The AA

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0:52Few businesses have more than 17 million customers and can say that the Queen was one of them. But that's the AA. This business was founded in 1905 and offers a range of car-related services, including roadside breakdown assistance, insurance and driving lessons. It even taught Queen Elizabeth II how to drive. But while it has a remarkable heritage, this business has had a difficult time recently. It was drowning under£2.7 billion of debt, and in 2021 it was taken off public markets following a takeover by the private equity firms Warburg Pincus and Towerbrook. Since then, Chief Executive Jakob Faudler has been working on a turnaround of this unique business.

1:34I'm Graham Ruddick, and this is the Business Leader Podcast, where we explore the stories and strategies behind modern businesses. In this episode, we look at the AA with its Chief Executive Jakob Faudler.

1:55the aa was founded at the dawn of the automotive era initially ironically actually to warn motorists for speed traps ahead that was the purpose with which the aa was founded i mean i don't know how people would feel about this today if we warned people about speed traps, but that was the first thing we did, and therefore have always been on the side of the driver. This is an organisation that sees it at the heart of the, looking off the interests of motorists in the country. Over time then developed many, many other services for motorists, in particular early on, supporting them when their cars broke down.

2:38For decades, really, the patrol force grew, and it was almost a normal thing that you became a member of the AA, or our esteemed competitor, the RAC, to have protection if you have a breakdown. And over the years, the AA developed many other products and services, and was quite innovative at times. So we brought the fuel pump to this country, for example. We expanded into providing driving lessons to people. The AA taught the late queen to drive in the 1940s. The AA had late Prince Philip as a patron and president. So there's a long history of involvement in all aspects to do with driving in the country.

3:22Fast forward to the end of the last century, we then also developed insurance services, service maintenance and repair services for customers when something was wrong with their car. And come the turn of the century, up to that point, the AA was a member-driven organization. So it was owned by its members and therefore had an ethos of focus on membership. It was almost a community. but by the turn of the century technology was beginning really to change the kind of digital revolution was well underway then and at that time it was clear the the business needed investment and it demutualized around the turn of the century and was then owned in various ownership structures for quite a few years by Centrica then there was a first stint on the private equity ownership then there was a spell on the stock market which ended in maybe five years ago now and then the AA was taken private under the current ownership so point being a long history really has become part of the fabric of the country I would say and it's it's a business but it's also an institution with a rich tapestry of history there.

4:42What was the organization that you joined what did you find when you arrived? So I joined, I probably need to step back. The way I got to know the AA was curious because I came from a banking background. I had used the AA, of course, as a breakdown customer. So I have had personal experience of the wonderful service the AA can provide. But I came to this business all the way through the lockdown period in 2020 and then into 21. And the reason I'm saying this is I came in with the current private equity ownership. And as private equity does, there was a lot of analysis of the business. I probably knew most financials of this business inside out.

5:27I knew a lot about the infrastructure and technology. But as this was all done through lockdown, I didn't really have a feel for the organization itself and the culture of the organization. So when I popped up as the CEO of the AA, must have been March 2021. I hadn't really met anyone from the AA in my life, other than a few wonderful patrols. So the organization I joined was different to what I thought and what I had expected to join. It was rich in history, tremendous pride in its heritage, a wonderful ethos around customers genuinely helping people at the moment of distress, but also an organization that had probably fallen behind the times a bit in terms of innovation technology performance ethos and an edge that was required to compete successfully so i joined an organization that felt like an institution with a superb brand a superb customer ethos but quite a bit of work to do to modernize for the future what was it about the role that interested you when you first became aware that it was going to be available potentially.

6:38Well, I think if an aspiring CEO gets asked, would you like to be the CEO of the AA, you basically say yes to that, because it is such a wonderful brand. There are very few such deeply embedded consumer businesses. Everybody knows the AA. So there was definitely a pride in being able to work in what is a beloved brand in this country, in particular, given that I'm from Germany. So there was absolutely something about being part of the fabric of the country. But also what attracted me was it's one of those organizations where the confluence of technology and people will make all the difference.

