Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:00:09:45} I'd like to ask a few questions about the annuity nature of the business and the type of contracts you sign with clients. Did you ever run into trouble with the fixed fee element? How did you try to average out inquiry numbers or average use and price accordingly? Is it priced per employee?

{audio:00:10:21} We had a price list based on per employee. Over time, we built a system that recorded every minute of usage for each client across about 40 different categories. We had this data segmented by business size, sector, and whether it was a new or renewed client.

{audio:00:10:55} You developed a timesheet process?

{audio:00:11:01} When a client connected with one of our legal advisors, we had a system in place that asked if they wanted to start recording time, so they recorded time on that client's call.

{audio:00:11:17} There wasn't much leakage; it was quite accurate.

{audio:00:11:21} It was pretty accurate; it was as good as the operators using the system. There were times when we had issues with the operators, but it was generally accurate. We developed a deep understanding of which sectors were the most expensive to support and which were the most profitable. We knew what business size and history to consider. In my last four years - really between LDC taking over and leaving - nearly everything was bespoke priced according to the business sector the client was in, the size, and their history.

{audio:00:12:05} For example, we knew that a 100-employee care home business would almost certainly not be profitable because they would never pay a higher price. We moved away from the care sector and targeted other profitable sectors. I had a detailed spreadsheet for the sales team to consult for pricing based on gathered information about the prospect.

{audio:00:12:51} Did you encounter any difficulties when it came up for renewal? Did you adjust for usage at that point?

{audio:00:12:59} Surprisingly, clients who used us heavily valued the service and knew they were getting good value for money. They were aware that going to a High Street law firm would have cost them three or four times as much for the same level of support. Nine times out of 10, we successfully renewed a client who used us heavily and increased the price accordingly.

{audio:00:13:39} On the flip side, clients who paid a hefty sum but hardly used our services were challenging. Since I left the business, the renewal pricing has changed. I used to price the renewals accordingly, aiming for a £150 per hour equivalent return. If I could maintain that average, I knew the business would make a 25% net margin.

{audio:0:14:38} For instance, our biggest employment law client, Cranswick Plc, a FTSE 250 company with 12,000 employees, used us heavily. We had a marginal return of about £80 an hour, but it was still a £130,000 per year fee. That didn't bother me because we had smaller clients who paid us £2,000, £3,000 or £4,000 and hardly ever used the service. If I could average everything out at £150 per hour, that would provide the business with the necessary net margin.

{audio:00:15:22} Do you think that has changed now?

{audio:00:15:25} I believe it has changed, and Cranswick is an interesting case. It might address one of the questions on your list. They significantly increased the price upon renewal, which I didn't agree with, and they lost Cranswick as a client.

{audio:00:15:43} What I find interesting is that I understand why they did that, but it concerns me that no one is looking at the bigger picture. They are taking a client-by-client view, which isn't scalable or manageable for a business with 15,000 clients. Another aspect is that I know Cranswick used to spend about £80,000 a year on occupational health services, but they didn't purchase them through us because we outsourced it to someone who wasn't part of Ellis Whittam. We added a 30% markup to make it worth our while, but then we became uncompetitive. I think they missed an opportunity to sell £80,000 a year of occupational health services to Cranswick. They are doing many good things, no doubt about it. At some point, someone will realize the missed opportunity. However, I think they haven't quite grasped the joined-up account management of enterprise clients and enterprise value-type clients. Someone will have renewed or chosen not to renew or risk losing Cranswick as a client in isolation. They won't have considered the missed opportunity to sell £80,000 a year of occupational health support. Cranswick is a massive company with abattoirs all over the country, air pollution issues, noise issues, complaints, and environmental concerns. If there ever was a client made for Marlowe Plc, it's Cranswick.

{audio:00:17:34} To follow up on that, do you think this is a consequence of the way the business was integrated or them running too siloed? Or do they just need to introduce a centralized enterprise management system that spans across the divisions?

{audio:00:17:57} I watched their market event presentation a few weeks ago, and they claim to have a centralized CRM system now. I honestly couldn't comment on whether they do or don't.

{audio:00:18:11} There are a few claims in there that I would say stretch credibility, while others are likely credible. I can't comment on that.

{audio:00:18:27} I've heard a couple of people, to put it politely, suggest that they might talk up the cross-selling a bit too much compared to the actual opportunities. Particularly, cross-selling across divisions can be quite tricky to do.

