The story of USAA, a liberated mutual to better serve the army

Written by Sarah Spitz, on 16 May 2019

USAA was founded in 1922 by 25 army officers who wanted to provide insurance policies tailored to military personnel, who had specific mobility and risk profiles. Forty years later, the United Services Automobile Association, focused on this niche, was not in good health: turnover reached 41% compared to 8% in the entire insurance sector at the time, policyholders complained about customer service, and many of them stayed solely because of low prices. However, this was before its new director, Robert McDermott, stepped in.

A bureaucratic and inefficient company with poor service

In 1968, Robert McDermott took over the helm of this organization of 3,000 people. This former Air Force pilot and World War II veteran was determined to reverse the trend. He quickly noticed excessive controls and bureaucratic habits that were hindering operations. To say the least: adding a child to an insurance policy required 55 different operations. Even the size of pencils was controlled: a new pencil could only be requested if the current one was less than 3cm long! Yet, document management was poor. Stacks of paper were scattered everywhere, and they frequently hired students looking to make extra money to roam the offices at night and find lost files...

Every office in the building was covered in piles of paper - files, reports, contracts, letters. You can't imagine how much there was. Piles, packs, bins, baskets full of paper. And of course, much of it got lost. Any day of the year, you had a 50-50 chance of laying hands on any given file. - Robert McDermott

Departments, entangled in territorial and ego-driven dynamics, communicated very little. The actuarial department didn't talk to underwriting, and claims didn't talk to either.

New priorities: training and autonomy

McDermott was determined to get rid of all these constraints to focus on one thing: service quality.

His first action was to reduce the workforce, without firing anyone. This wasn't difficult with a 41% turnover, especially since many of them were scared when he took office and started talking about change. For less performing employees who didn't want to resign, he transferred them to lower positions (at a fixed salary), which prompted them to leave quickly. To improve management performance and efficiency overall, McDermott hired a team of 14 independent experts to audit the company and root out inefficiencies.

Based on this new foundation, he launched a vast empowerment initiative (long before the term was in vogue). Up to 16 weeks of training were provided before any agent could take their first call. The goal was to enable them to make decisions themselves to reduce controls and speed up processes. Thus, if you visited their offices any day of the year, you would find a third of the employees in training with one of the 211 full-time trainers. 75 classrooms were available, with teachers from six regional universities who would come in the evenings to teach. He also funded higher education tuition for agents (provided they scored 10/20 for their bachelor's degree, 14/20 for their Master's). In 1991, training accounted for a $19 million budget, representing 2.7% of its annual budget. Twice the industry average.

All this training inevitably led to internal mobility desires among agents to explore other areas or gain more responsibility. USAA strongly encouraged this: every year, 45% of employees received a promotion, and 50% changed jobs.

We want people who know what other departments do, we want our managers to have the broadest knowledge of the company, and we want to fill key positions quickly. - Robert McDermott

Then, McDermott decentralized by giving autonomy to call center employees to serve the customer more quickly and directly. Thus, any agent now had the right to modify a contract while still on the phone with the client.

Customer service, at the heart of USAA's culture and new practices

If McDermott did everything he did, it was to better serve his customers. Not to make money, not to be modern, not to make his employees happy. For example, during the Gulf War, policyholders who went to war were encouraged to downgrade their auto insurance contracts to save money. Similarly, USAA opened life insurance policies for soldiers just called to serve during Operation Desert Storm, and a hotline was set up to better serve the families of the deceased with administrative formalities.

Service quality is explained by a strong internal military culture, aligned with the culture of the customers: the majority of employees are military spouses, and 8 of the 11 managers who worked directly alongside McDermott were former military personnel. After all, who knows the needs of a military member better than a military spouse?

When they were deployed, we were deployed. That's how we see our mission. We insure combat pilots and tank commanders. We sell life insurance to astronauts. We insured those guys when they went to the Moon. - Robert McDermott

But the most astonishing thing about all this is that this military culture is by no means incompatible with the liberation of the company. The dress code is strict, and it is USAA's military heritage that means some privileges have not been removed: the management offices remained luxurious and inaccessible, for example. It was even the Air Force that inspired McDermott with most of his ideas: it was from there that his attention to workplace well-being came, which is, for him, as essential as the morale of troops in combat. In fact, he implemented the four-day workweek, and the premises include tennis and softball courts, jogging tracks, three artificial lakes... It's from the military, and more specifically from Truman (who ended segregation in the military) that he also drew the idea of a real diversity policy, as well as the desire to rely on trained, versatile employees who can quickly change environments, like a soldier who suddenly has to leave his military base in Texas to fight in Japan.

Outcome of this transformation, 25 years later

Robert McDermott spent 25 years at the helm of USAA. Of course, he also implemented other very successful actions, such as the automation of many tasks through the implementation of an electronic imaging system (I remind you that we are in the 1970s...) and adding children and grandchildren to contracts to increase the customer base. When he left in 1991, the success of his model was undeniable. The company's assets and managed funds increased from $200 million to $20 billion, while the number of employees grew from 2,600 to 14,000 scattered across 75 branches and subsidiaries, making USAA the second-largest employer in San Antonio. As market penetration skyrocketed (95% of officers on duty were insured by USAA in 1991, compared to 75% in 1968), the service offering was greatly diversified to reduce its financial dependence on military insurance and thus on the broader military budget: credit cards, banking services, real estate investments, travel agency services were offered to all types of customers.

In 1987, Ernst & Young surveyed 154 CEOs about their priorities. Profits came at the top of the list, with growth not far behind. Service came in 11th place. But I argue that because service comes first at USAA, our profits and growth have been as good as they are. - Robert McDermott

In 1995, Money magazine voted USAA the best bank in America for the quality of its financial services. Without advertising: business was conducted over the phone, and USAA never went through an independent broker network.