iiNet ‘country club’ culture begins the death of 1000 cuts

 

train crash

When diametrically opposing cultures collide it can be… challenging

 

 

 

 

Today marks the end of the TPG takeover of iiNet with shareholders being paid $9.55 per share as part of the $1.4B acquisition.

TPG Executive Chairman David Teoh has said it is their intention to retain the iiNet brand, and that TPG have a lot to learn from iiNet, yet there is no doubt that it is his intent to remove what he views as frivolous spending in a Country Club Culture at iiNet. What we are about to witness is a colossal collision of cultures, where ultimately the TPG body will eject the iiNet culture virus.

Diametrically opposing business models

The rationalisation of the ISP market was inevitable with the introduction of the NBN, which effectively removes technological innovation at an industry level and reduces Internet Service Provider (ISP) competitors to reselling Government bandwidth. The growth in both TPG and iiNet over the past decades has been due to the beliefs of TPG’s Teoh and iiNet’s Michael Malone. TPG focussed on a low cost business model to provide lower pricing to the customer, whilst iiNet focussed on customer service as can be seen in their respective Brand Promises;

TPG: Fast, Reliable, Cost effective

iiNet: Best in class service, Get more out of the internet, Look after customers

Of course the Brand Promises manifest from the strategy of the company which connects with the Core Values and ultimately the founders beliefs. And David Teoh believes that a good business is a lean business.

In any business a decision must be made about the level of service which is to be offered to customers. Lower service levels will be accepted by customers as a trade off to a lower price for a product (TPG) whereas other customers are prepared to pay a high cost for a product for a better service (iiNet). Both are sound business strategies, however together, like oil and water, they don’t mix. TPG’s primary focus is operational improvement (think lean), and iiNet’s is service improvement. If you are providing average service at an average price you are unlikely to experience significant growth. You are stuck in the middle.Market profitability

Within the Australian ISP market we have a pool of customers who value a low cost, low service model in TPG and another who value high service at a higher price. Over many years TPG have carved out a reputation for the best pricing in the market, and iiNet have equally carved out a reputation for the best service. Both have grown their respective businesses at each end of the service spectrum and now TPG has acquired iiNet, only one thing can happen, iiNet will shift to the middle.

iiNet has already stopped selling it’s Fetch internet TV service and Shane Teoh (David’s son) has been appointed CFO. These moves are to be expected in a takeover situation, the real problem is the cultural chasm between the two businesses, and how TPG can deal with this, whilst losing a minimal number of iiNet customers. Because ultimately, this is how the deal will be measured in years to come, the attrition rate of iiNet customers under the new TPG ownership.

 

Country club culture

David Teoh who enjoyed a BRW front page as Australia’s shyest Billionaire is almost impossible to find a photograph online of, and is famously reclusive has built an empire using operational efficiency as it’s centre, providing customers what they need in the most efficient manner possible. That is completely his prerogative and given this is the perspective of the TPG founder it is logical that he would look to iiNet as being full of waste and having a ‘Country Club Culture‘.

A look at the iiNet careers page section talks about relationships you will build, Core Values, awards, working in your pj’s and eating cake. It goes to great lengths to explain the culture at iiNet and attempt to pre-qualify potential candidates with it’s Core Values. This creates a large qualified pool of candidates who align with the companies values.

iiNet Core Values

iiNet Core Values

Compare this to the TPG careers page which consists of 41 words, a spelling mistake and a link to the Seek.com job board.

Again the differences could not be more profound.

Of course the question from David Teoh is, how much more efficiently can iiNet operate? Where are we wasting money, providing benefits or services that we don’t need to that we can remove whilst maintaining the same service levels? This is very different to the central questions previously asked inside iiNet about innovation and improving customer service, incidentally a key thread in their Core Values.

 

It’s not all about the NPS

 

When iiNet acquired AAPT retail in October 2010 over the next year it took the NPS from -14 to +32, no mean feat as anyone who has commenced a Net Promoter Score program would attest. The way they did this was to inculcate AAPT staff and systems into the value system of iiNet, that customer service must come first and everything will flow from that. In later years across the entire business iiNet attributed a $1m profit increase for every single NPS point increase, and shared this information on annual reports.

In a recent statement for the first time TPG revealed it’s NPS score to be +25, which is still a long way off from the iiNet +63, but a respectable score nonetheless and higher than most industry pundits would anticipate. Whilst NPS is the best measure of customer advocacy, it should also be considered that industry wide customer service has improved significantly over the past 10 years and it is the difference above the industry average that really matters.aapt NPS

But it’s not all about the NPS, as NPS is only a KPI, and even though TPG has assured the market that they will keep iiNet as a premium brand and TPG as a price driven brand the conflicting ideologies are what places this strategy at risk. When TPG acquired Shark Tank Steve Baxters PIPE Networks in 2010, said Baxter on feedback from staff post takeover “you were forced to turn your lights and monitors off when you left the building, that sort of thing.”

 

The parallels with Amazon and Zappos

Of course this is not the first time a low price brand has acquired a high price brand, one such example is Amazon acquiring Zappos from Tony Hsieh  for US$940m in June 2009.  Zappos doesn’t claim to be the cheapest online shoe retailer, but it does claim to provide the best service in the industry – this leads to 75% of daily sales going to repeat customers. The substantial difference between this and the TPG deal of course is that Hseih negotiated as part of the deal that there would be no impact on the culture of the business post buyout and that he and his leadership team would have complete autonomy. Subsequently from 2009 Zappos has more than doubled revenues to over $2b in 2014 and maintains it’s own autonomy and culture.

 

 

What can TPG do?

TPG has effectively 3 options at it’s disposal.

Firstly it can completely absorb iiNet into it’s low cost model. This would be a rapid war of attrition and there is no doubt that many people will lose their jobs and there will be customer churn, but the 33% difference in NPS may not be enough to lose most iiNet customers. Like rapidly pulling off a band aid this may ultimately be the least painful course for all involved.

Secondly it can migrate to a hybrid model whereby it lives under the TPG values and positions itself as a premium brand (as David Teoh is currently suggesting). With leadership and executive positions being filled by TPG people it is simply impossible to maintain the iiNet Core Values. Whether documented or not they will change. Ultimately however the strategy will be flawed as identified in the chart above. Without a clear, concise and aligned commitment to customer service at all levels, and the accompanying Country Club Culture iiNet will transition from from High Service  + High Cost to Medium Service + High Cost and revenues will drop.

Thirdly they can provide autonomy to iiNet as Amazon did to Zappos. I think that this has the least likelihood of occurring and highest likelihood of success (as defined earlier). Whilst it might seem impossible, TPG could re-hire iiNet founder Michael Malone as CEO, allow him to select his leadership team and allow him to develop and execute his own strategy. If he chose to not take the role, hire someone who primarily aligns with the iiNet Core Values.

 

What can Michael Malone do?

Start an ISP.

If the business model has been too broken by the NBN, or if he simply isn’t interested understand that there are many clients and potential employees who would follow his high service values to any entity.

 

What can TPG/iiNet competitors do?

Understand the churn opportunity in the market is for iiNet customers who are happy to pay higher prices for better service. If indeed iiNet is about to transition to a lower service level as indicated in this article, unhappy customers will want to go somewhere.

 

From a market share perspective the iiNet acquisition by TPG is a logical one, however because the Core Values, strategies and business models of each are diametrically opposed, TPG faces significant challenges to grow the iiNet business because it is dealing in the Yin to what is normally it’s Yang. Every logical step that TPG takes to improve efficiency at iiNet will likely not make sense to people at iiNet, in fact it will probably be going against the grain for them.

 

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