Execution, culture and technology: Inside the AA’s transformation

Very few businesses have more than 17 million customers and can count the late Queen among them – but that’s the 120-year-old Automobile Association. Founded in 1905, the business now offers a range of car-related services, including breakdown assistance, insurance and driving lessons.

But while it has a remarkable heritage, the AA has had a difficult time recently. It was drowning in £2.7bn of debt shortly before it was taken off the public markets in 2021 after a takeover by the private equity firms Warburg Pincus and TowerBrook.

Since then the chief executive, Jakob Pfaudler, has been leading the turnaround of a business with a special place in British history. “[The AA] has become part of the fabric of the country. And it’s a business, but it’s also an institution with a rich tapestry of history,” he says.

That institution was founded by William John Bosworth at what Pfaudler calls the “dawn of the automotive era”. Its initial mission was to warn motorists of speed traps. Scouts on bikes would salute passing drivers with an AA badge to warn them of a nearby police speed trap, until a legal test case forced them to change the system to a salute unless there was a speed trap nearby.

By 1906, the AA had erected thousands of roadside danger and warning signs (it would remain responsible for road signage until the early 1930s). In 1908, it moved into publishing with its first AA Members’ Special Handbook containing a list of repairers, and in 1912 introduced AA Routes to help people find the best way to get somewhere.

In 1912 it began inspecting hotels and restaurants, issuing star classifications to those deemed of sufficient quality. All of which is to say, as Pfaudler puts it, that the AA has “always been on the side of the driver”.

The breakdown and recovery service for which it is arguably now best known was launched in 1949, while its insurance service was introduced in 1967. The AA Driving School was launched in 1992, but it had offered such services previously, having taught the future Queen Elizabeth to drive in the 1940s.

Until the turn of the century, it was also a member-driven organisation – owned by its members and putting them at the centre of its operations. But by then it was becoming clear that, with the digital revolution well underway, it would need some serious investment.

It demutualised in 1999 and was then bought by Centrica (which also owns British Gas),

before its first stint under private equity ownership with CVC and Permira, which merged the AA with Saga under Acromas Holdings in 2007.

In 2014, the AA was listed on the London Stock Exchange but struggled under a mountain of debt. It was delisted in 2021 and began its second stint under private equity ownership, which is when Pfaudler joined. Pfaudler, who was a breakdown customer, admits he didn’t have a “feel” for the business when he came in. And what he found there surprised him.

“It was rich in history, had tremendous pride in its heritage, a wonderful ethos around customers and was genuinely helping people at their moment of distress,” he says. “But it was also an organisation 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.

“I joined an organisation that felt like an institution with a superb brand, a superb customer ethos, but quite a bit of work to do to modernise for the future. What I’ve tried to do over the past few years is modernise the technology, modernise the culture and therefore create an AA that’s not just fit for the past 120 years, but for the next 120 years.”

The most obvious thing that needed fixing was the technology. The AA, like many heritage brands with a large customer base, was operating on outdated systems.

“In many businesses that have layers of history, you often find that you operate on clunky systems – they’re a bit patched together; there’s no real architecture to it,” he says. His early plan involved modernising that technology by bringing in cloud-based services that would set up the business for the future.

Hand-in-hand with that came a cultural and structural reorganisation. Pfaudler recalls joining a business where the leadership team was “worn down” after several difficult years struggling against debt. It needed re-energising, he says, but also refreshing with new people.

The first thing Pfaudler did was try to define the reality of the business – which had debt equal to seven-and-a-half times cash flow and was losing out to its competitors – while providing hope for the future.

“The first step was just to be honest about where we were and shake off what was a sense of complacency,” he says. “But just being the nasty headmaster is not enough. Paint a vision of the future and provide hope for the future: those two things were the leitmotif for the past five years, defining reality and providing hope for the future. I would say I’m halfway done, so this is a work in progress.”

While Pfaudler did what any new CEO coming into a new business does – listen to staff and customers and seek to understand the business – he saw relatively quickly that change was needed, so he moved fast.

He shifted the whole business from a monthly to a weekly activity cadence and introduced a chief operating officer function to bring together the change and transformation activity. He also changed almost the entire senior team, as well as between 60 and 70 per cent of the layer below.

“What I’ve tried to construct is a team where there was an esprit de corps. That’s important to me – that everyone plays their position, but they come together in a sense of camaraderie,” he says. “But the organisational structure needs to be defined in a way that people have their clear roles, know what they are accountable for, but also have an enterprise-wide view.”

So, what is next for the AA? Pfaudler says while the current private equity owners are happy with the progress the business is making, they are unlikely to be long-term owners. “I think the sense would be that we are closer to their exit than their entry, but there is still work to be done,” he says.

And while the business is unlikely to return to the stock market any time soon, Pfaudler believes the AA has “unfinished business” with the public markets. “In the long term, I do think the nature of the brand, the routes into the country and its 17 million drivers eventually [mean] this business belongs back on the stock market,” he says.

“We need to see whether there’s a market window opening up, whether there might be one interim ownership cycle from someone else. But eventually I do think this should be a business that’s a proud component of the FTSE 100 or more.”

As for nearer-term priorities, Pfaudler is focused on “maintaining and sustaining” momentum. He points to the fact that the AA is gaining customers and that its customer service levels are rising – its Trustpilot score just hit 4.8 from more than 180,000 reviews.

But he is also looking for ways to expand the AA so that it is “fundamentally more than a breakdown business”. That will involve taking a strategic view and trying not to be pulled too much into the day-to-day. After 120 years on the road, the AA is once again mapping out its best route ahead.