{audio:00:18:44} I think cross-selling and upselling can be overestimated. I recall when LDC acquired Ellis Whittam in 2016, they quickly calculated the value of selling health and safety services to existing clients who only purchased employment law services. While it sounded promising, there's usually a reason why clients didn't buy both services initially. They might be satisfied with a competitor or have their own in-house resources. Persuading clients to switch can be challenging. I think there are always inflated values put on the prospect of cross-sell and upsell.

{audio:00:19:53} Are these types of services relationship-driven in the sales process? How many conversations do you typically have with decision-makers?

{audio:00:20:16} Generally, Ellis Whittam's core clients were owner-managed businesses, with around 60 employees. These businesses care about doing things right but lack in-house resources. When dealing with such clients, we usually interact with managing directors, owner-managers, or finance directors. For larger clients, we might engage with group HR directors or procurement directors, but clients with more than 100 employees represented less than 5% of their client base. In terms of revenue, it was probably around 15%.

{audio:00:21:35} That's helpful. You mentioned an increase in inquiries during Covid. As some of these clients come up for renewal, have you noticed any differences in their retention rates compared to other cohorts?

{audio:00:22:06} I don't have that information, I'm afraid.

{audio:00:22:11} I left in July 2021, so it's been almost two years. You're right that the cohort of businesses will be coming up for renewal. The business model is excellent for building blocks of revenue constantly. The business used to achieve a 73% renewal rate by client number and a slightly higher 78% renewal rate by value. However, clients only come up for renewal every four years on average. If you're only losing 20% to 25% of your clients every year and winning the same volume of new business, you're just layering on top of the existing business. The value of the contract book naturally grows by anywhere between £5 million and £10 million a year. It would have to completely fall off a cliff for that growth not to continue.

{audio:00:23:30} Even with the cohort of Covid businesses coming up for renewal, even if they got a 60% renewal rate, but you wouldn't really notice it.

{audio:00:23:44} That's really helpful. Thanks. I think we've covered the sales cycle as well, haven't we?

{audio:00:23:51} Yes. For small to medium-sized businesses, you're looking at a four to eight-week sales cycle.

{audio:00:24:01} From the first inquiry, it's pretty fast. You also asked how Ellis Whittam wins customers. More often than not, I used to call it a distress purchase. They had a bad experience with Peninsula or Citation, which were great sources of new business for Ellis Whittam because they were better at sales and marketing. They would often get to first-time outsourcers before we did. However, after a four or five-year term, the service quality might not have been great. So, you'd have a business that liked the outsourcing model but wanted better quality service.

{audio:00:24:56} Did you find that you were competing on service level agreements (SLAs) or price, or was it a bit of both? As long as you were in the ballpark with price, but you could offer better quality?

{audio:00:25:08} We covered a bit of everything. In one of your questions, you asked about insurance. I always felt insurance was important because we were competing primarily with Peninsula and Citation. Peninsula owned their own insurance business, Irwell Insurance, which had a terrible reputation for taking fees from clients and not supporting them when they needed it, such as during an employment claim or tribunal. Clients would say they had been with them for 10 years without a claim, and as soon as they needed one, Peninsula found some red tape and didn't support them. Financially, it was in their interest to do that because if they had to support a claim, it came straight off their bottom line since they also owned the insurance business.

{audio:00:26:09} Similarly, Citation didn't own their own insurance company but self-indemnified with an advice guarantee. Like Peninsula, if they had to back a claim, it would hit their bottom line significantly. Ellis Whittam didn't have that issue as we had an outsourced third-party relationship with ARAG, Europe's largest provider of legal expense insurance. We focused on service delivery, and if a client had an insurable claim, it was insured. If ARAG had to increase premiums across the whole book as a result, that's what they did, but it meant clients received better individual service.

{audio:00:26:59} That's interesting. So it was a straight commission arrangement?

{audio:00:27:06} With ARAG? Yes, it was commission-based, and there was some profit sharing as well. It was a closed book of business, with premiums paid on a per-head basis. For most of my time at Ellis Whittam, it was £7.50 per employee per annum. A 100-employee business would pay £750 a year to have all their business covered for the cost of legal expenses associated with employment claims. That premium has now gone up, I think it's close to £20. It's not because there's been a huge spike in employment claims in the last three or four years, but the insurance is more expensive. Surprisingly, when they doubled the insurance premium, hardly any clients complained about it. They knew they were getting great value for money.

{audio:00:28:03} Do you think it's one of those products where, for a 100-person business, £750 is not such a big line item, so you can get away with those types of price increases? It must be that. I'm just trying to understand because if you can raise the price by 100% or more and it doesn't cause a lot of attrition, sometimes that's because it's such a small line item in itself.

