Monday, August 21, 2006

Safaricom Success



Mr. Michael Joseph, the Safaricom CEO, gave a talk over the weekend on leadership and the successful transformation of the company from a moribund department of a dying parastatal (Telkom Kenya) to arguably Kenya’s most successful company. The Q&A session also brought out more candid answers particularly on challenges he and the company faced as well as the performance of its competitors. And since Safaricom is not (yet) a public company, this is perhaps the closest thing to an AGM of shareholders for the company until 2009.


Safaricom CEO, Michael Joseph


The Beginning
The Company started in 2000. Vodafone (40%) put in $20 million while Telkom (Government of Kenya) who were supposed to chip in with $30 million, didn’t put down any cash, giving only their dilapidated network infrastructure and 17,000 existing, and angry, customers. The company had 5 employees led by the CEO who had done a similar start-up in Hungary. However three days after the company launched its network collapsed, damaging its reputation for network quality.

Today
Safaricom’s revenue is comparable to East African Breweries and Kenya Airways. It is several times larger than its competitor, has 900 employees and 4.6 million subscribers (the company also envisions Kenya as having 16 million potential subscribers).It has invested 55 billion shillings, all internally generated, constructing its network, which now covers about 20% of the geography of the country.

Success factors
Safaricom made several key decisions early on, but was helped by the collapse of Telkom landlines and, in hindsight, some blunders by Kencell (now Celtel) which launched around the same time and which initially had a larger subscriber base in the early years. These include:

- Focus on prepaid customers The company felt that in a country without a strong credit background industry, consumers would only spend what they had. Also the CEO felt that they would need these mass-market subscribers to support corporate customers who were more lucrative. Today they have 90% of the corporate market, which Kencell set out to target initially.
- Billing per second for calls while Kencell billed per minute. Safaricom sacrificed about 20% to 40% revenue per call but again, it won more customers who preferred to only pay exactly for airtime they used. There was much debate about which method was superior, but ultimately Safaricom won out
- Having great customer service which was free and available 24 hours a day. While customer service is only paid lip service in Kenya he felt this would be important as consumers ventured into the new mobile phone industry. Meanwhile, Kencell’s customer service was available only during working hours and was not free. The CEO knows it is difficult to get through to customer service but that’s because the company gets an average of 25,000 calls a day sometimes double. Yet 95% of these calls are simple, how-to questions (e.g. send SMS, change tariff) everyday questions, answers to which are found in phone brochures.

Marketing
Even though the company is 40% UK owned, all their products and advertisements cultivate a Kenyan image utilizing the beauty of the Kenyan landscape and Swahili words (sambaza, bamba etc.) to reinforce how Kenyan the company is.



CEO was very dismissive of Celtel (a pan- African company) advertisements whose adverts have nothing Kenyan about them and faults their marketing strategy for assuming all Africans are homogeneous. Earlier, Kencell also introduced (French) Sagem phones to Kenya, which no one had heard of while Safaricom used Motorola and Siemens as their basic phone models.

Competition
Safaricom’s average revenue per user (ARPU) is 2 X Celtel’s and has not dropped in three years even as subscribers have more than doubled, leading the CEO to conclude that most Celtel customers are primarily Safaricom customers. Even though the company has network difficulty in some places e.g. industrial area, Safaricom has never shaken the impression, wrong he feels, that Celtel has a better network or clearer calls. He also says Celtel has a very high cost structure since they have ½ the revenue but only 1/10 of operating profit before finance charges.
- The CEO is not worried about competition from CDMA wireless as long as it is in the hands of Telkom Kenya which is still a bloated giant (17,000 employees servicing 240,000 customers)
- He is also not worried about 3rd or other mobile operators, or new service providers, but accepts that they will change the industry

Financing
The first time the company took on a loan, conditions were very stringent and the loan could have been recalled e.g. if cash flow dipped. But the second time they went borrowing (12 billion for network expansion) the company was so established, they were able to dictate terms to the banks. They borrowed at 1% above the T-bill rate while also retiring old debt. He also said Kencell (Celtel) had much higher finance charges since they had borrowed and were still paying back an expensive foreign currency loan from their then parent company (Vivendi.)

