Flying the nest

In November 1989 Andy Pollock and Simon Rees took the biggest gamble of their lives. They decided to quit their lucrative partnerships at Ernst & Young to set up a new practice along with two friends and a handful of staff.

Within six months they had lost three of their largest clients. Within two years they had lost two of their co-founding partners in an acrimonious bust-up. And if that wasn’t trouble enough, the recession had also begun to bite, crippling the SME sector – the cash cow that their new firm was planning to milk.

At that stage few would have predicted that they would survive. Fewer still that seven years later Rees Pollock would scoop the 1996 Accountancy Age award for the best small firm. But Andy Pollock and Simon Rees have managed to do both. In the process, the duo have created a respected niche accountancy practice that boasts a profitable client base among blue-chip City companies.

Rees Pollock now has five partners and 19 staff. It operates out of a suite of plush offices in a modern block beneath the shadow of St Paul’s Cathedral. The firm specialises in fast growing companies in the high technology sector, franchising, media and leisure industries, as well as a clutch of City institutions and professional partnerships.

This year Rees Pollock earned around #1.25m in net received fees, up from #990,000 for the previous year. Two-thirds of the firm’s work comes from traditional services such as audit, tax and general business advice to companies with turnovers of up to u30m. The remainder comprises special work including corporate restructuring, one-off investigations and litigation support for lawyers.

A mixture of astute marketing, hard graft and the vision to spot the gap in the market has contributed to Rees Pollock’s success. The story of how the firm came into being, overcame serious setbacks and carved out a niche in the fiercely competitive SME market offers a blueprint for others in the profession looking to break away from the corporate straitjacket of large firms.

The desire to escape the restrictions that large firms impose was indeed one of the factors that motivated Pollock and Rees to leave E&Y seven years ago. As Rees says: ‘I couldn’t see myself spending the rest of my life dealing with the bureaucracy and the paperwork.’

Ironically, the trigger for their departure was the creation of E&Y itself in May 1989 when Arthur Young merged with Ernst & Whinney. Rees and Pollock, aged 33 and 34 respectively, were both partners in Arthur Young’s business services department which specialised in advising growing companies.

It should have meant entry into the big time as young partners in one of the largest firms in the world. But instead disillusionment set in during the post-merger talks as both Rees and Pollock realised that they weren’t going to wield anything like the influence in the enlarged business services department that they expected.

‘The talks were going pretty well until October when we had a meeting to discuss the way forward for the department and we realised that it wasn’t the way we wanted to go. We came out and sat down in one of the offices and said “what are we going to do?”‘ Pollock says.

The answer was staring them in the face – leave and set up on their own.

After all, Pollock and Rees had spent their professional careers advising start-up companies on how to grow, so who would know better than them what they should do? As for the newly created E&Y, the growing companies sector was not seen as an immediate priority, says Rees. ‘The bit we were involved with was a relatively small part of its business,’ he says, adding that the merger provided for a classic management buyout situation. ‘E&Y was probably more interested in making sure that its big clients were very happy and that the bulk of its fee income was retained.’

Eventually, after much soul-searching, Pollock, Rees and Roger Davison, another business services partner, decided to approach E&Y senior management with a proposal to leave. The idea was to take the key staff in the department with them and set up a dedicated firm targeting blue-chip companies in the SME market. Their marketing angle was to offer the expertise and service provided by a Big Six firm to clients who normally wouldn’t be able to afford it.

The three agreed not to mention a word about their decision to anyone until a deal had been struck with E&Y. They were worried that their plans would be scuppered by angry fellow partners keen to ensure that no-one rocked the boat during the delicate bedding-down period following the merger. Fears over possible leaks meant that Andy Pollock didn’t even dare write the date of the proposed meeting with E&Y’s management in his office diary in case someone stumbled on to their plan.

‘We kept it extremely quiet. Everybody knew something was up, but nobody knew what,’ says Pollock. ‘We didn’t want it to be broadcast to any other partners because we were scared we might get a bit of “We can’t allow this to happen” type reaction, which we got anyway once the news went public.’