7:18And that's what I've tried to do over the past few years, really modernize the technology, modernize the culture, and therefore create an AI that's not just fit for the past 120 years, but for the next 120 years. So far, you've heard an overview of the AA and how Jakob Faudler ended up as chief executive. Now let's get into how he has tried to turn it around. In its most recent annual results, the AA reported that revenues were up 12 % to£1.5 billion and underlying profits were up 6 % to£450 million. This is a business that's now on the right track. I think the first thing to say is it was relatively obvious right from the start that there was a technology gap.

8:00I'll come back to culture in a moment. But in many businesses that have layers of history and have a strong heritage and a past and a large customer base, the AI had 14, 15 million customers and now have 17 million customers, you often find that you operate on clunky systems. They're a bit patched together. There's no real architecture to it. So there was absolutely an early agenda around modernize the technology, bring it into a cloud-based technology architecture that works for the future. But going hand in hand with that was the cultural and the organizational aspect of it. And we can expand a bit on that, but there was definitely something around the organizational capability itself.

8:44So it felt to me the leadership population was a bit worn down, worn down after years of struggling against a mountain of debt, a bit demoralized. So there was absolutely re-energizing of the management needed and brought in a lot of new people and refreshed the pool of talent. But culturally, it was also an organization that felt both proud and complacent. It felt more nostalgic than ambitious. so intrinsically something that longed back to the past as opposed to was excited about the future so therefore the culture really was to paint a vision for the what the aa could be in 20 years as opposed to what it used to be 20 years ago how hard was the culture to change with that backdrop i mean this is business as you say is 120 this year that nostalgia and pride comes i guess with a a view of we've been here for 120 years but you're coming in with a view that things need to change So how difficult was it to get the culture to change?

9:50Those things take time and are multi-layered and are never done, really. So the short answer is this has been the greatest challenge, frankly, and the most ambiguous to some extent that takes time to move forward. Because the business had seen people like me come and go. And I was in no doubt about this. There was a sense of here comes another CEO, might be here for three or four years, here we go again. So there was a sense of resignation here. So the first thing I really tried to do is define the reality that we found ourselves in, which was seven and a half times leverage on the company, a pile of debt that was just a lot of debt on the company.

10:34We had to reduce this with private equity support, but also one where, frankly, we had started to lose out against our ever better competitors. So therefore, the first step was just to be honest about where we were and shake off what was a sense of complacency. But just being the nasty headmaster, it's not enough. Paint a vision of the future, provide hope for the future. And those two things together was a leitmotif for the past five years, defining reality and providing a hopeful future for the future. And I would say I'm halfway done. So this is a work in progress. How did you approach the first 90 days?

11:15When we've spoken to CEOs involved in turnarounds before, there's hear a lot about sitting down with the senior team, listening, learning. How much did you do that? And how much did you do things that perhaps people wouldn't necessarily expect? What would surprise people about what you did in the first 90 days? Yeah, look, any new CEO will say, of course, you need to listen. Of course, you need to get a personal feel of what the business actually does. does and I did all of this I had patrol rides I was in the call centers I listened to customers I listened to the team but I think it was relatively early it was clear there's probably a refresh needed and and I I concluded myself to move quickly rather than let that simmer too long so in addition to learning and absorbing very early on I did some what I would say symbolic actions that I think I try to indicate there's a different type of focus and edge and performance ethos that will come.

12:14That obviously was scary at the time, in particular from someone with a German accent. But I think over time, the business got used to this. But early on, we moved the whole business from what was at the time a monthly cadence of doing stuff to a weekly cadence to indicate we need more edge, we need more responsiveness to customers, to competition, to the environment. So in addition to absorbing for the first three months, I actually moved quite a few things early on. What else did you do that was symbolic in those early days? The second thing I did early on in my tenure was change the organizational structure.

