Direct Line to Send 2,000 to Unemployment Line

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According to Direct Line (LSE:DLG) there are soon going to be nearly 2,000 red telephones on desks with  with no one to answer them.  Although the company bid farewell to several hundred employees in 2012, yesterday they announced another round of cost-reduction cuts that will send up to 2,000 more office and support staff directly to the unemployment line.

If you recall, within the past 12 months Direct Line has come out from the corporate umbrella of the Royal Bank of Scotland in a move by the bank to shed non-core assets, and Direct Line was floated on the LSE in the Nonlife Insurance sector in October.  The IPO proved to be successful, especially when measured by the performance of the share price over the ensuing nine months.  It floated at 181.00.  Today it is above 229.00.

The divestiture from RBS was part of the bank’s overall restructuring plan to being itself back into regulatory compliance after the 2008 banking crisis.  That being said, the implication – and correctly so – is a) that the insurance business does not fit the core banking business, and b) that Direct Line had been more of an liability than an asset to the bank.  Continuing that assumption, one comes to the realization that Direct Line was a company in need of a cure.    One analyst observed yesterday that “Direct Line was very unprofitable for many years, part of the upside of the IPO was that they were going to restructure the organisation.”   Smart investors were not looking at Direct Line for a way to make a quick buck.  They understood the situation, realizing that, when the company got its act together, it should become a long-term, higher profit-generating entity with the company hoping to achieve its goal of 15% Return on Tangible Equity.

Paul Geddes, Direct Line’s CEO, indicated just how inefficient the company had become whilst operating as part of the RBS system.  He said, “While we continue to invest in the business with the aim of winning in a market which is changing fast, it’s clear that we need to become more efficient to deliver the good service and value our customers expect.”

When 2,000 more employees have to begin wondering from whence their next paycheck will come, the move clearly indicates a previous presence of a “fat cat mentality” and/or a failure to move into the 21st century along with the rest of us.  Whilst my heart goes out to the 2,000 individuals, many of whose lives will be changed forever, it is likely that, had Direct Line not been willing to be gut-wrenchingly honest with itself and its need to radically change, 14,000 people could have lost their jobs.  From that perspective, perhaps the headlines should read:  “Direct Line Moves to Save Over 12,000 Jobs.”

I have never relished announcing job cuts and plant closures, which I have had to do several times.  The fact is that it tore me to pieces to have to tell people, many of whom were more than employees to me – they were friends – that they no longer had a job.  It has been the most distasteful thing, I think, that I have ever had to do.

So I empathize with Mr. Geddes, understanding that the cost will seem much too excessive and much too personal for some.  I understand how he feels when he says, “This is another step in the ongoing transformation of Direct Line Group and an important part of our aim to regain competitive edge.  We have not made these proposed changes lightly and understand the impact they will have on our people. As we have done in the past, we will deal fairly and carefully with those impacted, and do all we can to support them through these changes.”

Shareholders and investors apparently understand and agree with the Direct Line strategy.  DLG’s share price rose 10.0, a factor of 4.56%, to 229.1 by midday.

For previous ADVFN reports on Direct Line, see “RBS Unveils Direct Line IPO,” “Direct Line is Off and Running,” “Six Clues About the Direct Line IPO,” “Long-term Forecast on Direct Line Group,” and “Timeline for Direct Line IPO.”

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