it is presently not matched by the investment community and press back in his homeland, both of which have seized on the 80% drop in share price as the latest sign things are going awry.
“When we listed in Australia, it took two or three years to get traction because we were bringing a new class of investment to the market,” retorts Grech. “But if you looked at the trajectory of our share price, it is fair to say that we established a reputation for delivering what we promised and shareholders were rewarded.”
“In Australia, particularly among institutional investors, there are concerns when [local] companies go overseas, because there have been some [high-profile] failures. But we have been surprised by the extent of the reaction. A few own goals [such as the accounting errors unveiled in June] have been scored in that process, but as an organisation we have admitted to those mistakes, dealt with them and moved on.
“Over the next few years we hope to demonstrate that [the Quindell buy] was a right and sensible strategic decision. Not just for investors, but for our other stakeholders, whether that is staff or clients.”
The Quindell deal was thrown under renewed scrutiny in the wake of the Chancellor of the Exchequer’s Autumn Statement when George Osborne announced plans to fight the compensation culture around road traffic injuries by removing the right to general damages for minor whiplash injuries, and transferring injury claims of up to £5000 to the small claims track.
“It is not surprising that the current government had a concern about fraud linked to road traffic accidents and so it should. All sensible market participants want to see a sustainable market that delivers people the rights and restitution that they are entitled to, and does it in an affordable manner from an insurance policy perspective,” says Grech.
“But in 2013 the Transport Select Committee examined very similar proposals and rejected them. And we – and most other market practitioners – had assumed it was unlikely to revisit them in the short term. I believe that this is the wrong way of dealing with these issues and that there will be some unintended consequences if the government pursues this course.”
Asked to expand on these unintended consequences, Grech continues: “If you think about it from the perspective of the individual claimants, this effectively eradicates their existing rights. But the government still needs the support of the wider community to address fraud and this could be quite counter-productive.
“Imagine those people who will be languishing, trying to act for themselves in that small claims environment. Imagine what that could do for the government and the backlash it might create in time.”
As to whether Slater and Gordon will have to fundamentally change its business plan to reflect these reforms, Grech adds: “I would not like to speculate about what is still an early-stage proposal. We need to see how this plays out and our attitude as a stakeholder is to engage with government, insurers and to understand the problem we are all seeking to address. To be – and I don’t want to sound like a broken record – part of the solution and not the problem.
“I am very proud of the role we have played in Australia – and to some extent in the UK, although it is early days – to try and bring about sensible changes that assist meeting the objection that those deserving of compensation receive it quickly and affordably and that those that don’t, don’t.”
When asked whether he gets annoyed by the use of language such as this being the ‘last hurrah’ for compensation culture, Grech comments: “Quite frankly, it does not add anything to the debate. No one can contend – not even the most extreme commentators – that the majority of people who make claims are fraudsters.
“We are talking about a small component of the total claimant population, and we should tread carefully as a community before we take away rights that have been in place for a long period. Before we strip them away we should ask whether there are other, better alternatives.”
System abuse
Pressed on the common assertion that the UK has built up a reputation as the whiplash capital of the world and that something quite fundamental has to change, Grech notes many countries have developed different solutions to deal with personal injury claims, and that in his opinion “the UK has a very sound system”.
“But like all systems, at the extremities you need to make sure that things are not getting out of hand and there is clearly evidence that there are people who are abusing it,” he continues.
“What we are urging is for [the government] to address those people who are causing the abuse, not strip down the fabric of what has been built up for everyone else.”
Listening to Grech and Fowlie, it is evident that they are keen for Slater and Gordon to play a greater role in shaping the success of the UK insurance industry. And that means winning friends within the management of firms that might have previously seen them only as an adversary.
One of the most evident signs of this change has been the announcement Slater and Gordon will not take on any soft tissue injuries that are older than one year.
“We see ourselves as a participant in the industry as we and insurers are co-dependent on each other and share an obligation to make the industry function effectively,” Fowlie expands.