Other
Peculiar Kenyan call habits: CEO denies he ever made this infamous statement attributed to him. However he admiited he doesn’t understand why phone traffic between 8:00 p.m. & 8:40 p.m. on week nights is four times higher than normal, even though cheaper call rates are also available on weekends and at other times during the day.
Gift of gab: The most profitable call sites in Kenya are Garissa and Mandera. Safaricom has also set up call sites to meet high demand at remote refugee outposts such as Kakuma and Dadaab. Kenyans are also high users of text messages (next to Philippines) while Nairobi has the highest density of mobile calls in the day time (higher than New York) partly because landlines are poor.
Social responsibility: The company spends 200 million shillings a year on corporate social responsibility projects through its foundation and its biggest sponsorship will be the 2007 Mombasa cross country ($250,000).
Recruitment: Safaricom only employs graduates, yet somehow 70% of them fail a pre-employment test the company administers. They are now recruiting overseas and the average age of employees is 24 (seems young).
Premium rate services: CEO hates these companies who run promotions that charge 20 and 50 shillings above normal Safaricom rates. He has to let some of them use his network, by law, but makes it as expensive as possible for them to do so
Bad stats: When the company launched, it found that most of the government statistics on income, expenditure, and population were, and still are, wrong as shown by the number of subscribers the company has.
Honesty and integrity are the best virtues he has learnt to have on his job. This has enabled him to perform his job and shielded him from unreasonable requests/offers from politicians and business people and if there had even been a whiff of anything less, he would have been asked to compromise himself or the company.
Next CEO: He’s reluctant to retire even though he knows its inevitable. His last contract was renewed, after a long battle between forces from Central and Western Kenya who each wanted their own candidate, but were unable to agree, leaving him as the comprise candidate. He will prepare for retirement by stepping back as the face and spokesman of Safaricom slowly and we will soon see other senior managers at the company take on more public role in the future.

Future
- CEO wants the industry measure and focus to change from ARPU to ARPU margins
- Call costs will come down and there will be more price completion (perhaps even 5/= per call) as new competitors and technology become factors down. He expects Safaricom profits to drop from next year and may have to start cutting costs to stay competitive.
- Safaricom will have a new big product by year-end, which will change our lives. The company will also add a new tariff this year

Safaricom IPO
IPO was planned to happen this year, but the Cabinet rejected the proposal until Telkom is first privatised. The reason is that Safaricom is Telkom’s only valuable asset, and they did not wan to diminish Telkom’s IPO value and prospects. So the 25% sale will be in2008 and will be bigger than Kengen’s, by far, according to the CEO.

35 comments:

Davis said...

Safaricom should carry out a survey from its clients on their peculiar calling habits between 8.00 - 9.00 PM. Am sure most of the guys are not aware of other off peak times during the day. By 8.00 PM, they are all trying to call - been starved the whole day to make a cheap call.

Anonymous said...

sorry guys to include another topic, but was just wondering if i missed the scangroup announcement of their allotment on the 18th
thanks

Anonymous said...

Interesting as always. Any other way to make donations to your site if one's in Kenya without compromising my anonymity? Anonymous donations perhaps?

Ms K said...

Brilliant write-up Banks. Any idea what this big product is?

Anonymous said...

Very comprehensive, Thanks. You mean there is off peak during the day apart from before 8am and after 6pm? tell me. L.

Jakarumba said...

I think it is unfair to have it as a policy that they employ only graduates whereas wee know that there are certain professional qualifications which are more advanced than degrees.
Furthermore you find that someone has a degree simply because he can afoord parallel programme of private university.
I can't wait for their IPO!!

mwasjd said...

I saw the poster at work, but thought it would be just another career talk. Turns out it was mor of an investor brief. Talk about missed opportunity (though not entirely thanks to you banks)

As for the peculiar thing, MJ's statement of denial sounds something like one american president's statement: "I did not .... with that woman" You can't escape the truth!

We can only wait for the price drop, and as for the killer app, I can only guess it has something to do with getting more revenue out of Kenyan pockets. IPO, we'll all be hoping...

Jakarumba said...

Mwasjd, it was at the Leaders Forum. You can join for 3k.

bankelele said...

