Final Ferrit: The governance failure

Part four of  a four part take on the end of Ferrit. We started with Market Space, then  site idea and execution, and business economics. This is hopefully the last Ferrit post, but the most important in this series

The Governance Failure

There were failures at a number of levels from Telecom, including poor strategy, poor execution, but to me most of all it was a failure of governance.

Strategy
The strategy failure was at the highest level – and not only in the way Ferrit addressed the perceived space (see above). The failure was at clearly articulating and following a vision of “What does Telecom do“. The answer is that Telecom NZ delivers telecommunication (& IT) services, and until they can demonstrate that they can do that well, anything else is a distraction.

The launch of Ferrit meant that Telecom moved focus and resources away from its core broadband and mobile business lines, and so NZ slipped even further behind the rest of the world. It is heartening to see in the press release that the main reason for Ferrit closing was to move back to the core business.

Branding
The branding of Ferrit was brilliant as a case study in ineffective branding. Beyond ineffective, Ferrit’s brand equity managed to plummet from day one. From the choice of rodent name, to the sleazy and intelligence insulting advertising, to the Ferrit.com website which was a porn site domain that Telecom was forced to purchase. Perhaps they could sell it back now.

Meanwhile New Zealanders are smart, and can see through branding campaigns that seek to portray an image that is clearly inconsistent with reality. Telecom itself suffered from this approach for years, and Ferrit was another example of just what not to do.

Simply put – Ferrit may have done everything they could to create a poor brand, but the failure to gain traction was caused by the poor site and flawed strategy, not by the poor brand.

It’s easier to describe how successful web (and other) companies go about building credibility, or brands. Trade Me, Google and Apple all followed a similar path. They start small, they make a great product and they grow slowly and organically through word of mouth. Only after they have established a strong beach-head do they contemplate an advertising campaign.

Torpedo7 is a Kiwi success story that has out-performed Ferrit by using this method. The bicycle and sporting goods site usability is fantastic, their fulfillment stunningly quick and their advertising spend is very hard to see. The result is traffic to their sites that is larger than Ferrit’s, and no doubt revenue figures that dwarf Telecom’s folly.

Ferrit turned this approach upside down, launching a wildly extravagant and misguided campaign months before the site was able to do anything useful. Anybody that visited the site had a poor experience and thus moved on, often never to return. By the time the site became mildly useful it was too late – the brand was in ruins.

Execution
Telecom took a corporate approach to the development and launch of Ferrit. They did the equivalent of buying and adapting SAP rather than just using Xero. That’s not how things work in the web-world.

They could have done it well – here’s how:

  • The leader of the team needs to be someone that completely “gets” the internet, someone that had no legacy power internally and someone that understands the technologies.
  • The number of staff needs to be tiny – obeying the two pizza rule, where two pizzas can feed the development team.
  • The software should be open source, or developed internally using the newer tools and never outsourced.
  • The marketing team should not exist until well after the soft launch and early market acceptance, (they just spend money) and external advertising agencies should never be contacted in the first few years.
  • The budget should be small – making the team work smarter with what they have and preventing any expensive follies.
  • The location should be away from the corporate parent (it was), and in a lean environment (it was not)
  • The team should be interconnected with the local web community, be that on the latest social networking tool, conferences such s Webstock or simply through blogs.
  • The early scope should be small, with more features (and dollars) added only after the concept is proven

Telecom and Ferrit failed on all of these levels. Sadly I’ve seen corporates fail consistently at building their own businesses – Pfizer’s recent laying off of research staff was an admission that they are just too big to innovate, while Trade Me is the classic example of a start-up taking away the corporate incumbents’ businesses.

Governance
This is where I am truly perplexed, and concerned not just for Telecom but also for many other large corporate businesses in New Zealand. The total failure of Ferrit was obvious to any external observer right from the start. How could the leadership of Telecom let this happen? And if this was really was a pet project of the then CEO, then how did the Board of Directors let this start and keep going for so long?