12:51So normally you would say you take three to four months, you develop a strategy, then you think about organization. But I thought, in light of this business feeling at the time, quite fragmented and siloed. And therefore, while there was a brand that spanned the AA, not many other things spanned the AA, I early on introduced the more centralised chief operating officer type function that brought together all the change and transformation activity in one place. So it could get aligned with a broad strategic vision as opposed to be dissipated and fragmented. So that was an early organizational move that, again, send a signal that there's a one AA approach now as opposed to 15 different AAs.

13:37What did you do in those early days and maybe even more recently as well that was particularly surprising or unpopular? And were there decisions that you took that people within the business didn't agree with at the time? I mean, any organizational change will face resistance because people are used to the, and rightly so, are used to the way things have worked. So that organizational change itself that took some persuasion and cajoling. And in fact, in the end, I just did it and it sent a signal. other little symbolic changes that took a while to embed were moving from more intuitive management and management based on experience to a more evidential based management mi-based defining the right performance indicators measuring them and then following up on them that was the ethos around how do you define measure and manage performance took some doing and grated initially how much of the senior team did you change and when you're hiring people what are the skills and characteristics you're looking for so as i say as i came in initially there wasn't a great strategy of fundamentally changing people but relatively quickly it became clear that that probably was needed.

14:55So I ended up basically changing all of them, bar one who had joined three months before me. So arguably the entire team relatively quickly was redefined. And then over the following two, two and a half years, we also brought in a lot of new people at the layer below. So if you look at the layer below now, about 60 or 70 % have also been new to the organization over the past four or five five years and what i looked for was me fundamentally i think i'm more interested in capability and attitude than specific expertise although for some jobs obviously you need a track record and need expertise so what i've tried to construct is a team where there was an esprit de corps and that's important to me that everyone plays their position but they come together in almost a sense of camaraderie I would say.

15:50But the organizational structure needs to be defined in a way that people have their clear roles, know what they're accountable for but they also then have an enterprise-wide view that cuts across their specific area of expertise. You put together the strategy and then there's a lot of execution involved as well. What's been the key here to executing that strategy? You touched on a very interesting point when you said you'd move from monthly to a weekly cadence. Was that part of the execution and and what other things have you introduced that have really focused on that and let me let me pick up you pick you up on one thing i actually with hindsight i did first who then what as it turns out i think that there's a book about from good to great where that is one of the chapters actually get people on the bus first before yeah basically uh be that i'm an ex mckinsey guy so the textbook is you define a strategy and then you assemble the team i think it was the other way around actually first who then what and people with the right attitude and right temperament and right ambition but you're right the aa is i think 95 percent in execution game and five percent a strategy game it's a it's an operationally heavy business we do 10 000 breakdowns every day we have 17 million people with cars driving around so there's a lot going on so the rigor and the right cadence is essential to to to keep this business excuse the pun on the road so to say so there's a lot that i that i brought in terms of performance ethos defining performance indicators for a start how to measure and manage them in what frequency so monthly to weekly where to deploy technology where to deploy people so there's there's plenty of we probably need to dig a bit deeper into that question on first who then what how difficult is it to be patient when on that because you said yourself you'd arrived and it was pretty clear straight away what needed to be changed but you've obviously got to assemble that team so how difficult and then slash important is it to remain patient during that time when you're trying to put together that team before you try and find the answers to the problems in front of you i think there is a tension there.

17:59And in particular, when one is impatient with getting results, there's a temptation to just rush in a direction, do stuff. So I try to resist this. And in a perhaps surprising way, private equity ownership helps with that. There is and there never was really a short-term pressure on the business. So we had no quarterly results, presentations. There was no, the intensity that comes of listed company isn't the case in private equity. So they are by definition a bit more patient but a bit more determined and they helped with that so i think the first year was getting the organizational basics right with this then laying a foundation for within six to nine months a turnaround from a shrinking business to a growing business in years two and three then expand beyond what we were so there was absolutely three to four year horizon to it as opposed to a two quarters horizon.