{audio:00:28:32} The service that Ellis Whittam provides is essentially an insurance product, offering peace of mind alongside legal expenses. As the insurance book became less profitable, we introduced an administration fee, which brought in an additional quarter of a million pounds to the bottom line. This helped offset the drop in profit share, and I'm sure they've increased those fees since I left.

{audio:00:29:22} Regarding legal advisor utilization, how did you manage that as the company grew? Did you have a specific utilization number in mind, or did you try to predict demand and plan for employee growth accordingly?

{audio:00:29:51} To be honest, we tried to recruit more lawyers when the legal team expressed that they couldn't cope anymore. We had a certain degree of certainty in future business, as the level of new business and renewal rates remained consistent. However, in the last three years of my time at Ellis Whittam, it became more difficult due to attrition of lawyers. As we grew, more high street law firms began to poach our lawyers as they themselves started to think about introducing fixed fee model. We were constantly chasing our tail trying to fill vacancies.

{audio:00:31:13} With the acquisitions Marlowe made, they brought on board HR consultancies and HR advisors who, although not legally qualified, can handle lower-end inquiries from clients. They've introduced a pyramid model with a senior lawyer at the top, junior lawyers beneath them, legal executives, and HR advisors. This structure is assigned to a group of about 300 to 400 clients, and lower-level inquiries are directed to HR advisors, making it more efficient than before.

{audio:00:32:21} When they mention the potential for margin expansion, it refers to this type of improvement, correct?

{audio:00:32:25} The cost to serve was a focus under LDC. They brought in new metrics, as you would expect from a company like LDC. There was a greater emphasis on cost to serve metrics and making the business more efficient. Andy Gunson, who recently became the CFO of the GRC business alongside Gavin, was heavily focused on this aspect.

{audio:00:32:58} Going back to the acquisition, from a qualitative perspective, what was your impression of the acquisition team? They are known for having a polished acquisition process. How did they compare to other buyers?

{audio:00:33:28} The acquisition process happened quite quickly. We engaged Clearwater and put an IM out into the market. Within three or four weeks, we had three serious responses back and narrowed it down to two potential buyers. The acquisition team had some very young members, only a couple of years out of university. They were bright, Oxford-educated individuals, but somewhat inexperienced. They made some poor acquisitions without much due diligence, like the Youmanage HR software, which cost them £1.5 million.

{audio:00:34:46} I wouldn't say they were extremely polished, but we liked them and understood their approach. I met Alex in 2018 to discuss the possibility of joining Marlowe, but we decided it wasn't the right fit at the time. However, he probably gathered enough information from me to know that Ellis Whittam would be a great acquisition for them one day. We liked their business and thought they were strategically clued up. Mark Ellis, the founder, was keen not to sell to another private equity-owned business. However, we came close to selling to Citation. Mark called Alex out of respect before signing the deal, and Alex increased his offer to match Citation's. It then became an emotional decision for Mark, who felt he was leaving a better legacy for the staff by selling to Marlowe instead of another private equity-owned business, where we knew a number of people would lose their jobs if we sold to Citation.

{audio:00:36:53} That was helpful. I was trying to get a sense of Alex. He seems like a reasonable and straightforward person. I mention this because it's important to trust the person running a business like this, as you rely on their word for many decisions.

{audio:00:37:25} I spoke with someone else a few weeks ago who felt that Alex lost some credibility due to the £20 million write-down related to restructuring costs. The market reacted poorly to it.

{audio:00:37:40} Yes, that was at the end of last year.

{audio:00:37:45} It became a trust issue between investors, Alex, and the markets. I liked him when I met him in 2018. He had a clear purpose and strategy, and he knew where he was taking the business. The shares were around £3 at the time, and I decided to buy some even though I wasn't joining Marlowe.

{audio:00:38:14} That's a great endorsement of someone.

{audio:00:38:19} I liked him a lot, and I was upfront with Mark Ellis about it. I told him that we should watch out for these guys because they could become a serious threat. In 2018, they weren't on anyone's radar. They had a small HR consultancy business acquired through the William Martin acquisition and were looking for someone to run and grow it. After my conversation with Alex, I think he realized it wasn't the right platform for growth. I believe that's when he knew he needed something like Ellis Whittam. In terms of a platform for growing GRC, I don't think he could have done better than acquiring Ellis Whittam.

{audio:00:39:26} You stayed with the company for a while after the merger, right? About nine months?

