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Switching into Scottish Power

When Ian Russell was approached to join Scottish Power,understandably he jumped at the chance of returning home. Since that timehe has masterminded the company's transformation into a utilities giant,guiding them through their first steps in the post-privatisation free playmarket.

To date, privatisation has generally been no bad thing for the average British consumer – nor for those utilities whose management has succeeded in adapting to the rigours of the market. Contrary to the popular view, adaptation has not been limited solely to the rapid upward revision of board remuneration packages. In many cases, adaptation has been a root and branch affair, involving change at every level.

In the more successful instances, it is not unusual to find that new brooms have been deployed, new blood injected and new directions explored.

Utilities which have not gone down this road have increasingly found themselves at the wrong end of hostile takeover bids. The sight of a complacent management sitting on an under-achieving, and consequently, an under-valued asset base, is too tempting a sight for well-funded and better managed competitors to resist. The result has been a tendency for utility companies to divide themselves into the two opposed categories of predators and prey – again, no bad thing for the consumer if it ends up improving and extending services.

The board at Scottish Power appears to have resolved, at an early stage, to carve out a place for itself in the ranks of the eaters rather than the eaten – all in the interests of its customers and shareholders, it goes without saying. One manifestation of this resolve was the decision in April 1994 to appoint Ian Russell as its director of finance.

It is perhaps a touch unfair to begin by casting Russell quite so starkly in the role of acquisitions supremo, for his portfolio at Scottish Power is extremely diverse and challenging. His responsibilities now include overseeing information technology, public relations and strategic planning, in addition to the not inconsiderable burden of heading up the finance function in a FTSE 100 company. Nevertheless, his most noticeable claim to fame just at present is undoubtedly the skill with which he masterminded the acquisition of Southern Water, and his history to this point speaks loudly of his interest in, and affinity for, the analytical precision of the neat acquisition.

It was, of course, not ever thus. Russell’s career started out as humbly as the next chartered accountant’s. A Scottish lad, born and raised in Edinburgh, his first step on the road to Scottish Power was an accountancy based degree, a BCom, as it was known a few decades back, undertaken with the express intention of becoming a chartered accountant.

This initial hurdle successfully overcome, and feeling the need for a certain broadening of perspective, he set course for London. Thomson McClintock, in those days, was, he says, the only audit firm which allowed its aspirant audit clerks to register for the Scottish Institute examinations from a London base, so, in 1974, this was the firm he joined. Russell qualified in 1977 and gave the firm one further year, just to be sure, as it were, before turning his back on the world of the practising auditor.

“Life as an audit partner in a major firm probably holds a great deal of interest, but I was impatient to get into commerce – I always felt I was more of a do’er than the profession could accommodate,” he says reflectively. For Russell, getting his hands dirty in the work-a-day world of commerce meant plunging them up to the elbows in chocolate. Mars – still one of the best management training grounds in the UK, in his opinion – was his first port of call. He spent three years as a financial accountant with the company, trying, as he says, to acquire some man management and commercial business skills, as well as getting to grips with the client side of financial processes.

Mars was – and is – a private company, so while there was a great deal it could teach the erstwhile auditor about business practice, Mars could not provide Russell with much practical insight into quoted company/Stock Exchange related work. His next stop, in 1981, was the Terry Maher conglomerate Pentos. At the time Pentos was still feeling the effects of recession, and was in cash-raising mode.

Russell came under the direction of Ian Duncan, now finance director at Tomkins, and worked as his lieutenant on the finance side. “Essentially, what we were doing was selling businesses to generate the cash to keep Pentos afloat,” he recalls, with a certain relish for that old challenge.

It turned out to be a tight-rope act conducted at the sharpest possible end of commercial practice. “Ian was a great mentor. He introduced me to a number of commercial skills that I had not picked up – nor dreamed of picking up – at McLintocks or Mars. They were not exactly printable skills, but they were all legal,” he notes.

In 1983 Russell received an offer from the Hongkong and Shanghai Banking Corporation (HSBC) which looked far too good to pass up. His initial task was to assist the colony’s premier bank in establishing investment businesses in London, Jersey and Luxembourg. Then, in 1987 HSBC decided to consolidate its various local investment operations into a single, global investment management group operating out of Hong Kong. Russell was offered the position of financial director of the consolidated business.

His task was to work with the group chief executive to push through the consolidation.

