Cell C building a lean machine

Cell C is working hard to right-size its organisational structure, with its full-time employee headcount below 900 as part of the company planning to compete with its larger peers using a far smaller workforce. 

The company aims to ultimately to create a capital-light business that will, in time, have better margins than its larger competitors, which have to invest heavily in maintaining and developing infrastructure. 

Cell C CEO Jorge Mendes revealed this in the company’s latest update to the media regarding the turnaround of the major telecom operator in South Africa. 

Mendes ascended to the helm of Cell C at an extremely difficult time for the company, with it failing to turn a profit during the 23 years it has operated. 

It has also suffered from a lack of strategic direction, with a regularly changing leadership team and, at times, conflicting strategies. 

Over time, this has resulted in the company’s balance sheet being steadily weakened to a point where it was hopelessly insolvent.

Mendes described this balance sheet as a “crime scene” that would take years to clean up in previous discussions with Daily Investor. 

Cell C is currently two years into its six-year recapitalisation plan, with owner Blue Label pumping additional cash into the company through various channels. 

Apart from this recapitalisation plan, Mendes has made it clear that the company has to begin generating positive cash flow to tackle its debt burden sustainably and fund its growth on its own. 

Part of this has been right-sizing the organisation with a full-time employee headcount of Cell C to less than 900 people, making it the most productive telecoms company in South Africa according to revenue per employee. 

Mendes told the media that Cell C’s aim is not to drive down its headcount but to create a lean workforce that is not as bloated as it has been in the past. 

Furthermore, a crucial part of this plan is to attract and keep the skills that Cell C desperately needs to build out its offering. 

The plan is to ultimately greatly increase Cell C’s operating leverage, whereby it needs to burn less cash to grow its revenue and, over time, generate significant cash flows. 

The lean machine 

Cell C is not only looking to create a lean workforce but also rely more heavily on partnerships with other companies, including MTN and Vodacom, to reduce its need for capex. 

It also means that the company will look to growth with its smaller workforce and not merely become a smaller company with less employees. 

Key to this is Cell C’s Mobile Virtual Network Operator (MVNO) offering, which Mendes said operates with a profit margin that is similar and, in some cases, greater than its direct-to-consumer business. 

Mendes believes that Cell C’s focus on its MVNO offering enables it to provide its customers, typically large banks and retailers, with tailor-made solutions. 

As a result, it has an edge over some of its larger competitors, which are not willing to squeeze their margins to engage with certain market segments through MVNO partnerships. 

Some of Cell C’s largest MVNO partners include FNB Connect, Capitec Connect, and the more recently launched Old Mutual Connect. 

Mendes explained that, in essence, this will result in Cell C becoming an aggregation player whereby it will aggregate mobile traffic through various MVNOs. 

Crucially, this means that Cell C aims to be agnostic when it comes to network providers and technical partners to offer its clients the “best of both worlds” by offering connectivity on MTN and Vodacom through its various agreements. 

This should translate into Cell C being more resilient than its peers and is central to its plan to differentiate itself from its larger competitors. 

Mendes said that Cell C’s reliance on partnership goes beyond the MVNO business and includes outsourcing some of the functions the company previously did itself. 

Without having to build and operate everything itself, from masts and towers to call centres, Cell C should be able to effectively have a completely different business model from its competitors. 

Mendes explained that, essentially, Cell C will flip capital expenditure in the traditional telcoms model to operating expenditure at a much lower level to enable it to generate positive cash flow in the next few years.