{audio:00:39:37} Yes, I stayed for nine months. My contract was for six months, but they tried to get me to stay longer. I might have made the wrong decision by leaving. I was just so tired after 11 years, and I knew I needed to do something different. Looking back, I wonder if I made the right choice, but it was my decision. They really tried to keep me.

{audio:00:40:18} While you were still there after the acquisition, did they do anything you disagreed with?

{audio:00:40:29} I didn't agree with their acquisition of Youmanage. I thought it was a poor decision, and I believe they are still paying the price for it. There were better businesses in the marketplace that could have provided a stronger HR software platform. Peninsula, for example, has three strong brands. They've got Peninsula Business Services, they've got the Health Assured business, the occupational health business, and they've got Bright HR. They are such good products - especially Bright and Health Asssured - that they can lead on those products. They can lead on Bright HR and bolt on Peninsula's employment law or health and safety advice.

{audio:00:41:40} In my opinion, Marlowe missed a significant opportunity. They could have acquired a good HR software platform for less than £10 million and it would have been good enough to be a lead product with Ellis Whittam services bolted onto it. Youmanage is a dreadful product.

{audio:00:42:01} Now, their only option is to try and bolt on Youmanage, which is not good.

{audio:00:42:09} It's terrible. The business I've joined has a connection to Mark Ellis. I'm now the commercial director, using Ellis Whittam services. Youmanage's HR software is so bad that I've given up on it. The CTO admitted that they thought they could just put a new skin on it, but they will have to rewrite the whole thing. It cost a million pounds to buy, but the missed opportunity is even more significant.

{audio:00:43:06} I haven't used it, but is it so bad that it would give a negative impression of Ellis Whittam services?

{audio:00:43:18} If you had bought Ellis Whittam or WorkNest services and were told they had this great HR software bundled in, you would not have a good impression after experiencing Youmanage. It's really poor.

{audio:00:43:51} They'll have to get rid of it eventually.

{audio:00:43:54} They are in the process of doing it. I'm not sure exactly what he meant, but during that market event, Alex mentioned a new round of significant investments in HR software. I don't know if he's referring to the HR software, because the CTO at WorkNest has built a case management system used by all the legal teams and HR businesses, which is fantastic. The CTO at WorkNest is absolutely invaluable. He will get things right, but it will take time. I think they missed an opportunity with the HR software aspect, such as absence management, sick leave management, and performance management modules. There are some good products available in the market, but Youmanage is dreadful.

{audio:00:44:48} That's helpful and very clear. I have a slightly abstract question. Do you think WorkNest, with the bolt-ons, has moved forward as a business since you were there? Is it stickier? Is it a better proposition? Do you think it has room to become an even better proposition?

{audio:00:45:14} There's definitely room for improvement; there's no doubt about that. They're on their way, but they're not there yet. They haven't really focused on health and safety, nor have they made any health and safety acquisitions. Delivering this service is quite difficult, as they face the same problem as Peninsula and Citation. Clients purchase a block of consultancy days, but actually delivering those days is logistically challenging. Clients may cancel at the last minute, not agree on a day, or show no interest, resulting in a large number of unused consultancy days.

{audio:00:46:09} This concerned LDC, as they were unsure if they were carrying a massive, unquantified risk. They were also worried about clients who purchased consultancy days but never received any service and then experienced a significant health and safety issue. They do have clients like that. This is not unique to them; it's a feature of the fixed-fee health and safety consultancy market. The problems that Peninsula and Citation face are worse than WorkNest's, but their issues are still considerable.

{audio:00:46:58} Managing and delivering the service is difficult, as they are constantly chasing their tail on diary management. They haven't developed a great diary management system to tackle this challenge. They may not be ready for it or are maybe not quite as attracted to that part of the market as others. They haven't made much progress in this area, and it seems like a problem child.

{audio:00:47:31} They have rewritten the software they use, which was previously outsourced to Shield Safety Group. They were spending a significant amount on the software, about three quarters of a million a year, so building their own is a great saving. The new software will likely be better than Shield Safety's. They are making the right moves, but it takes time. Steve Clark has built a health and safety system that will be better. He will rebuild Youmanage; it will be better.

{audio:00:48:07} However, it has been two and a half years since the acquisition, and they're not there yet. Interestingly, I inquired about an employee assistance program (EAP) for my current business, expecting an offering from WorkNest due to their occupational health acquisitions. They do have an offering, but it's with the same third-party business, Wellbeing Solutions Management, that I used three years ago at Ellis Whittam. I was surprised they haven't developed their own EAP offering within Marlowe and that WorkNest are offering out someone else's product.

