From remarkable customer leadership to conventional utility at O2
02’s Customer Plan is one of the most vivid examples of a Moment of Belief we’ve discovered in our research. The idea that a mobile company would invest hundreds of millions of pounds to give existing customers the best deal was revolutionary.
Unusually for a company that became an outstanding customer-led success, 02 started life as part of a nationalised industry - the UK’s British Telecom. In 1984 it was privatised and as the potential for mobile telephony emerged, Cellnet was created - a 60:40 joint venture between ВТ and Securicor, a business with a background in security services.
The mobile market was initially limited in appeal, with high costs and large handsets that needed big batteries or a connection to a car. Cellnet and Vodafone, both quite technical and business orientated, led the UK market. In the early 1990s, consumer branding overhauled the sector, first with One-to-One (later taken over and rebranded Т-Mobile) and then Orange. Independent distributors like Carphone Warehouse and Phones4U became winners through smart trading, an understanding of brand, of tactical marketing and a wave of consolidation.
Growth was rapid but not for the incumbents who were seen as old- fashioned and uncool. Cellnet’s customer base was business orientated, and its consumer customers tended to be older and low value. In 1999, ВТ bought out Securicor’s share, and in 2002, Cellnet was spun off from ВТ completely. At this stage the view in the mobile telephony sector was that Cellnet was close to being worthless, known for ‘glovebox’ customers - people who kept a switched off handset in their car’s glovebox just in case their car broke down.
This was the first stage of 02’s customer-led journey and their burningness was pain - they were out of business unless they acted very boldly indeed. The team had been together for a while, and they felt they had something to prove personally too.
The management had a very clear, basic customer challenge. They needed to find a way of attracting high-value consumers and this meant young people for whom the mobile phone was becoming an essential part of life - they used texting as much as calling to stay connected to their social group. Recognising the need for complete reinvention, Cellnet rebranded as 02 - the oxygen you need for modern life, where heavy users would rather be without their wallet or keys than their phone.
02’s early years were successful as it employed some of the best marketing talent to build a dynamic, youthful and appealing brand. It made bold decisions, such as sponsoring the edgy TV programme Big Brother, which was controversial but loved by the customers it needed.
Initially, it had a following wind. The Orange brand had vacated its position as an early customer-led pioneer following acquisitions that took it from entrepreneurial Hutchison to ex-state-owned France Telecom. The market was also fast-growing with room for competitors to have some success by taking different paths.
The customer base changed and grew but the market was maturing. As competition intensified, the industry was not in a good place. The whole sector was set up in an inside-out way - the convention was that the critical growth metrics were customer numbers and average revenue per customer, leading to a continual fight to acquire new customers in ‘tricksy’ ways. This approach relied on the hope that tempting offers would attract new people and grow share, and then when their introductory discounts expired, their inertia would stop most of them cancelling their contracts, a point at which revenue from each of them would increase and they would become profitable.
By 2004, it became clear that the market and 02 had issues. Profitability was falling as this intense competition spiralled. Existing customers woke up to the way the market favoured switching, and there was increasing resentment that unless they left, or threatened to leave, which prompted their existing network to give them a much better deal, they were taken advantage of. 02’s leadership needed to react.
In 2004, Matthew Key was promoted from CFO to CEO. He was an accomplished strategic thinker who had been an integral part of the 02 success story. The shift in role allowed him to take a broader perspective and a longer-term view across the years he was going to be in charge. Among others he could rely on was Cath Keers, 02’s CMO with a background in customer service, marketing and sales. She naturally cared about customers and spent considerable time at the front line to stay connected to what was really going on. Mark Stansfeld was 02’s commercial director responsible for sales. He was open to customer-led thinking, not focused on price as would have been common with most of his peer group at the time.
This was a difficult period. Key and his senior team needed to develop their strategy and it was clear that more of the same was going to lead to diminishing returns at best. Previously profitable customers on long-term contracts were leaving at the rate of 25-30% a year and more and more had to be spent to attract people to replace them. Margins were falling while independent retailers who sold multiple networks were getting showered with money in a zero-sum game to buy customers’ choices, making their owners very wealthy in the process. 02’s own call centres were multiplying as existing customers called not just with problems but also when they renewed, playing a game to get the offers they knew were at the discretion of the people they spoke to.
