In the second edition of our special CFO insight interviews in 2016, Finance Monthly spoke to Mark Evans, Chief Financial Officer of Telefonica UK. Telefonica UK owns the O2 brand, as well as giffgaff and a share of the Tesco Mobile joint venture. He talks to us about his role, O2’s customer retention, and predictions for business in 2016
How did 2015 treat O2?
The UK mobile market is one of the most competitive in the world – prices are typically the lowest in Europe and have fallen year after year for the last 10 years. It’s safe to say there aren’t many industries that have had that level of challenge to confront. At the same time mobile devices and the use of mobile technology are in increasing demand. Phones are being used as far more than just a phone – 2015 was the year that the smart phone became the most widely enabled internet device, surpassing laptops and tablets for accessing the internet. The demand from customers is increasing by more than 100% year on year. Not many other industries could follow that level of growth and appetite for services each year.
For O2, 2015 was a strong year. As a CFO I evaluate performance through 3 lenses. My philosophy is that if you do the right thing for the customers and employees, then the financials, ie. the shareholder interest, will follow.
The Customer Lens
We now have more than 25 million customers. Our base grew by more than 4% last year – we are the fastest growing operator in the UK. More customers are choosing O2, but more importantly when they do join they tend to stay. One of the measures we look at is “churn”, which is the rate at which customers leave our organisation. We’ve now achieved our lowest level of churn which is also the lowest in Europe. There’s no doubt that we do one or two things well and customers love that, but we are far from complacent and with 25 million customers of course within that scale of business we get a few things wrong. It’s important that we recognise this, acknowledge it, and use it to strengthen the business.
The Employee Lens
You might think that in a year where we are on the verge of finalising a deal with CK Hutchison the uncertainty would create a decline in employee engagement. In fact it has been the reverse. Our internal measure for employee brand engagement and passion has never been higher. When I spoke to some ratings agencies they were pleasantly surprised that our financial performance has strengthened in the year that we are going through a sale process, they expected the reverse. We look at it this way: If you are so proud of working for O2 and if this was the last year under the existing shareholder ownership, you would want to leave your mark and make it a truly successful year.
That has helped us secure Brand of the Year by the Marketing Society. We like to say that we are a brand that runs a business, not a business that runs a brand. We’re very proud of that too. We were fortunate enough this year to win by beating brands such as John Lewis, Google, and British Gas. The Marketing Society is not just a mobile award but a UK industry accreditation, and we cut across these industries to be nominated and won. This created a real excitement and pride internally, which is fundamentally important if we want to strengthen business performance.
The Shareholder Lens
You would expect me as CFO to be focused on our fiscal performance. Our customers and revenue both grew by 4% in 2015, although this may not sound exciting, in a tough market with growth at 1%, we’re pleased. Our profitability also grew, this time by 8%. We met our shareholder expectations in 2015, which only increases their appetite, so I think 2016 will be just as stretching and demanding. We typically make between £1 and £2 of profit per customer per month. Although we are a huge business, there really isn’t a big margin to play with so we have to get things right for the customer first time. If we don’t, profit can easily reverse.
We are a very capital intensive industry, and are spending £3 billion over the next 5 years investing in critical UK infrastructure. Briefing employees internally I explained this as the equivalent of building the Shard seven times. That is the level of investment we are putting into mobile communications in the UK.
2015 was a good year for O2 – we met shareholder expectations, we are leading the market financially even though it is extremely tough, and our employees have never been as engaged as they are. Finally, customer numbers speak for themselves – we have maintained the highest level of customer satisfaction in our industry for 7 years in a row. When customers join O2 they stay longer than any other mobile operator, which is why our base has grown to 25 million customers. All in all, a good year, but we can’t dwell – of course we need to look forward.
Are things on the up going into 2016?
Telefonica UK owns the O2 brand as well as giffgaff, and we have a share of the Tesco Mobile joint venture. The business – which encompasses those 3 elements – is underway in a sale process which is subject to regulatory clearance through the European Commission and is valued at £10.25 billion. Prospective buyer CK Hutchison own Three in the UK.
It’s imperative that we continue to operate in the same way that we always have irrespective of the transaction, by putting customers at the heart of O2 and launching innovative services. Legally it is our obligation to continue to compete with Three and every other competitor in the marketplace. The European commission may not approve the deal, we’re confident they will, but we need to operate as a standalone independent competitor in the mobile industry. An example to demonstrate this is our newest proposition which we call smart-home, which gives the ability to use a mobile device to control different elements in your home to make life easier, such as heating and security.
This demonstrates we are not standing still but continuing to bring innovation to the marketplace to ensure that O2 continues to get stronger and stronger. I think that smart-home is just one illustration of how we visualise future mobility. We believe that the mobile is more than just a phone – it’s rapidly becoming a remote control for life. It is the centre for digital mobility and we have a role in customers’ lives that is more than just connecting calls and texts.
One of the decisions we’ve taken over the recent years is to recognise that we need to help customers understand the possibilities of technology. How do we get the best out of our phones so they aid our lives? We have 700 gurus in our stores offering help for the public to make the very best of smartphones, tablets, or wearables. It is a free service that can be used at any time with any operator.