“The challenge with this sort of an exercise,” he recalls, “is to solve the cultural issues. Investment is largely a people business and getting investment managers from New York, Melbourne and Tokyo to act in a co-ordinated fashion for the betterment of their investment performance is not exactly straightforward.” The keys to success, too, are not easily summarizable. The main point, he suggests, is to be able to offer encouragement through real rewards and inducements. “You have to have tangibles you can swap, like giving one manager more clients out of Hong Kong – the trick is to see that whatever deals you strike, you always emerge a net winner,” he says.

Russell found Hong Kong a very stimulating place to live and work. Like many ex-pat Brits, he quickly discovered there are only three things that matter in the Colony: money, money and money. With HSBC having some $25bn under management, there was enough at stake to keep things interesting for a while. However, for a mixture of career and family reasons, when he received an offer from his former mentor, Ian Duncan, who had moved to Tomkins as FD, Russell decided that he’d had enough of the Hong Kong fast track. He joined Tomkins as director of financial control, based at Dayton, Ohio, just after the group acquired aluminium window manufacturer Phillips.

“Tomkins consisted of about 70 companies at the time, most of which made parts for the US auto industry. It’s core strength was metal bashing, in various guises, but it was a difficult company to get one’s arms around,” he remembers.

Tomkins’ most famous subsidiaries at the time were Smith & Wesson, and, in the UK, the valve maker, Pegler. Some two years after Russell joined, the company acquired Rank Hovis McDougall (RHM), and the remainder of his time with the conglomerate was largely taken up with bedding them down.

At first sight, he points out, RHM would appear to have very little in common with a leading “metal basher”. But Duncan and the top management at Tomkins had spotted the fact that RHM’s manufacturing processes had a great deal in common with the production processes in many Tomkins subsidiaries.

Just prior to the takeover, RHM had gone through a highly publicised struggle with Australian outfit Goodman Fielder Wattie which it had tried to buy and which had then launched a counter bid against RHM, only to inspire a further attempt by RHM in turn. “The stock was in a horrid position as a consequence of all this activity,” Russell says, rendering RHM a relatively easy target.

Never one to be content with plodding diligently on in a junior role, despite the varied interests offered by Tomkins, Russell reckons he had begun to think the time was about right, career-wise, for him to try for an FD’s post at a FTSE 250 company. However, before he could put the thought into practice, and much to his surprise, in early 1994 Scottish Power asked him how he would like to join them.

“Better people than I, I hasten to say, had turned the job down because it was in Scotland, but not surprisingly, neither I nor my family had any problem with the idea of coming back home to Scotland,” he notes.

Since his arrival, Russell reckons Scottish Power has gone through three distinct phases. “During the phase one we concentrated on strengthening the finance function, particularly out in the businesses. Our aim was to devolve more of the accounting and finance functions to the businesses and have rather less of it in the centre,” he explains.

Phase two, which began in late 1994, dealt with the acquisition of Manweb.

By January 1995 gossip in the City had Manweb right near the top of a most-likely-bid-target list which seemed to be comprised largely of utility companies – others on the list being Swalec (South Wales Electricity), South Western Electricity and South West Water. No one at that stage, however, outside of Scottish Power, was specifically flagging the Scottish utility as a likely predator.

“Our first task was to get board approval for the broad strategy of expansion through acquisition,” Russell says. From March 1995, following board approval, the acquisition became his specific responsibility. Manweb, we can assume, knew nothing of this until a #1.03bn bid was launched on 24 July 1995.

“Know your target” is one of the maxims Russell appears to have taken to heart during the course of his career. Many avid readers of The Times might have missed a little snippet on 24 March which noted that Manweb was keen on selling five of its superstores and was in talks with Scottish Power to that effect. With hindsight, it might have preferred to have had those discussions with a less interested party, such as Trafalgar House, say, or Hanson. By October the bid was a fait accompli.

At the time of the bid, Scottish Power had already successfully diversified into gas supply, telecommunications and retailing. Its acquisition of Manweb was hailed as the start of a consolidation process within the UK power industry. Scottish Power justified the bid on the grounds that the “merger” would result in improved management and cost savings and efficiencies through the use of common computer systems. In short, Russell had convinced the board they could manage Manweb better than the incumbent team. Why this should be so is an important part of the story.

“There is no one single reason why Scottish Power needs an expansionist strategy. To understand why we’ve taken this approach, you need to start by looking at how much the company has done since privatisation to reduce its cost base,” Russell explains. Reducing the cost base equates, other things being equal, to better management. Being a better manager means having something to offer to companies that are not quite so well managed.

More specifically, it means having something to offer shareholders of companies that are not quite so well managed.