Costs to attract, retain and run the business were spiralling with the customer bucket full of leaks. Burningness had returned in the form of increasing pain and a growing fear that this just wasn’t sustainable. As a contemporary described it:
Cath Keers personally championed the customer-centric agenda. She had a belief that doing the right thing for customers would win out.
She had ambition for the business and wanted the brand to do something meaningful. She was also not fearful of having a go.3
She initiated work on what became called the Customer Plan, a central plank of the leadership team’s turnaround strategy. Instead of focusing on new customers, it proposed that 02 would put existing customers at the front and centre of their priorities. This would end the practice of giving new customers better deals than those already with 02. However, in order to keep customers in the face of the competition, it would mean giving the entire customer base a better deal. The only way this might work would be if retention rates stepped up and customers became happy to have a more positive, trusting relationship with 02, buying more from the brand instead of counting down the days until they were free to leave.
This was a true Moment of Belief. The cost of taking this step would be huge and immediate, estimated at around £150 million. (In practice, it turned out to be more like £250 million!) The benefits would only be visible in time, and no one knew for sure whether they would materialise.
To pay for this plan, another big decision was made - to stop work on technology where 02’s aim was to compete with hardware and software businesses. Instead, they invested in a range of things that existing customers valued - prices that were fair and reasonable, new stores, better call centres and a better digital customer experience.
The period when the plan was developed and debated was considerable and the timing in some ways fortunate, as CEO Matthew Key was in a position to apply his judgement as well as knowing the numbers inside out. The market model was broken, and it was worth betting on changing it; in the medium term it should help 02 outperform. This move was also in line with the values of the kind of business he said he wanted to run - putting customers first. After a month of debating the plans, they were eventually signed off by the pic board but with the clear expectation that either this worked, or the senior team would be looking for new jobs.
The boldness came from three kinds of burningness:
- • Fear of the future and the competition, making it clear that change (or failure) would be inevitable at some point, as shown by the numbers.
- • Ambition of one kind, closer to Tesco’s determination to beat Sainsbury’s, in this case fuelled by the success of the indirect distributors in the market, Carphone Warehouse and Phones4U, whose owners were doing very well; 02 wanted to grow its own direct business alongside them.
• Ambition of another kind, for customers, seeing the potential in investing in what customers really valued, rather than trying to push them towards a mobile network’s bottom line.
Once the decision was taken, there was a lot to do. Beyond identifying the headline areas that mattered, the 02 team executed brilliantly. The customer experience mattered, with carefully designed customer journeys and attention paid to the touch-points that mattered most; call centres and stores hired differently - people were selected because they displayed the values and attitudes that fitted with 02’s beliefs. This meant they could be given more freedom and broadly asked to do the right thing for the customers they served. The underlying holistic approach was that ‘it only works when it all works.’
Having embraced the direction and made the investment, there was an anxious wait to see whether it would pay off. In practice, it worked far more quickly and decisively than anyone imagined. Four months in, surveys showed 02 leaping from the bottom of the customer satisfaction charts to the top, and they had started to grow swiftly. Existing customers loved the initiative, even just hearing about it and in advance of experiencing the joy of an easy renewal. The team were surprised to find the degree to which customers of other networks loved it too - unsurprisingly, with hindsight, they were just as frustrated as 02’s customers.
Deb Corless described the effect at the sharp end in contact centres working on renewals:
Before the Customer Plan, we were in a deal-making environment.
Call handlers would try to offer the best deals only to the best customers, giving less to others, and they would be steered by the latest offers and subsidies, looking to cross-sell to get profits up whether the deal was right for the customer or not. The customer’s mindset was to battle hard to get a good result. After the Customer Plan, customers called and actually liked their 02 experience. There was trust, and they were open to seeing what the offer would be. Colleagues loved it too. They wanted to feel proud of their work and now they saw their job as doing the right thing for the customer. They could be generous, offering little bundles of goodness like free texts at any point in the conversation. All this, and it worked commercially as well - I was sceptical at first, but the evidence built people’s belief.4
For 02 this meant a leap in retention and also a leap in new people being attracted. Far from taking five years to have an impact, it had happened in months.