A meeting was finally set up in November between the three partners and E&Y’s top brass – senior partner Harold Cottam, London managing partner Nick Land, David Wilson, who was the head of the business services department, and Peter Edwards, Cottam’s deputy.

‘Going into Cottam’s room for that meeting was the worst moment for me,’ recalls Pollock. ‘My biggest worry was that he would turn around and say “you must have been plotting this. You are therefore in breach of your partnership agreement and I am sacking you”.’

Cottam, however, had other ideas. Hanging on to disgruntled partners post-merger would not have been a good idea. In the end, what could have been an explosive and ugly meeting ended in an amicable deal.

‘After half-an-hour’s discussion, Cottam just said “OK, I understand.

I suppose we are talking about money, people and clients”,’ recalls Pollock.

Negotiations continued into the New Year and a deal with E&Y was signed on 24 January 1990.

Under the deal, the three partners were allowed to speak to their staff and some clients, but only after E&Y had contacted them first and explained its side of the story. In an astonishingly generous gesture, Nick Land also came up with a support agreement, whereby E&Y would train the embryonic firm’s staff as well as provide it with technical back-up.

In April 1990, the three partners – Davison, Pollock and Rees – along with a senior manager Amanda Shingleton, who became a partner in the new firm, and ten staff left E&Y. Their new firm, based in London’s Smithfield, was called DPRS after the first letter of the four founding partners’ surnames.

We started the business classically with too many people but we wanted to have the flexibility to be able to act on reasonably sized clients.

We didn’t want to get caught in the trap where it would be just the four of us and we would be forced to build it up slowly,’ says Rees.

DPRS had an initial earned fee income of #200,000 from clients that moved over from E&Y, and overheads of around #650,000. But the fledgling firm ran into trouble early on in its life. The recession was hitting most companies hard, and work, especially lucrative corporate finance contracts, had become thin on the ground. But worse was still to come. Three of DPRS’s largest clients – a computer company, an employment agency and builders’ merchant – fell as casualties to the recession during 1990-91, leaving a large hole in the firm’s accounts.

Precarious as the situation was, Rees says they managed to turn that potential disaster into an advantage. Although the loss of the clients was bad news in the long term, in the short term it generated a lot of work for DPRS as the three companies struggled unsuccessfully to survive.

Fortunately, DPRS had the foresight to make sure it got paid.

‘For the first six months, these three accounted for about 25% of our fee income. But we planned our business on the basis that we wouldn’t be profitable for the first few months, so the impact of them (going under) was that we were busier than we had expected during that period, and that gave us some fat to live on in the following months,’ says Rees.

Client problems aside, tensions within the firm also surfaced during 1991 and a bitter row began to develop among the four partners. The crux of the argument was over how the firm should be developed and what services it should offer. Davison and Shingleton wanted to provide a broad range of services while Rees and Pollock wanted to focus on a limited number of areas.

By Christmas, all attempts at reconciliation had failed and a split was inevitable. In May 1992, Davison, Shingleton and a handful of staff left. Rees and Pollock, moved out of the Smithfield offices, renamed the firm Rees Pollock and relocated to St Paul’s. They also appointed two new partners, Catherine Kimberlin and Tim Howkins, who is a member of the Chartered Institute of Taxation and the firm’s IT expert.

1992 was the turning point. Since then, the firm has gone from strength to strength, building on its reputation and client base. Proof of that is the rise in fee income which has increased from #747,000 in 1992-93 to #1.25m for 1995-96.

The growth has also had an effect on the firm’s self-confidence, enabling it to move out from E&Y’s giant shadow. ‘We can market all our services under our own name now,’ says Rees. ‘The dependence on trading as a spin-off out of E&Y has fallen away over time as we have developed along our own particular track.’

The firm, he adds, has also signalled its intention to expand in various niche areas by poaching new partners from the Big Six. Rees Pollock’s latest recruit, Johnny Moulsdale, a former audit partner with KPMG who joined nine months ago, is a sharp reminder of the desire to attract new clients.

Moulsdale, who says he quit KPMG because he wanted to have more freedom and flexibility in what he was doing than KPMG allowed, has already made his mark. During his first few months, he conducted a review of Rees Pollock’s audit procedures, assessing the firm’s strengths and weaknesses.

