Inside a turnaround: The Direct Line story

14 March 2017 -


To the casual observer, Direct Line probably looks like a straightforward, successful insurance group. It is, in reality, one of the most dramatic and ultimately effective turnaround stories in British business

Matt Scott

In April 1985, Direct Line turned the world of insurance on its head. In an industry ruled by intermediaries, the upstart new company sold insurance purely over the telephone, thus removing the need for a broker. In so doing, it allowed insurers to interact directly with consumers for the first time.

At the time, the business only sold motor insurance, operating from a tiny office in Croydon, with just 63 employees. Today, as an independent, publicly quoted company, Direct Line Group (DLG) employs more than 10,000 people and sells to more than 15 million customers over numerous lines of business.

But the path to success hasn’t always been plain sailing. The 2008 financial crisis hit RBS (by then DLG’s owner) very hard. RBS ended up in state ownership as part of the government’s £50bn bailout of the big banks.

DLG chief executive (and CMI Companion) Paul Geddes headed up the bank’s retail banking unit at the time, and was at the frontline of the crisis that saw RBS’s share price drop by more than 97% and the bank report the second-biggest loss in UK banking history.

“There were a few things to learn from that period and one is the need to keep talking to people all the time, even if you have nothing new to add,” Geddes says. “Sometimes even just hearing something is what people need, even if it is just to say: ‘Since I last spoke to you, nothing’s changed.’”

A new beginning

As a result of receiving state aid, RBS was forced by European regulators either to sell or float its insurance business, and was given a deadline of the end of 2014 to complete the transaction. Geddes’ boss at the time, Stephen Hester (now CEO at rival insurer RSA), asked him to take over at Direct Line and guide the insurance group onto the stock market.

For Geddes, the deadline and the knowledge of how much needed to change had a bracing effect. “Crises help focus energy, so having immovable timelines makes you very bold and decisive,” he reflects. “You can’t have a business on a war footing all the time, as it is exhausting, but it does overcome some of these obstacles to change – complacency [and the sense that] everything is fine or ‘I quite like the way we are’.

“It was absolutely evident that where we were wasn’t good enough and so we had to change it.”

One area where drastic change was required was pricing.

Under the previous regime, serious mistakes had been made, including an under-provision for claims relating to whiplash injuries due to traffic accidents. These would dog the market for years and eventually force DLG to plough almost £400m into reserves for its motor policies.

“Our forefathers were rather blindsided by it [bodily injury claims],” says John Reizenstein, DLG’s chief financial officer. “They had not planned for it and had taken on the wrong business, including in commercial lines, and they had left themselves under-reserved as a result.

“After Paul unpicked things, he discovered that we had written lots of the wrong business at the wrong price, and had under-reserved for it, so the company made a loss in 2009 and 2010.”

To fix the issue, Geddes took the bold decision to increase prices across the board. He then took the even bolder decision to walk away from some lines of business entirely.

“For us to IPO on the date we wanted [October 2012], that required us to have a business that was of a particular level of profitability. We just had to walk away from business that could never get that profitable,” says Geddes. “You are probably never going to be brave enough to do that as clinically and quickly as I did it without having this ticking clock [of the IPO].”

Tough decisions

As Geddes sought to find £100m of savings by the end of 2014, consideration inevitably turned to headcount.

It was decided that almost a third of senior manager roles needed to be cut. And DLG would have to look at closing 14 of the insurance business’s 27 UK offices. For the senior leadership team, these were dark times.

“Decisions like that weigh heavily on everybody’s minds,” says chief operating officer Steve Maddock. “You’re talking about impacting families and children, and there are a lot of consequences. We had to say goodbye to just short of 3,000 colleagues in the claims department alone.”

The team was determined to be as clear and open in its communications as possible. Specifically, they would give long lead times about planned changes. In the case of DLG’s Cardiff office, staff there knew of the planned closure in 2010, three years ahead of schedule. This allowed people to plan for the future, even if that meant the business being at risk of losing too many people ahead of closing down.

“We set some very clear principles, and one was that we were not going to sit on and hide any information from anyone affected,” says Geddes, “so, when we knew we had to shut Cardiff in three years’ time because we had a lease break, [we told them].”

He adds: “We could’ve waited till the year before it closed to tell people, but there was no way I was ever going to sit on information where, if somebody is going to be turning down another job or buying a house and I knew something about their life that they didn’t – that is unacceptable.”

To help staff affected by the closures and redundancies, DLG set up retraining sessions and even ran interview training and job fairs to help employees find new roles outside the company.

The decisions about which sites would be affected took account of the likelihood of employees finding a new role. In some cases, sites with high staff turnover – an indicator of an active local jobs market – were specifically identified for office closures.