As ambition grew, some more big Moments of Belief followed. In London, the great structure built to house a year of Millennium celebrations - the Dome - had been through a period of sporadic use as a venue for fairs and one-off shows. Then it was bought by AEG, the entertainment business, with a vision to turn it into Europe’s leading purpose-built venue for music concerts. They wanted a headline sponsor, but the lasting image of the Dome was as an unloved mistake.
Corless remembered 02’s decision to become that sponsor being announced at the annual marketing conference 12 months in advance. ‘There was a lot of rah-rah and clapping, but we were all thinking they’d lost the plot.’5 As the launch got closer, the team saw more details emerge that were encouraging, but doubts persisted. Eventually, in the run-up to the public launch of the new 02 venue, 18,000 02 colleagues, families and friends were invited to a preview evening.
There was comedy, there were bands and it was amazing. It set new standards for any venue in the UK, and it was an O2 branded experience.
It was the proof of the pudding and another pivotal moment for O2.6
Clearly, this was another true Moment of Belief - a market-leading action based on customers that ended up working commercially for 02 as well. They took the big bet because the team felt customers would value the bold endorsement, and they would also value their priority access, something that the business built into a valuable and unique property.
There were more big and impressive Moments of Belief along the way:
- • An innovative deal with Tesco to create Tesco Mobile as a SO/SO joint venture, a way of reaching a different set of customers with a more relevant proposition that became the biggest and most successful MVNO (Mobile Virtual Network Operator) in the world with 5 million customers and plenty of awards for customer service.
- • Reinventing the whole pay-as-you-go offering into an option seen as classless and easy - for people who wanted to control their spending - rather than cheap and second-best.
- • Winning the Apple iPhone launch in the UK and insisting they changed their plans from working with two networks to only working with 02. Apple and iPhone had huge cut through especially among early tech adopters. 02’s UK exclusivity gave people happy with their existing network a reason to join 02, it added to 02’s image as the most forward-thinking operator, and it generated pride with colleagues. Peter Erskine, Group CEO at the time, and Matthew Key had recognised the potential in this deal and then landed it too.
- • Buying an independent retailer (The Link) to grow more direct relationships with customers.
- • Launching giffgaff, the world’s first mobile network where service was largely provided by customers through a customer community, again hugely innovative and boldly executed leading to a lasting success, 10 years in and counting.
The list goes on and on. But the reason 02’s story is in this chapter is because the outside-in beliefs couldn’t and didn’t last.
The most obvious challenge to the company’s beliefs came with its purchase by Telefonica, announced late in 2005. The issues weren’t immediate though and not for the direct reasons you might assume from a distance.
Telefonica admired the customer centricity of 02. In Spain, Telefonica was originally the state-owned telecommunications monopoly. A large organisation not used to intense competition, the Telefonica culture was financially driven and dominated by engineers in top roles.
To begin with they recognised that the value of 02 would be diminished if they got in the way of its bold, customer-led ways of working. So 02’s base was broadened internationally both as 02, for example re-branding a recent Czech acquisition, and in many Latin countries as a guiding spirit behind the Movistar brand.
The period from 2006 to 2009 was good, a honeymoon perhaps. 02 was doing well and the Telefonica share price was strong. But slipping from outside-in beliefs back to those that are inside-out can come from the inside, from the team itself, as much as from outsiders imposing their views.
One force comes from the natural process of running a business. Around the board table the conversation is about the here and now, the plans and the quarter-by-quarter progress. Talking about customers can feel like a distraction. And then, when the company is succeeding and the numbers keep rising, it can feel easy. There are calls to speak at conferences, awards and a constant flow of compliments.
02 started to diversify. It had won in mobile telecoms and it started looking for growth beyond the core, partly in obviously linked markets such as broadband and fixed line telephony, and partly more boldly, looking to take mobile into other areas of customers’ lives such as health and financial services.
Both parts of the diversification proved challenging:
- • On broadband, there was a lot of debate over the entry point the business should take and by the time a plan had been agreed, the window of opportunity had largely closed; others, like Sky, moved faster and invested more. Broadband also turned out to be a more operationally complicated undertaking than expected, and so the distractions continued as market entry proceeded.