Another realisation we had at O2 is that technology is being adopted by younger and younger people. My daughter Jessica is 3 years old and knows how to use a tablet; tablets didn’t exist when I was 3, and I certainly wouldn’t have understood technology. We recognise that we have a responsibility to parents to provide the practical support and advice that they need to help their children utilise the technology but importantly to stay safe online. We have all read or heard of horror stories. We have just launched a partnership with the NSPCC at the end of 2015 which we will build on in 2016 to provide 1-on-1 expert technical advice to parents via a dedicated helpline. We will also run a number of interactive workshops which will be focused on workplaces across the UK and we will also use the same approach with schools up and down the country. 2016 is the year of a potential disposal, but notwithstanding that we are going to continue to forge ahead with new innovation.
The role of CFO is well positioned to drive cultural change within a company. What goals did you arrive with as CFO of O2?
A typical view of a CFO is that we are purely here to focus on the shareholders’ needs which I fundamentally disagree with. I joined O2 in 2012 having been in the mobile industry for a number of years. When I was with a competitor I looked across at O2 with some envy, because they were the brand that led the market and were more innovative and customer centric than any other. When I had the opportunity to join the business, my goal was simple. How do I as CFO help the organisation to continue to be brave, putting the customer at the heart of everything we do, but at the same time encourage my finance team to be as instrumental with the insight and the innovation as any other? My team produce finance reports and analysis, but this does not also mean that we shouldn’t contribute to the ideas, insight and the creativity in the business.
My objective when I joined was for the organisation to continue to believe in customer centricity and at the same time to encourage those that work within the finance area to contribute just as much as any other; to be as forthright with ideas as the marketing and sales functions. An example to bring this to light is that in 2013, O2 introduced a product called Refresh. It is a flexible contract which enables the customer to change their device whenever they want. The typical market product is that operators constrain you to a fixed-term minimum 2 year deal. Of course with the wonders of technology customers don’t usually want that. We introduced Refresh to enable customers to change their device whenever they choose. Equally, if a customer decides to keep a device for 2 years and has therefore paid for the device fully, their monthly charge should automatically reduce on the 2 year anniversary of the contract – often halving. Other operators were simply not doing that – you can imagine that CFOs might wince at the thought of automatic reduction of bills or the freedom to move. It was a bold initiative, but the flexibility and the transparency has actually helped us keep our customers longer. By giving them the freedom to leave, they have decided to stay and it has led to stronger customer loyalty to our business. Refresh was a concept that originated in the finance function which I am personally proud of. Just last year, we extended the proposition further – not only is it a flexible contract, but we now automatically replace the iPhone with the latest model available. We will swap out the old iPhone device for the new at no extra charge.
We are being true to putting customers first and giving them the services that they need. The payback for us is that customers stay longer and they use our services more. Refresh is a good example of the cultural change that we stand for at O2, as an organisation and as a function. Finance roles afford just as much opportunity to provide innovation and creativity in the organisation as any other.
O2 is so large – how is your chain of command set up, and how often do you work with its global branches?
O2 is a very big business: we have 25 million customers, operate 18,000 network sites, and we have a retail footprint that exceeds 400. Probably the most staggering metric is that we have billions of transactions each and every day – calls, texts, or data downloads. Providing that capability is a workforce of less than 7,000 people. It is a fairly small organisation serving a very broad customer base. We are focused and keen on keeping the structure of our organisation as flat as possible. This means that the voice of the customer is never far from the top of the organisation. The other reason we like this structure is that decisions can be taken swiftly, despite the scale. Our goal is always to try to make decisions as swiftly as we possibly can.
The O2 brand, alongside giffgaff and Tesco Mobile, are owned by Telefonica UK. Telefonica UK is owned by the global Telefonica business which is listed on the Spanish stock market. Telefonica has 4 very large businesses across the world – Germany, Spain, Brazil, and the UK, but they also cover virtually every country in Latin America as well. That gives Telefonica quite a coverage, certainly across Europe and South America. The group meets once a month and each of the 4 major operators are part of the group management structure. The CEO of the UK attends that session each month, giving us opportunity to learn from best practice across the globe and bring it back to the UK. We can leverage learning and new findings across the globe by being part of the Telefonica brand.
Looking forward into 2016, what do you anticipate for your role and for O2?
The mobile industry is dynamic, innovative, and can change the way we live our lives. Our role at O2 is to help customers access and make the most of technology.
Our main messages:
- I believe that as a CFO, I should prioritise customers and employees just as highly as shareholders.
- Mobile and digital technology is transformative – we can see the way it impacts our lives with things like Airbnb and Uber. We are just scratching the surface with the possibilities of technology. It’s an incredibly exciting industry.
- You can also use that technology to be a disruptive but constructive force based on how we organise ourselves internally by transforming business models and serving customers in a fundamentally different way.
I will continue in my role as Telefonica CFO and as chair of giffgaff and Tesco Mobile. I believe that 2016 will be an exciting and action packed year for us. Watch this space.
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