While the decisions were difficult, Geddes and his team knew they had to make them. “Too many people means accountabilities aren’t clear and people are jumbling over each other,” he says.

There were benefits, too, for the people who stayed. “People today would say that it feels like their company a bit more. When you are 10,000 people doing something in an organisation of 170,000, the company is the man and, whatever you do, there is not much of a link between your performance at the company, your reward and the future of your career, whereas in a company of 10,000, it is worth having an idea that will save the company £500,000 because that means we can grow some customers.”

To nurture such ideas, DLG has created what it calls its Ideas Lab, a staff suggestion scheme that can net employees up to a £50,000 bonus for the right initiative, as well as the opportunity to work on developing the scheme themselves.

“The whole premise of the Ideas Lab is giving people permission to challenge the norm,” says Maddock. “It’s about skilling the organisation to become agents of change. We don’t want the ideas of our people disappearing into a change vacuum.”

The executive team is also open to challenge and scrutiny from all areas of the business.

‘Employee representative boards’ have been established to consult on major changes, such as the job losses required towards the beginning of the change process, and to get feedback on the way the business is being run.

Employees have even set the company’s values: ‘do the right thing’, ‘aim higher’, ‘work together’, ‘take ownership’, ‘say it like it is’, ‘bring all of yourself to work.’

“Usually the exec team disappears for an away day and then all of a sudden you get a mission statement on a Monday morning,” says Maddock. “We didn’t do that. We held workshops with everyone in the business and our values were presented to us by our frontline colleagues.

“The brief was: can you describe the type of organisation that you would like to work for? The exec team had very minimal input into the creation of the values and that of itself has been incredibly powerful for us.”

As a result, employees at Direct Line are impressively engaged. Indeed, Direct Line’s employee-engagement score rose from 60% in 2015 to 73% in 2016. In staff surveys, more and more people are moving into “the champion box” where they are seen to be a champion of the business, rather than just neutral. “If you are a champion, you are very loyal, recommend us as a place to work and feel good coming to the office,” says Reizenstein. “Our people see us as successful and they are getting some rewards for that.”

Those rewards include a share scheme that gives employees a stake in the company if the business performs well, and that aligns staff performance with the wider business strategy.

Mission accomplished?

When I speak to Geddes at Direct Line HQ in Bromley, he is in jovial spirits. He is as comfortable joking around with our photographer as he is talking about the latest management thinking.

So is the turnaround now complete?

Shares in DLG have soared since the IPO and the business has once again returned to profitable growth, with a reputation for solid underwriting and reserving. In each of the five years following the 2010 injection of funds, the insurer has been able to release significant funds from prior-year reserves.

Paul Arnold, a director at change-management experts Able and How and a keen observer of big change-management programmes, is very impressed. “It took 18 months to separate out every single strand of the business, from customer data to independent functions and governance,” he says. It was “a case of operating from a burning platform”.

The approach, says Arnold, had to be one of “controlled urgency; there was no plan B and the leadership teams embraced the need to shift their people on to the next step as rapidly and as efficiently as possible. Once the separation had been effected, the focus was on creating a new brand and rapidly building the business into a viable standalone operation.”

But, whatever the market thinks, Geddes and team are not resting on their laurels. “People tell you how marvellous you are, and you probably aren’t as bad as when you came in, but you are never quite as great as you are when you say you are doing well.

“A lot of it is having the right board, which keeps grounding you in humility.”

The next generation

DLG is now launching its first graduate and apprenticeship programme to help prepare its next generation of leaders. Geddes himself went through extensive management training while at Procter & Gamble.

“You assume management skills in other people, but most people when they join a company don’t get taught them,” he says. “You’d never expect a doctor to just make it up as they go along, and similarly there is best practice in management, which is a teachable, learnable thing.”

Maddock and Reizenstein both talk admiringly of Geddes’ humility and rational approach. Geddes himself describes the change process as akin to undergoing surgery in hospital; building muscle to be a competitor once more; and then growing profitably once the rehabilitation has taken place.

He believes wholeheartedly that DLG will be successful, but you sense that he’s still learning from the challenges it has faced.

“You have to respect the past, be really honest about the present, and be optimistic about the future,” he says. “It is one of those ones where I never doubted we would get there, so I had natural optimism, but I was also absolutely free to go: “‘You know what? We are not very good at this; we need to make massive improvements.’

“In the middle of the crisis, we were having to make a lot of people redundant, shut a lot of offices, turn away a lot of business and shrink quite a lot – that’s pretty grim if you don’t know why you are doing it. So it was great to be able to have the narrative and the storyline to say: ‘Here’s the picture on the jigsaw box; we are heading towards being a brilliant business.’

“It does feel more like a family business now,” Geddes reflects. “We’re big enough to have lots of resources, but we should be a small enough company that the company isn’t an ‘it’ or a ‘them’.”