He has now turned his attention towards developing new business areas by using his City contacts to expand the firm’s portfolio of clients in financial services.

One area being targeted by Moulsdale is the turbulent world of pensions which is still coming to terms with the wider implications of the Mirror Group Pensioners’ scandal of the early 1990s. Complex new regulations to control the activities of pension scheme trustees and their advisers have provided a boom time for lawyers and accountants. Rees Pollock is keen to exploit this new niche in the marketplace.

‘Pensions is an area where there’s a lot going on and we can bring big firm expertise to people who want independent advice,’ says Moulsdale.

Rees Pollock, which already has prestigious City clients such as the Bank of New York’s pension scheme under its belt, has notched up six new clients in the past few months. And Moulsdale is confident that it can pick up even more in the future.

‘You don’t actually need a big firm of auditors to do a pension scheme.

Even though a scheme might have some big numbers in it, it is essentially fairly straightforward work,’ he says. ‘And because of the changes in the pension scheme rules, which have tried to separate out the roles of employer/auditor and employer/adviser, there is no reason why large pension schemes should have the same auditors and advisers.’

Another notable area of success has been investigations. Rees Pollock has recently enjoyed a minor coup by being the smallest firm to be added to the Department of Trade & Industry’s exclusive list of approved accountancy practices for conducting investigations.

‘Most of the major DTI investigations either don’t get handed out or are taken up by the large firms. There are a number of smaller-scale investigations, mostly done behind the scenes, that the DTI gives over to small and medium-sized accountants,’ says Moulsdale.

The firm also has its eyes on other new areas of work. It is looking to establish itself as an adviser to foreign companies planning to set up in the UK. It’s too early to say how much success Rees Pollock will have in this field, but if it can attract a few clients, Pollock and Moulsdale are confident that others will follow.

According to Pollock, satisfied clients are the best source of picking up new business. ‘Most of our work tends to be non-pitch related and comes from situations where somebody has recommended us, be it an institution, bank or another client,’ he says.

And the firm has its share of fans among its clients. Forbes Petrie, managing director of London-based construction equipment company Pirtek, has dealt with Andy Pollock since his Arthur Young days and moved over to Rees Pollock with him.

Petrie says he was drawn towards the firm because of its willingness to offer an entrepreneurial dimension to the traditional role of accountant.

‘It does our audit and tax planning but to be honest the back-up and service that we get from Rees Pollock is as good as the service that we used to get from the Big Six in the past,’ he says.

He points to a recent M&A deal where Pirtek used the firm as advisers.

‘Andy Pollock and the firm negotiated the deal alongside us when we went to raise money on the venture capital market. They looked at the best options for our business, convinced us to go to the merchant banks instead to get the money, dealt with the lawyers and piloted the deal through to the conclusion. It was very successful,’ says Petrie.

Gerald Hobson, managing partner with City law firm Hobson Audley Hopkins & Wood, is another client who is an admirer of Rees Pollock’s brand of Big Six-style advice. His firm has been with Rees Pollock since 1992.

‘We had been with Kidsons Impey for some years and it was very thorough, but it was quite expensive, so we put the work out to tender and got Smith & Williamson and Rees Pollock to bid. Rees Pollock was about half the cost of Kidsons,’ says Hobson, whose firm also owns the building containing Rees Pollock’s offices.

Hobson says that the lower cost aside, he was attracted to the firm because it had Big Six partners working for it. ‘We’re a small practice but I want to be noticed and treated as the most important client by my accountant. I get more personal attention and usually from a senior partner at Rees Pollock than I would do at a Big Six firm,’ he says.

Hobson’s words sum up Rees Pollock’s achievements during the past seven years. And in the light of the English ICA’s recent report, Added Value Professionals, on the challenges facing the profession in the year 2005, others would do well to look carefully at Rees Pollock’s marketing strategy .

In its report, the institute paints a bleak picture of a fiercely competitive marketplace where small firms will have to specialise and offer added-value services to survive. Rees Pollock has already taken these points on board and made it into a business philosophy. Its success should point the way for others to follow.