18:55Could you have done what you've done here as a listed company? I think it would have been difficult. The performance pressure, the reporting pressure is high on a, certainly on a quarterly cadence. Private equity has been incredibly helpful in being genuinely strategic over a five to six year time horizon. So I think, I mean, as it was at the time, the AA struggled as a listed company. The private equity folks, not only brought a slightly longer-term perspective to it, they also de-levered the business and they simplified what really mattered, which was ultimately performance for customers, shareholders and building organisational capability for the long term.

19:38Jakob Faudler grew up in a family of actors, but he went into science and did a PhD in physics at Oxford, becoming a doctor. This mix of art and science has given him an interesting approach to leadership, but also it raises the question, how did he end up in business with a background like this? I grew up in a family and household of actors, which is something people don't really know about me. So my dad was and is still an actor, my mum was an actress, my grandparents were actors. So I was surrounded by, I think, quite intellectual, but also humanistic. There was a family where people mattered, where humanity mattered, where getting your head around why do people behave in a certain way is important for an actor to take on a role.

20:30So there was a lot of that going on, a lot of psychology, quite intellectual, Shakespeare and all of that. And I do remember early on in my childhood that I always found that a bit weird. and counter to what I think is how my brain works is logic, mathematics, rationality as opposed to emotionality. So early on I concluded, well, I want to go in a different direction and I decided the thing that's probably almost defined as the different direction is mathematics and physics. So I became a mathematician and a physicist and I loved it. the purity of thought, the logic, the evidential nature of it.

21:13And then I realized at some point, well, and this is somewhat ironic, this is quite an austere world and one that can be very lonely. I did a doctorate and started a postdoc, and I realized there are maybe five or ten people in the entire world that I can talk to about my work. And it started to feel lonely and lacking the human interaction. And it was a bit funny, I guess you can't escape where you come from. So the people dimension was completely missing from it. Plus, I realized I'm just not good enough to get a Nobel Prize. That's also the level of brilliance and creativity and luck, frankly, is immense.

21:54So I decided that that was not my world and kind of slowly worked my way back towards people and now run a business of 7 ,000 people where people really matter. When you went into business, I think it was with McKinsey, did you naturally feel at home straight away or did you initially at least think, what have I done? And the reason I think I ended up, well, I began my business career with McKinsey was there is a lot of logic and rationality. And therefore, the training as a physicist and a very rigorous way of dissecting a problem comes naturally to a kind of consulting firm. So that bit was a natural transition.

22:41So structured problem solving is what McKinsey does. the closer it then came to organizational aspects of why do people behave in a certain way you know it came actually naturally because i think this was almost my memory from my childhood so why do people do things the way they do it how do you engage hearts and not just minds i think came surprisingly naturally to me and i love it has as your leadership management approach been shaped by your background this this art side here and this science side over here absolutely absolutely and And I think the more I grow as a leader, the more I realize the symbiosis of rational logic, evidence, rigor with people, empathy and inspiration is what is the success in business in my mind.

23:30And most of my roles over the past 20 years have entailed a combination of those two things. So my Lloyd's days, for example, when I ran the entire branch network, all the contact centers, a large people area, 35 ,000 people or so, a people area where technology was completely disrupting everything. Branches were being closed. Everything was moving to the mobile phone as opposed to the branch. so the bringing together the what does technology do what do people do what is rational what is emotional was absolutely essential to both define the reality that the business found itself but provided a hope for the future and i'm doing the same at the a ultimately technology plus people equals growth could you give an example about how that approach to leadership has helped you here and particularly in terms of getting things done and getting the team to to follow you strategically well coming back to one of your earlier questions this business was somewhat complacent but with a proud heritage was under-invested and didn't quite have the management routines and rigor needed to compete with a bunch of formidable competitors and stay up to date with technology so therefore moving towards a more evidential rigorous performance oriented ethos i.e the logic part of it together with cultural change making people believe creating a bit of psychological safety and resilience those two together i think defined the past four years here or five years can i ask you about einstein because i've read that he is someone who particularly interested you and you learned from?