“Having owned the [Quindell] business for a short time and based on the work that we were doing, we thought there was strong evidence of a correlation between age of presentation [of claims] and their progress and success.
“And so it was sensible in regard to our responsibility to claimants and stakeholders that we needed to make a change to the intake strategy we inherited – to make sure the claims that we are presenting are able to advance.”
Fowlie continues: “It has been greeted well and is evidence that we are taking responsibility for the direction the industry needs to be going, rather than relying on government to intervene. We understand that given the heritage of our business, plus the acquisition of the Quindell assets, we needed to build some credibility and we have to do that through our own actions.”
Where next for consolidation?
The Quindell acquisition has allowed Slater and Gordon to diversify into a number of new areas that sit adjacent to its core business, such as rehabilitation and credit hire. Grech also says the deal allowed it to build up its partnership business. Although this has taken a recent hit with the loss of the Swinton motor claims account, it has just sealed a deal with Brightside that will see it replace some of that volume.
“What is interesting about the UK market when compared to Australia is that how we had grown there would not in and of itself be sufficient for us get to the position that we wanted to be here,” adds Grech.
“Because in the UK market there is a much greater role played by partnerships, and there is a wider range of channels by which customers come to receive services, and that is not just in legal services. So we liked the idea of having a multiplicity of channels and partnerships, but it was an area in which we were underweight and needed to address [with the Quindell deal] to be successful.”
Grech on...
Whether it overpaid for Quindell
If you look at the trajectory of the acquisitions we have made before in both Australia and the UK over a decade, the multiples we have been paying have not really changed. Quindell was different as it was the first time we had bought assets from a publicly listed company and that created differences in the way the transaction had to be structured. People are entitled to reach a view about whether we paid too much or too little; all I would urge is that they do not come to that view too early.
The impact of the ‘minor accounting’ errors in June
Although they did not have any impact on our financial performance, they were regrettable errors and that shakes confidence in investors and we have to earn that confidence back. From our perspective we have to focus on the fundamental business and for us this is a strong business with a good strategy that is full of people who are committed to delivering it.
Shared common goal with insurers
We all know that the route to success is improving the client experience, so all of us are on a similar journey: to find ways to improve the customer journey, and doing that more affordably because there is an expectation people want it cheaper – whether insurance or legal services. So there are more similarities than differences and what we are learning from our partners in the insurance market is that we can add value for them.
Following the Quindell acquisition, Slater and Gordon estimates that it now has 10% to 12% share in its chosen market, while in Australia it has closer to a quarter. Which begs the question: how big can the firm get in the UK?
“When we listed in Australia, I cannot remember our market share, but I remember going to investor presentations and saying if we could get to 10% to 15% that would be terrific, and that was a genuine proposition,” responds Grech.
“I did not expect us to get to 20% to 25%. [In the UK] we are somewhat surprised by the rate of acceleration of consolidation. It is happening at a much faster rate than we anticipated when we were doing our business plan.
“That has been challenging to deal with as we have had to put ourselves in a position where we could lead that [consolidation], which was our primary objective. I would not like to place any limitation on [what our market share could eventually be], but I would also not like to say we will hit a target and take that for granted.”
Grech notes that for now, Slater and Gordon will not be looking to seal any further major deals. A position he believes others are likely to follow.
“I would be surprised if you saw more large-scale acquisitions in the consumer legal services area. I would not exclude it as there has been a lot of private equity interest but, until the regulatory position has settled down, that kind of capital is unlikely to want to participate.”
Fowlie adds: “Being brutal about it, potential investors are going to watch what happens with us and that will inform their decisions.”
“We are testament that it is not for the faint-hearted,” concludes Grech, with a wry smile breaking out over his face.
Fowlie’s Christmas message for insurers and brokers
“What we want to be known as is a trusted participant in the UK insurance market, whether as a partner or frankly as an adversary looking after claims. We have built a strong reputation in the Australian market over many decades and we think we are on the way to building a good reputation in this market.”