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The Financial Director interview: Richard Pennycook, group FD of RAC plc

Three-times turnaround king Richard Pennycook has exchanged unpredictability
for stability, and crisis talks with bankers for expansion planning. As group
finance director of RAC plc, he enjoys managing a brand that other FDs would
love to get their hands – and balance sheets – on.

Pennycook joined RAC last August after completing his third turnaround in a
row with the sale of HP Bulmer, the cider-maker, to Scottish & Newcastle.

This followed four years working on the turnaround of motorway services group
Welcome Break (as finance director and then chief executive), and before that an
intensive nine months at retailer Laura Ashley.

Pennycook appears to have enjoyed all three experiences. He went to Laura
Ashley in 1998, just after high-profile retailer Ann Iverson had left.

“She and her team had tried to grow the business fast and expanded into North
America, and that had all proved to be unsuccessful,” says Pennycook.

“They were in a position of breaching banking covenants, out of cash. The
business needed to be stabilised and refinanced and so I went on board. It was a
fascinating challenge.” Pennycook worked alongside company doctor David Hoare.
The pair spent nine months negotiating with the company’s banks, refinancing the
business and bringing in a partial new owner, Malaysian United Industries, which
took a 40% stake.

Pennycook’s most recent turnaround – at HP Bulmer – was an experience he
describes as “something quite special”. He explains: “It went tremendously well.
It was clear that it was a good business but it had got itself into all sorts of
trouble. As a high-profile family – but public – company, it had attracted a lot
of press interest. When we arrived in the business, its share price was 89p. It
had breached its covenants. It was in difficulties, but we knew that underneath
was a good business.”

At the start, Pennycook wasn’t sure whether the outcome would be a sale or an
operational turnaround taking perhaps two or three years. “The turnaround plan
we developed and the modelling we did said we would be able to recover the
business, refinance it and should be able to get the share price to about £2.50
over three years,” he says. “From 89p, that would have been a good recovery.”
That wasn’t what happened, however. Scottish & Newcastle made too attractive
an offer. “We sold the business within six months for £3.40,” Pennycook says. ”
It seemed to me that it probably doesn’t get better than that.”

Apart from thinking the Bulmer experience would be hard to beat, Pennycook
also wanted to introduce a little more certainty into his working life.

“With a turnaround, you have to assume it will last six months,” he says. ”
It might be six years, but you just don’t know.”

It is also a potentially stressful life, but Pennycook – a tall, lean man
with a gentle yet clear speaking voice – exudes calm. It is hard to imagine his
feathers being ruffled. He says he learned not to personalise the turnaround
experience. “If you are not careful, it becomes your problem,” he explains. ”
What you are doing is going in to fix some problems that have been created
through circumstances or, more typically, through management failings. You have
to keep a certain detachment. You also have to be prepared to push back
stakeholders, because they will seek to make unreasonable demands. Part of being
a good turnaround team is knowing the right pace to go, when to respond to
demands and when to push back, because there are all sorts of divergent
interests involved.” For example, the turnaround team may have to combat
unrealistic expectations about the potential for business change. Banks may try
to impose too tight covenants. “You have to have room for manoeuvre in these
situations,” Pennycook says, “because one thing you can almost guarantee in a
turnaround environment is that you haven’t seen the worst of the bad news. If
you put unrealistic covenants in place, all that will happen is that next week
you trip them again.”

When HP Bulmer was sold and Pennycook had decided it was time “to get back
into the calmer real world”, the opportunity at RAC arose. “I was keen to get
into a business with real growth opportunities,” he says.

“My background is categorised as being retail and hospitality and both of
those sectors have their challenges in terms of finding real growth
opportunities. RAC, in a slightly different sector, provided real opportunities
for growth.”

Pennycook was impressed by RAC’s selection procedure. “The recruitment
process was the most thorough I have come across,” he says. “That was a big plus
for me. We are all aware of the pitfalls of the traditional interview process.
At RAC you get the traditional interviews, but you also get psychometric tests
and a fairly rigorous assessment centre, which involves six or eight senior
people in the business who spend a morning with you in a competitive
environment, where there are two or three other people going through it too.
That rigour I found very refreshing. It’s also a two-way process. The company
gets a good idea of the individual they are hiring; the individual gets to make
a very informed decision about the business they are joining.”

After Pennycook won the job and joined RAC he also benefited from an
extensive induction. “I spent the best part of three months just going around
the businesses,” he says, “going out on patrol, sitting in the call centres,
talking to customers, meeting a real cross section of the senior team and the
guys who actually deliver the services; that’s been invaluable.”

RAC’s operations are divided into consumer and business services. The
consumer side includes BSM, the UK’s largest driving school. The B2B operation
sells motoring and related vehicle services to businesses, including breakdown
help, accident management, insurance claims processing, vehicle inspections and
customer contact centres. It also provides manufacturer support services (such
as distributing parts to Norwich Union’s accident repair network) and has a
share in Lex Vehicle Leasing, a joint venture with HBOS, serving clients such as
Siemens, Honda and Marconi.