Scottish Power, Russell points out, started out by rigorously benchmarking itself in the aftermath of privatisation against overseas utilities who were accustomed to surviving in the free play of the market. It wasn’t exactly starting with a level playing field, since the government had loaded it down with a certain amount of gearing (around 50%) and a pocket full of binding, long-term coal purchasing agreements before turning it loose to fend for itself in the world. But as Russell notes with a shrug, that was simply the way the rules of the game had been written and there was little to be gained after the fact in wasting time bemoaning these little difficulties.

In addition to finding out how other utilities managed their affairs, Scottish Power also set about making better use of its customer base by finding more to sell to them – its moves into gas and telecommunications services being two examples of its efforts in this direction. Having discovered just what an asset a large customer base can be, it is not surprising to find the board at Scottish Power coming round to the idea that an even larger customer base would probably turn out to be an even better thing.

“Our strategy was to take the skills we had developed and to apply them to getting better value out of other people’s businesses,” Russell reflects.

Looking round at the regional electricity companies, Scottish Power decided that a number of players had not reduced their costs by anything like as much as they could have done, and this had resulted in them being undervalued by the market. “Perhaps ‘undervalued’ is not the right word,” Russell notes, “the market had got the price right, given the incumbent management, but there was value there for a new management that was not yet being reflected in the share price.” At the time of the acquisition, Scottish Power was the lowest cost distributor in the UK while Manweb was the third highest. The rest, as they say, is history. According to Russell, Manweb’s costs are now on track to be halved over a three year period.

Phase three, not surprisingly, involved another, bolder acquisition.

“We had long had it in mind that the one utility skill in the UK that we did not have under our belts was water,” he recalls. One of the points the board had to decide upon, early in 1996, was whether it made sense, ahead of a prospective election, to apply the “Manweb” formula to a high quality water company. After due reflection, the board decided that it did make sense, and once again, Russell was charged with heading up the acquisition team.

“When we launched the bid at the end of May it took a lot of people by surprise. It took the Southern Water management by surprise too, particularly since we had been involved in a joint benchmarking exercise together at the time and had got to know them rather well – we haven’t had too many offers for benchmarking since then!” he notes.

Commenting on the logic of the acquisition, Russell points to the underlying parallels with Manweb. Southern Water had not reduced its costs since privatisation, and indeed, costs had actually increased. It had a third of its workforce deployed on non-core business and the board itself claimed to spend 50% of its time on non-core activities. “I thought companies like this had vanished in the mid-80s, but there they were,” he says.

The bid itself was once again justified purely on cost savings, but the up-side for Scottish Power was an additional 1.8 million customers, all of whom, in future years, are capable of constituting a market for the company’s gas and electricity services.

The next phase – what Russell calls phase four of his life at Scottish Power – is pretty well certain to be taken up with ensuring that the company derives maximum value out of the acquisitions made during phases two and three. As a utility company, Scottish Power now reaches one in five UK households in one guise or another and has “control” of three distinct regions, a) Central and Southern Scotland, b) North Wales and c) Kent, Surrey, Sussex and Hampshire. “The task of increasing efficiencies is probably never ending,” he notes. “We’ll be reducing our head count by a further 6% in the coming year or so – and this is after achieved reductions of some 43%.”

“The thing we know best is how to run large asset base companies with large customer bases, inside a regulated environment. As to the future, we intend to stick to our knitting in these three core areas,” he says.

Anthony Harrington is a freelance journalist.

FD

Curriculum vitae

THE CITY ON RUSSELL

“Russell manages to do what few FDs master – he combines a very sound strategic understanding with high management abilities. FDs usually get one or the other right, seldom do they make themselves master of both. Since he and others in the new team arrived at Scottish Power the difference has been enormous.

The company used to be regarded as a rather large and sleepy enterprise and is now seen as aggressive and dynamic. They were one of the lowest rated companies in the sector, now they are one of the two highest rated, and are seen as having better growth prospects than any of the others.

At a time when other companies have failed to make acquisitions, they have succeeded in everything they have gone for – and Russell has to take a good share of the credit for that. His awesome intellect and capacity for hard work have made a big impact in the City and he is very highly regarded.”

THE INDUSTRY ON RUSSELL

“I rate Ian very highly. He is a very demanding and stimulating client, which is to say that he combines a sharp intellect with incisiveness and an extraordinary capacity for work. Companies are driven by the management team, not just by the FD., but having said that it is clear that he has played a key role in the development of Scottish Power. He has helped to position the business very soundly for the growing competitive market. The whole culture in Scottish Power, which he has helped to foster, is to get themselves into shape to run efficiently and aggressively, and then to apply that same decisiveness externally. It has stood them in very good stead.”

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