25:21What was it about him and his achievements that you think that there's much that can be learned from? In a way, for someone who's trained as a physicist to admire Einstein is a bit of a lazy answer, I have to admit that. However, I admire him for something particular, which is the childlike creativity that he exhibited. because theoretical physics is basically maths. It is the language of physics is mathematics and it can get very abstract and very complex. But his ability was to see things that genuinely sparked creativity beyond the core maths. And that moment of creativity, how do you fundamentally rethink something that humanity has thought for the past 2 ,000 years is absolutely mind-boggling.

26:08And the question, where does creativity come from, has stayed with me forever and ever. And now I'm asking myself, could artificial intelligence ever create such sparks of creativity where you just fundamentally see the world different, where you think time and space and energy are all wrapped into one thing and time can replace space and vice versa? It's absolutely amazing. As a CEO who constantly, I imagine, is battling against getting bogged down in the day-to-day, how do you make sure that you have the time and space to think creativity, to ask the questions that you don't just take for granted what is in front of you?

26:48I don't know the answer to that question, and I probably don't. And I've actually learned creativity is not something that you block in your diary. There's a one hour that you are now. This is the idea generation hour. Creativity, new ideas come in the most unexpected moments and in most unexpected places. So I like running. I do a long run on a Sunday. That's normally after about an hour in when some random thoughts shoot into my head. So I think my somewhat glib answer is it's not so much a question of time. You just need to allow those thoughts to come in. having said this i i think i i am trying to be quite disciplined with time allocation and time management for myself but also my team that i don't impose unreasonable expectations and therefore i'm pretty um efficient with the use of time so and i do block block times during the week but that's not the moment when creativity happens what um you touched on this a little bit there but what blocks creativity what stops creativity happening both both personally for user leader but also within a business more broadly?

27:53I think knowledge and expertise sometimes blocks creativity because if you think you know it all and you've seen it before, by definition you can't imagine the world any different than it is today. So almost a willingness to second guess your own assumptions, a willingness to learn, to shake off expertise and not just think I know what I'm doing all the time opens those little doorways when creativity comes in and you might rethink things so in a funny way i think expertise can be the enemy of creativity um how are you sort of putting that into practice here five years into this made so much progress how are you making sure there's still a mentality within the business that you're driving forward you're you're evolving you're looking to the future so i think we we i think probably my last few answers have sounded a bit highfalutin and i don't want to they absolutely haven't it's been i really haven't i don't want to be like the very conceptual thing so coming back to the aa is fundamentally an execution business we need to get 10 000 12 000 breakdowns correct every day having said this uh it's also a business that needs to reinvent itself and think for the next 20 or 30 years so what that therefore means is we need to get the basics right but we also need to be able to imagine a world that looks different to what it is today and if cars are more about data we need to think well what could that data do for us what does it do for drivers how can we get the power of that data into the hands of drivers and wrap an aa proposition around that so practically speaking it means asking questions prompting questions asking things like how do you think about this That's one of my favorite questions to challenge or to to probe a bit where people think they have the expertise.

29:46And my favorite questions is, why do you think this? How do you think about this? What if it was not true? What do you what are you thinking? So that is a method I'm trying to deploy here, but also give people space and liberty to experiment a bit, to try things, to allow failures. not obviously failures that threaten the existence of the AA, but allow experimentation and a learning mindset fundamentally. Before joining the AA, Jakob Faudler worked for Lloyds Banking Group for more than a decade. He worked with the then chief executive Antonio Horta Osorio, someone who he has learned a lot from.