Davis: They have quite a bit of data, but maybe a survey can tell them why calls like that happen

Ms K: Thanks, no idea yet

Anonymous:
- Scangroup annoucnment moved to Wednesday
- also try e-mail
- there's a tariff (safari I think) with 11/= calls starting at 6PM

Jakarumba: I guess the company wants to weed out applications

Mwasjd: He talked leadership, I lifted the financial stuff. He was quite clear, that he never said that

Jakarumba said...

Banks, any 411 on Eveready IPO. All I know is that its in October.

Anonymous said...

How does one join THE LEADERS FORUM. I'm seriously interested. Thanks

Jakarumba said...

Anonymous, please visit British Council with your personal details and 3K. Am joining this weekend.

mwasjd said...

banks: just google safaricom + peculiar, you'll find links for standard & nation which picked up the vibe about peculiar. Still cool that you picked up the financial vibe

coldtusker said...

The cabinet is making another gargantuan mistake by not listing Safaricom!

Delinking Safaricom & Telkom will allow Telkom to make the harsh decisions necessary to survive otherwise it will die a slow & miserable death.

If Telkom had been privatised 4 years ago, it would have been a huge boost to Kenya's economy.

I have to say that Kirui is certainly trying to upgrade Telkom's network as well as roll out new services.

Safaricom's value is in its shares i.e. go public & let Telkom use the (substantial)proceeds to retrench the workers, pay off old debts & invest in a stronger network!

Oh, PLEASE set up an oversight committee staffed by the private sector, KACC & IFC to ensure the funds are not misused!

aJamaa said...

Thanks for taking the time and effort to put this post together. I wonder if anyone in business school has undertaken a research project on the continued rise of Safaricom. It would definately make for better reading.

I am not convinced that Safaricom's network is comparable to Celtel in terms of geographic distribution. I have been to parts of Kissi and Nandi (Tinderet) where my Safaricom line could barely get a signal while the Celtel guys were having a ball.

I keep wondering if Safaricom's success is attributable to good management or poor competition?

coldtusker said...

I propose that Vodaphone should get control over who is appointed the MD & FD!

I like the KQ arrangement which has seen a Kenyan CEO (Titus Naikuni) chosen for his ABILITY not whose he is cousin or political party he supports!

KQ has grown from strength to strength under the KLM arrangement as has Safaricom under Vodaphone.

Look at how government interference can screw up firms like EAPCC & Uchumi!

Anonymous said...

safaricom's success and cellphone success in africa can be attributed to one thing.

the land lines don't work!

that's why cellphone companies are doing well all across africa.

bankelele said...

Jakarumba: Not too keen on Eveready, coldtusker has written on it recently

Jakarumba: Yes its through the British Council, next forum in September will have PS Joyce Nyamweya

Mwasjd: There seem to be online references to the comment, not when he actualy said it (something he vehemently denies)

coldtusker: I'm afraid if that even after a Telkom IPO they may still be reluctant to hive off any Safariom shares (diminishing Telkom's value). No stomach for harsh decisions especialy with elections looming. I think foreign companies will continue to use the KQ model in future partnerships with the Kenya govt

aJamaa: CEO admitted as much that poor competition aided safaricom. I agree many people in some rural areas have better Celtel than Safaricom service, and you'll find villages where people primarily have Celtel lines

The Speculator said...

Hi Bankelele,

I came across this very informative and useful Blog which is very useful for Kenyan investors. I have a keen interest in the NSE and am learning the stock market here.

Keep up the good work.

Anonymous said...

As for the bad mouthing of Telkom by safaricom CEO, I can only say watch this space! We know vodafone has been forced to wind up elsewhere this will not be the first time they may be doing it

Anonymous said...

Like it or Hate it,Telkom is like the City Council, will always be there..for it has too many tentacles and deep roots including 60%"ownership" of Michael Joseph's Safaricom "empire" and can easily turn tables by bringing it back to the fold under what is being called a unified licence that does not care what is fixed, mobile or internet.

Anonymous said...

If safaricom is that good how come i pay dearly to make calls in its network. it has a lot to thank telkom about. very soon they will be non- performers

Anonymous said...

Oooh! This is how to 'appreciate'the opportunity the parent[TELKOM]allowed the child to develop and grow up-Ready network-masts;staff;good-will etc.Celtel/kencell on the other hand was struggling with masts and GOvern..bureacracy licence etc.Remember the story of the camel and owner in the hot desert.Again there is an african tale that someones parent sat out and was without clothes .the CHILD called the world and said look my naked parent it is funnny!Hahahaaa..