The business operation is by far the largest in terms of revenue. In 2003,
revenues from ongoing consumer-based operations totalled £353.1m – a third of
the £1,053.8m ongoing revenues generated by RAC’s business services. However,
the consumer business is far more profitable – last year turning in profit
before interest, goodwill amortisation, exceptional items and tax from
continuing operations of £51.3m, outstripping the £50.8m achieved by the
business services division.

Pennycook notes the different dynamics of the business and consumer markets.

“B2B is typically high volume, lower margin, but it’s a long-term business,”
he says, citing as an example the RAC’s 10-year contract with British Airways to
manage its fleet of specialist airside vehicles. “There is great value in
developing such long-term business partnerships,” he says.

“On the consumer side, the customer signs up for a one-year membership – but
we do have a very high renewal rate; there is a lot of loyalty as a result of
the fact RAC provides very high levels of services in what is a distressed

Pennycook recalls that when conducting market research on different brands in
the past he was always envious of RAC and the AA. “If you are a retailer, by and
large your customer is relatively indifferent to you, but looking for you to
screw up,” he says. “If you are the RAC and your member has broken down on a wet
Friday night on the hard shoulder of the M26 in January … boy, are people
pleased to see the van arrive, and even more pleased if the car is fixed. So the
opportunity to provide a great service experience is there, and that resonates
in the way people view the brand.”

In order to capitalise on its positive brand image, RAC last year completed
the implementation of a new customer relationship management system, which
should enhance cross-selling opportunities. “The new technology will allow us to
have a single view of the customer to make sure, when we do approach them for
something, we don’t then pester them a week later for something else,”
Pennycook says. “In terms of what we provide them, we have to recognise that our
heritage and our brand association is to do with motoring and that is
front-of-mind for the customer. So beyond breakdown (services), what else can we
offer those customers that they think we are credible to do? It’s clearly
motoring insurance, potentially car loans, inspections when they are buying a
used car – those sorts of products.”

Care will be taken in terms of how those appropriate products or services are
provided. For example, the RAC doesn’t want to just flog a particular insurance
product; it wants to be able to support its members in getting the best deal
available, by using a panel of insurers so that the RAC can shop around on a
member’s behalf. “In supporting these opportunities, we need to be very smart
about it,” Pennycook says, “to make sure we continue the high brand standards
that apply to the traditional business and build on those, rather than dilute

In supporting the brand, Pennycook is currently working to ensure the
robustness of the non-financial metrics and measures used to monitor customer
service and brand health. The RAC already measures aspects of service delivery
such as how long it takes the call centre to answer a call and the time taken by
its patrol vans to reach members. “What we are now saying is that we need to do
more around the softer elements of the customer’s experience,” says Pennycook.
This includes looking at how well the call centre diagnoses the caller’s problem
and the friendliness of the patrolman’s greeting. These aspects are being
measured through customer satisfaction index cards (around half a million of
which are received back from members each year), as well as follow-up customer
care calls and mystery shopper tests. “We are doing more calling ourselves to
get a sense of the softer elements of the experience,” Pennycook says.

Now settled into life at RAC, Pennycook admits his early career success owes
much to a colleague from his days at Arthur Andersen in Bristol – Tony Collier –
who left the firm to become group FD at Allders when it completed its management
buy-out from Hanson. Collier asked Pennycook to join him in the buy-out team as
group financial controller.

“I always knew I wanted to go into industry,” Pennycook says. “It was an easy
decision to go with a colleague that I knew well – into a role which, probably,
I would have struggled to get if I hadn’t gone with someone I knew. It was a
good role for me at the time. Tony Collier backed me to do a big job when I was
25. He taught me that sometimes you have to take a chance on people.”

Name: Richard Pennycook
Age: 40
Qualifications: FCA, BSc

2003-: Group finance director, RAC plc
2003: Group FD, HP Bulmer
2000-2002: CEO, Welcome Break
1998-2000: FD, Welcome Break
1998: Group FD, Laura Ashley
1995-1998: FD, JD Wetherspoon
1994: President, Allders International North American operations
1992-1993: FD Europe, Allders International
1990-1992: Group FC, Allders plc
1985-1990: Arthur Andersen
Other: Non-exec director, jj beano’s

Biggest challenge: Developing the finance team around me who
could succeed me and the FDs currently in post; it’s easier to do in a FTSE
business than a mid-cap, where you have to be lean and mean.

Biggest hassle: Compliance and bureaucracy.

Which company would you most like to be FD of: RAC plc. The
first time I met Andy Harrison, RAC’s chief executive, I said I would like to be
FD of RAC. So I am consistent.

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