Briefing: Financial versus market orientation – why ebitda can be a cruel mistress for brokers

Over a decade ago, I borrowed an eye-watering sum of money from the bank to fund an internal acquisition. It was such a horrendously large figure that even key person insurance would not provide enough indemnity to cover the full cost of repayment.

This transaction marked a professional fork in the road for me.

Up until that point, I had been what I will term a ‘market orientated’ guy. An insurance geek whose focus was on insurance related matters, such as getting and retaining clients, marketing, battling to improve the claims function, negotiating reinsurance and product design. Simple and honest stuff.

But, almost overnight, a word that carries a whispered Lord Voldemort style dark reverence suddenly slipped into my lexicon. That word was ebitda, referring to a business’ earnings before interest, taxes, depreciation and amortisation.

Suddenly, there was an aspect of financial oversight added to everything we did as a business.

I have always described myself as a ‘build it and they will come’ type, relying on an optimistic instinct founded in subject matter expertise, curiosity and, frankly, hope. An almost unteachable alchemy that comes from understanding market sentiment and knowing what will resonate with customers.

Then – following the internal M&A – along came ebitda, announcing that it was here to ‘keep us honest’. Which, to be fair, is the point.

When you have borrowed a lot of money or when you are planning to sell a company, you cannot live on good vibes and hope alone. Ebitda aims to cut through the noise of broker chatter around sentiment and timing and promises of a better tomorrow, to land at a sensible determination of today’s position.

So far, so reasonable.

The problem is that once this devil is invited to your dinner table, it does not disappear afterwards. Having done the pact to sell your soul, suddenly you have to tolerate its presence.

And this is where my big beef begins.

Financial versus market focus

Ebitda is not merely a metric – it has become a mindset and it is one that has seemingly captured our industry. And that mindset, if you let it run riot, rewards short-termism.

A downturn in financial results demands an “ebitda bridge” to rectify it, which usually means sacrificing medium to long-term capabilities and investments for immediate recognition and gain. And that’s where a lot of companies get stuck. They become ‘financially orientated’ as opposed to ‘market orientated’. This is a trap that is hard to escape.

Soon enough, financially orientated organisations begin to behave like someone who has discovered calorie counting. At first, they lose a little weight using this method and feel pleased. But there is a risk that they might become obsessive about their weight loss journey – stopping eating anything enjoyable, losing muscle and potentially collapsing at the first sign of exertion.

And that is what happens to a business that becomes purely financially orientated.

It can look fantastic for a while. Leaner, possibly sharper and doubtless more disciplined. But beneath the surface, it is hollowing out the very thing that made it a viable acquisition target in the first place – its relationship with the market, its delivery of the activites that fuel growth and the cultural components that can make a company truly great.

Financial orientation stymies creativity and true purpose. This mindset is not building new tracks – it is reliant on squeezing as much as possible from the current setup.

You can only cut certain costs once. You can only centralise, outsource, downsize and ‘synergise’ so much before all you have left is a logo, a finance function and – eventually – a shrinking customer base.

Market orientation, meanwhile, is the discipline of staying close to your customers, investing in capabilities they will value and having the courage to do things that do not pay off immediately, but will matter later. It is about creating an organisation that can feel the mood of the market in its bones because it is actively listening.

Beyond the numbers

This is where the general insurance industry is arguably at a crossroads.

Obviously, we do need financial discipline. In insurance, we cannot bluff our way through as livelihoods depend on our products and services.

But my plea to the industry is to view insurance not just as a financial machine.

It is a promise making business that is sustained by trust, reputation, service and product relevance. It is manned by people who care and led by those who understand UK general insurance beyond what can be measured in a quarterly pack.

In my experience, those that live by spreadsheets alone know the price of everything and the value of nothing. Insurance is a fabulous industry, so love it for what it is and does – not simply from what can be earned from it.

Because sustainability does not come from ebitda maximisation. It comes from market orientation. From building something worth buying, worth renewing and worth stakeholders sticking with.

And if we get that bit right, ebitda will usually take care of itself.