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Thodey has a way to go on customer satisfaction

8 Feb 2013 THE AGE
BY MALCOLM MAIDEN (THE MAIDEN FAMILY OWNS TELSTRA SHARES.)


EVERYTHING Telstra does in the telecommunications market here is big, and in the December half it successfully asked no fewer than 5 million customers to rate it for service and products on a scale of one to 10.

These regular "how are we doing" surveys are grist for chief executive David Thodey's drive to make Telstra a more customer-friendly company. They are used to generate what managers call net promoter scores, and Telstra's NPS results are telling him that Australia's largest telco has a way to go before it completes what he says is job No. 1 - getting customer satisfaction up to world's best practice.

On the scale that Telstra runs, customers who give the telco a score of either nine or 10 are classed as advocates. Customers who give the group a score of either seven or eight are classified as passive, and those who score the group between zero and six are considered to be detractors. The NPS is the ratio of advocates to detractors: there has to be as many people in the more tightly defined advocates basket as there are in the larger detractors basket for Telstra to get its NPS score into positive percentage territory: it's a tough test, and Telstra isn't close to where it needs to be yet.

Thodey won't say what Telstra's NPS score is, and there are in fact a series of scores, on various customer-facing parts of the business. They vary, with Telstra rating more highly with its government and big corporate customers than it does with its retail customers, but the group is on a negative single figure percentage overall.

The industry benchmark is Verizon of the US, and its NPS scores begin about 25 percentage points higher than Telstra. So if Telstra surveys 10 million a people a year as the December-half survey pace suggests, it needs to shift about 1.25 million of them over from the detractors basket to the advocates basket to get into Verizon's class.

That's a big task, but it isn't just an academic exercise. Customer satisfaction feeds back into revenue and earnings because advocates are customers who are extremely happy. They are the least likely to move to a competitor, and also the most likely to react positively to invitations to deepen their relationship, by taking on (and paying for) more services.

It's the connection between customer satisfaction and customer retention and revenue per user that underlined Thodey's pitch to the board in 2009 that improving customer satisfaction was a key job for the person who replaced Sol Trujillo, and the board's agreement with him was one of the reasons he got the nod to be the new CEO.

In briefings on Telstra's 8.8 per cent higher $1.6 billion December-half profit result on Thursday, Thodey said the group was where it expected to be with its drive to improve customer satisfaction. Complaints to the industry ombudsman about the group fell by 10 per cent during the half, and higher satisfaction is showing up in reduced customer churn rates.

He also acknowledged that Telstra had a long way to go, as my Verizon comparison suggests - but that is actually good news for Telstra shareholders. It means that customer satisfaction is a potential profit driver.

The challenge for any boss of an incumbent telco is to find avenues of growth that compensate for declining revenue and profits from its traditional businesses. Here's how Thodey is doing it.

Telstra's old PSTN copper wire voice service posted a 10.8 per cent decline in revenue to $2.2 billion in the half compared with a year earlier. Its revenue will continue to leak, and Thodey is easing the pain by seducing customers across to two-year contracts that combine the fixed-line phone service with fixed-line broadband.

Fixed-line broadband customer numbers rose by 85,000 in the December half to 2.7 million, and bundled customers grew by 117,000 to 1.5 million, 56 per cent of the total fixed broadband customer base. As a result of that, fixed broadband revenue was 4.4 per cent higher than the December 2012 half at just over $1 billion, limiting total fixed line revenue slippage to 4 per cent. The gross profit margin on fixed-line broadband actually improved by 4 percentage points over the year, to 39 per cent.

The group's Sensis directories business also continued its profit-crunching journey onto the digital world. Sensis' total revenue was 12.6 per cent lower than a year earlier as print directory revenue fell by 27.9 per cent to $202 million. Digital revenue rose by 11 per cent to $201 million, and will this year overtake print as the biggest top line engine, but as that change occurs, margins are shrinking. They contracted from 28 per cent to 23 per cent in the year to December.

Thodey's biggest offsetting growth engine continues to be Telstra's revitalised mobiles business. It has boosted customer accounts by 3.8 million customers or 36 per cent to 14.4 million since the middle of 2010, including 607,000 in the latest December half.

Mobiles revenue rose by 4.6 per cent to $4.56 billion, more than twice as much as the PSTN voice business delivered, and earnings before interest, tax, depreciation and amortisation as a percentage of sales rose by 3 percentage points to 37 per cent in 2012, suggesting mobiles delivered a December-half EBITDA of about $1.7 billion - a third of the group's 5 per cent higher half-year EBITDA of $5 billion.

A campaign to simplify internal processes and boost productivity also continued to deliver by contributing $381 million to the result in the half, but it is now more than two years old. The easy yards have been gained.

Customer satisfaction is a less obvious third profit driver. It's not something that Thodey is ready to break out as an earnings lever but it's a real contributor nevertheless, and it could be a significant one in the medium term if the group successfully hauls satisfaction rates up to where the world's best telcos are.

Thodey is said to be relentless on the issue inside the company. Executives know that if they get a call from him, he's quite likely to ask them to detail their most recent personal customer contacts.

mmaiden@fairfaxmedia.com.au

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