30:29I learned a lot from Antonio. He's become a real mentor of mine. different business but similar situation really so Antonio came in after the financial crisis after Lloyd's had just merged with HBOS and at the time was also financially in a difficult position there was a lot of bad debt around financial crisis and Antonio brought a similar rigor to Lloyd's which what I'm trying to bring to the AA so at the time defined the situation which which was not one that anyone wanted to be in, but provided a clear path out of it and did very similar things that we're doing at the AA, like tighter performance ethos, greater accountability to people, and ability to prioritize.

31:17So I learned a lot from that, and I think I've deployed a bit of that playbook here. Who else do you look to learn from today? Who do you seek advice from about leadership and CEO? I learned from many people, to be honest, and I'm not afraid to learn from people that report to me, to be honest. So that a priori, there's not a hierarchical thing. You can learn from many, many people. I'm blessed with the wonderful chairman at the moment, Rick Haythorn Thuade, who constantly reminds me of the 5 % to 10 % that's not just being excellent execution, but is imagination, forward thinking and connecting the dots.

31:57So the intellectual stimulation and the push beyond the day-to-day is strong from him. But I probably learn something from somebody every day, to be honest. So what next for the AA? Could a return to public markets and an IPO be on the cards? The AA was taken off the stock market four and a half years ago. So I think this is still unfinished business, I would say. So current ownership, they're happy with progress. There are private equity owners, so they're not necessarily long-term owners of the AA forever and ever. And I think the sense would be we are closer to their exit than their entry, but there is still work to be done.

32:38And we're beginning to think what could happen in the next few years. I think the AA could go in many directions. In the long term, I do think the nature of the brand, the routes into the country and 17 million drivers in this country. Eventually, I personally think this business belongs back on the stock market. We need to see whether there's a market window opening up, whether there might be one interim ownership cycle from somebody else. But eventually, I do think this should be a business that's a proud component of the FTSE 100 or more. in the short term i think there may be multiple avenues and there may well be another ownership cycle before an ipo what are your priorities as ceo for for i guess how we're talking about 2026 so what you know what are your priorities for the year ahead we live in very uncertain times i think just keeping this um what's the right word this uh ship afloat and a ship afloat is we've That is not the worry.

33:40But this business moving in the right direction, that itself takes a lot of doing. So the first priority almost at any point in time is maintain and sustain the momentum we have in the business. And we have great momentum. We're gaining customers. We are becoming a more efficient business. We're growing our customer service levels. So Trustpilot's score just hit 4.8. So I think just maintaining that momentum and keeping it steadily moving forward, that at any point in time is the first priority. the really big new thing will be to extend the AA beyond what it is today. So the next three to five years really do see us grow our insurance business, grow our service and maintenance and repair business.

34:24So in five years from now, I would like to see an AA that is fundamentally more than a breakdown business. What's been the hardest part of this job so far? Hard is a strong word. It wasn't a walk in the park, but I have so far enjoyed pretty much all of it. I think the relentless nature of it, it's 10 ,000 breakdowns a day, something going wrong at any point in time. Keeping your head above water takes some doing. So not being dragged into the morass of the day-to-day and thinking what is the next 10 to 20 years, that's a constant battle. What's some mistake that you've made and what did you learn from it?

35:04I possibly have jumped too quickly to optimizing and improving the status quo and not stepping back early enough to create that long-term vision. So early on, as I said earlier, I built the team and got sucked into the day-to-day quickly. And then we were still in COVID and then inflation hit and supply chain issues. So there was a lot of just external stuff thrown at the business that really only over the past two years have I been able to step back and define the future in a data-driven EV world for the business. So I think my advice to anyone is resist being dragged into the business too early on.

35:51you've been listening to the business leader podcast with me graham ruddick our producer is anushka tate if you enjoyed this podcast and want to get all of business leaders content including more stories about why businesses succeed and fail sign up for our regular newsletters at businessleader.co.uk board slash newsletters

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