{audio:00:49:06} I hope that, after their frenetic period of acquisitions, they will now focus on addressing the gaps in their proposition and become more targeted. The language they're using seems to support this idea.

{audio:00:49:29} I believe a large part of Andy Gunson and Gavin Snell's new remit is to examine the council's acquisitions. For the most part, they have made good acquisitions, but there have been a few less successful ones. When you've made around 70 acquisitions, it's expected that some will not be as successful, especially when they were purchased by lads only two years out of university. To be fair, they didn't pay high multiples for them, but that's how it goes.

{audio:00:50:07} Now, Gavin and Andy's task is to better integrate these businesses, find efficiencies, and establish a common commercial model, way of working, and CRM systems. They are both highly capable individuals. I have a high regard for Andy Gunson, who is now the CFO of the GRC Division, and Gavin has previously managed large businesses as MD and CEO. He seems more comfortable now than when he joined Ellis Whittam with 200 employees.

{audio:00:50:54} I think they are excellent appointments, and Alex has recognized their potential. They will likely need to grow their team and invest in support to achieve their goals, but I have every confidence in their abilities.

{audio:00:51:20} That's brilliant, thank you. Lastly, I always ask if there's anything else you think I should be concerned about or considering?

{audio:00:51:33} On the GRC side, I think it's a great model. In particular, there's a significant opportunity to move clients from one-year contracts to three-to-five-year contracts. On the e-learning side, when Law at Work was acquired, many of their clients were on one-year deals. Since then, they've been moving clients onto longer contracts as they come up for renewal.

{audio:00:52:18} I'm not sure why they don't report on the overall value of the contract book. They discuss EBITDA and turnover but not the contract book value. I would expect them to have significantly grown their contract book value as they move clients from one-year deals to longer contracts, especially in the GRC business. For example, when Ellis Whittam was acquired, their annual revenues were around £17.5 million, but their contract book was worth over £60 million due to the average contract length of 4.1 years. As Law at Work clients move from one-year deals to three-to-five-year deals, there could be a tenfold growth in the contract book value in a short period. I haven't seen them reporting on this, though.

{audio:00:54:01} They don't seem to report on that. It might be due to the complexity of accounting standards for presenting that information. It would have to be an adjusted number. Perhaps it's something to ask them, as it would be helpful when trying to model revenue projections for the next few years.

{audio:00:54:27} Law at Work had about 1,000 clients when I left, with an average annual fee of around £6,000. Their contract book was worth £6 million. If they can renew most clients onto three-year deals, the contract book value could increase to £20 million, with £20 million in guaranteed future revenues instead of £6 million. That's where the massive opportunity lies for the whole business. Also, they've assessed the market to be worth over £8 billion and they've still got a pretty small share of it.

{audio:00:55:23} I'm not very familiar with Ideagen, one of their competitors, but I don't think anyone is doing exactly what Marlowe is doing. They seem to have gained an advantage over Citation and Peninsula and I would see them as the leading player in the GRC field. However, they still have a small share of the market they've assessed. In that respect, it should be very encouraging.

{audio:00:55:54} That's the hope, indeed.

{audio:00:55:59} I wouldn't be too worried. I believe they are taking the right steps and have good people on board. I trust Alex; he is a smart and strategic individual. Although they have made some mistakes, nothing is ever perfect. Alex appoints good people and is a pleasure to work with. He has always seemed straightforward and honest to me.

{audio:00:56:33} However, I think they have a smaller head office team than they should for a business of that size. They've kept the management teams from the acquired businesses, and while some have left, it's mostly the same teams running the businesses. This could become problematic eventually. Perhaps addressing this issue is part of Andy and Gavin's responsibilities in heading up GRC. I think they should have a bigger head office team supporting all of those acquisitions now.

{audio:00:57:22} I suspect that the newly appointed department and division heads will be addressing this issue. Acquiring businesses as quickly as they have requires leaving people in place for a while, as replacing them would be difficult. Then, they can rationalize it overall.

{audio:00:57:50} Alex mentioned having around 120 software developers, which is an impressive number. However, I believe now is the time for that to be a centralized service. If they have that many developers, they should work for a centralized software development team instead of individual businesses. I'm sure that's something Gavin and Andy will be looking into.

{audio:00:58:13} That's great. Thank you so much for your help. It has been very informative.

Marlowe: M&A, Post-Acquisition Process & Management

Former Sales Director at WorkNest

inpractise.com/articles/marlowe-manda-post-acquisition-process-and-management