- • On wider diversification, good work was done to understand where the 02 brand could play a valued role in customers’ lives. But the risk with brand extension is that it is easy to become brand focused rather than looking outside-in, from where customers stand. A big mural appeared in 02’s new UK headquarters depicting ‘02-ville,’ a village of 02 services. It seemed to be centred on 02 rather than the customer. As someone in the business remembers feeling at the time, the intention was good, trying to invest ahead of a maturing mobile industry. 02 was looking to fix problems customers had in other areas of their lives. But perhaps because of the huge success of the brand, the team found themselves assuming too much strength and having not enough humility. An example might be looking to fix issues with the way money works for customers by applying customer insight when it’s a truly complicated market to change, especially for a single country- based mobile operator.
Now, fighting on a broader front, but in a core market that was relentlessly competitive, 02 was losing momentum.
When the takeover had happened, a few of the core team left or stepped back having had a financial windfall. Then in 2008/9 the financial crash hit
Spain especially hard. Telefonica was naturally in trouble given its exposure to the whole of the Spanish market. Growth rates across Western Europe slipped back to low single figures, and to Telefonica, South America was more attractive. 02 became a cash cow, providing much-needed income and, under pressure to produce more cash, investment slowed.
This made a material difference:
- • In 2010/11, there was an auction for the new 4G spectrum, but Telefonica set conservative ceilings for 02’s bids. As a result, 02 came out with not much additional bandwidth meaning they could offer customers less capacity and carry less traffic. The network subsequently cost more to run and gave customers an inferior experience.
- • By 2012, what was ‘core’ was changing. Newer businesses like challenger Three saw the future of mobile in data and using the internet. That was the focus, not making calls and sending texts. As a result, they were on a journey to deliver the best mobile internet experience, while 02 judged itself on call performance stats.
- • In 2013, 02 outsourced its contact centre operations to Capita, worth a rumoured £80 million annually to the 02 bottom line. After a protected period, the service was moved to South Africa despite what one employee described as a ‘car crash trial’ and customer satisfaction never recovered to the 02-owned levels.
Corless had left 02 at its peak, joining mobile challenger brand Three for four years, then returning to 02 as part of a new customer experience team and expecting great things. Instead, she described what she found:
... a group that felt downtrodden. Part of the role was to update the exec on metrics and actions, but it felt like going through the motions, looking to tell good news stories, not highlighting areas to do better.
If issues mattered to customers but addressing them would have little commercial benefit, they felt unimportant. There had been lots of patting on the back about O2 being an amazing customer-centric business, but to be good at this you have to be paranoid and we’d lost our paranoia.7
02 had moved from being a proactive, maybe paranoid challenger to being more of an incumbent. The more you have, the more you have to protect, especially when it is difficult to justify riskier investments. And riskier investments are exactly what outside-in initiatives look like - definite costs, uncertain returns, costs now, returns in the future. The new challenger gathering strength was Hutchison-owned Three who, as we have just seen, had recruited plenty from 02 and was recruiting more as 02 people felt held back from pursuing their best ideas.
Meanwhile the day-to-day experience for leaders within 02 had evolved - as it would in what was now an international company. A business looks to lower costs in areas that are shared, and functions like running the company’s IT platforms and networks were brought together. It meant more frequent negotiation with the centre for the 02 UK team, taking time and shifting attention inside the business. The centre has to manage by numbers and so the conversations and meetings are more about metrics and less about customers, what matters to them and whether new and better alternatives are emerging.
By 2013/14, Telefonica was seriously thinking about selling 02, and this proved destabilising. Two other big competitors, Т-Mobile and Orange, were also looking for new owners and so immediate profitability really mattered. It was even harder to get a yes to investment requests. An agreement was reached with Three, but having had a year trying to maximise profitability to ensure the best price, an objective that is a hugely inside-out force for a business, the European competition regulator blocked the deal in 2016, a decision overturned rather academically by the European courts in May 2020.
As we write this, 02 soldiers on in the UK, a good strong business in what is now, on the network side, a mature sector with another merger rumour swirling around it and Virgin Media. 02 is good, but it is no longer an outside-in leader. This has been arrived at not by making big mistakes, not through hubris or complacency, but simply in the natural way of things.
Next, we’ll look at the inevitable arc of companies falling from out- side-in to inside-out through the stories of three exceptional companies. Virgin Atlantic, whose outside-in beliefs were challenged by internal forces; Market Basket, whose outside-in beliefs were challenged by external forces; and Nokia, a market leader who drifted away from being customer-led and was taken by surprise by a competitor changing the rules of the game.