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.