Anonymous said...

MJ is such a big liar how can he claim that he started safaricom with 9 members of staff while he knows very well that the people he started with were all telkom staff or is he counting only the expatriates.Who did,the donkey work for them ? what about the masts and the swicthing equipment for interconnection with other networks.This guy is not honest the way i thought he was . If anything he is just too arrogant the way his critics have been claiming.

Anonymous said...

MJ is such a big liar how can he claim that he started safaricom with 9 members of staff while he knows very well that the people he started with were all telkom staff or is he counting only the expatriates.Who did,the donkey work for them ? what about the masts and the swicthing equipment for interconnection with other networks.This guy is not honest the way i thought he was . If anything he is just too arrogant the way his critics have been claiming.

Anonymous said...

Pride preceeds a big fall- not that i wish Mike a fall with a thud - so the guy must get down to work and stop mouthing. There is alot happening at Telkom and soon it will all come out. Believe you me the next success story will be....... you guessed right TELKOM

JK said...

It is good to always appreciate and acknowledge what others did before the arrival of MJ. I don't suppose that the CEO really knows where the brand name 'Safaricom' came from.
As you celebrate your success please acknowledge the foundations laid by the 'forefathers'

Anonymous said...

Mj Sense of doing well might have gotten into his head how can he can he rubbish every thing Kenyan from the Government,Kenyan graduates and remeber the peculiar Kenyan calling habits.And for all this he gives us a network whose
clients dare not use because of the costs.Isn't it strange indeed to find people holding their mobiles and queing to place a call on the coinboxes.I hope that one of this days the government will actually license a Network who will
compete with Safaricom on equal terms and give us good value for our scarce resourses.

coldtusker said...

MJ's or Safaricom's acheivements are great BUT there should be another network coz the call charges are horrendous!

I have to say that Safaricom was destined for the dustbin until MJ came along! I remember when everyone wanted KenCell not Safaricom when they started off... 3 years later it was Safaricom that was king!

If the government had not dithered & favoured Telkom with 60% of Safaricom, Telkom would be deader than a dodo!

Note that Telkom put no cash into the deal coz their "license" was their "entry pass"...

E-Nyce said...

I really wish we could get some Sijuicom official to step up and explain their recruitment processes. Sorry, the hiring of only graduates is pure BS, as their own statistics tell them.

How much investment do they make in training programs, in order to grow their own competent staff? We all know the answer: None. So why not?

Also, has Sijuicom ever formally (seriously) explained the nonsense of recruiting Kenyans in UK & US? I think Steve tried to get a straight answer from someone and was foiled. The scam obviously didn't work. I guess they thought KTs so stupid that they would work for Kenyan wages.

Anonymous said...

fine saf com made money,thats a good thing but i hear and know for a fact that their representatives in customer care are the least paid in the industry,celtel hiked salos,so as a company i find their strategy at cost cutting ingenius though harsh on the customer care people

sir said...

Why is it that the guys responsible for MPESA have not achieved privacy of clients details. This is because guys are able to retrieve client details Like Names...What do you plan to do or you don't have any ideas....

Anonymous said...

Safaricom is a story of typical corporate exploitation of a amrket which lacks exposure in terms of quality of service. I don't think there exists any other telecom company anywhere in the world which treats its customers even half as bad as Safaricom. Long queses in the retail outlets, call centers that offer pathetic service - best don't call them; staff that is extremely arrogant and dumb. You have to meet their Chief of Customer Services - Pauline, she is one of the dumbest person in customer services anywhere in the world !!

Anonymous said...

Safaricom is a big rip off... Kenyans wake up you have been brainwashed into thinking that expensive is always best well think again. Now we have YU and Orange as the better options.

And KUDOS to YU for their excellent customer service.

I recommend YU to anyone who has an ear (Try it and you will not regret it).

To YU all you have to do now is increase your network coverage and the rest will be history. I see a brighter future in YU.

RGDS.

Irrate Safaricom Customer.

Anonymous said...

honestly safaricom has become too too expensive.i'd rather zain cozx they smart.they have targeted the youth and safcom should emulate that!!

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