Was there anybody on the board that gets the internet? Was the board able to reconcile the tens of millions money being poured into Ferrit with their fiduciary obligations to shareholder to maximise value? Was the board able to reconcile their obligations to other stake-holders with not only Ferrit’s poor performance but the resulting internal distraction from the core goals?

Who was asking the hard questions? Telecom.co.nz has pages and pages of corporate governance material on their website, but I can’ help but observe the board failed dismally in their obligations to shareholders.

All is not lost – they did exercise their biggest power and bring in Paul Reynolds as CEO. He is slowly turning around Telecom, and is doing it well. We could argue that the Ferrit closure happened about a year to late, but really it is a small amount of money to the giant corporate.

Paul has managed to change out his management team and now drop Ferrit without acquiring a nickname such as “Neutron Jack” or “Chainsaw Al”. Credit to him for that, but I hope that his current board is asking him the tough questions.

It’s a sad interlude for Telecom that needs to pass into history. The great news is that this closure is yet another sign of a resurgent Telecom that puts customer needs first and understands that shareholders benefit when you create value for all.

About Lance Wiggs

@lancewiggs
This entry was posted in Broadband, Internet Business, NZ Business, telecom. Bookmark the permalink.

6 Responses to Final Ferrit: The governance failure

  1. Chris says:

    Sorry this is a repost from business economic post – meant to be posted here.
    ——-

    There’s also a tinge of arrogance, or stubbornness involved. The whole industry panned Ferrit from day one, and it wasn’t because it was Telecom – it was because Telecom spent an obscene amount of money to put together a very average site. The NZ industry were very vocal in dissecting the shortcomings of Ferrit. It could be said that Telecom had it easy – they had money to burn and a willing and knowledgeable choir of industry veterans telling them exactly what was wrong with their business model and execution and how to fix it. All Telecom needed to do was remove the lawyers of bloat and get someone in there who knows the ingredients to a successful online operation. But no, Telecom in their arrogance clearly ignored everything anybody was saying and continued on, determined to put away the $3 commissions until one day it added up to $70m. Someone at Telecom was obviously making it a personal vendetta to prove everybody wrong and continue signing off on appalling advertising and keep spending money in the hope that one day New Zealander’s would catch on and realise that Ferrit was in fact a godsend and how silly we have all been for not spending our precious time there. The sad part is that statistics show people were in fact spending some time there, time spent on site was quite high – it’s just a shame that in the $70m spent somebody forgot to commission some A/B testing and work out how to convert some of these visitors into buyers.

    But no no, somebody at Telecom read that if you continuously pound people with traditional media advertising that you will implant your awful, dodgy sounding brand into the mind of the consumer. Then said consumer will find themselves subconsciously wandering over to Ferrit, buying lots of stuff and telling all their friends what a fantastic site and wow it was all so easy. Alternatively, you could study and learn from NZ’s best executed (and one of the worlds best might I add) online businesses and take a leaf out of their book on how to build a brand and a business. When the advertising didn’t work Telecom obviously reconvened and came to the conclusion that people just weren’t getting it and understanding what Ferrit was, so out came new TV ads with some weirdo and half a face repeating the point that Ferrit was a shopping mall and had many retailers under one roof. What year is it, 1997? Trust me Telecom – people not knowing what Ferrit was was not the problem. People knew all too well what it was and it was that public indifference to it that cut off your life support – you just simply weren’t to get another chance no matter how many small improvements you made.

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  2. Rua says:

    They also switched agencies & outsourced development teams several times, changing the whole technology stack and throwing away all code and knowledge each time. It’s almost as if the process was designed to have no chance of success.

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  3. Marshall says:

    I’d be interested to know more details about the outsourcing.

    Are we talking about outsourcing all the way to India and all the associated communication problems or was it to a smaller firm in the ‘naki who just weren’t that good?

    Anyone with info please post!

    Awesome analysis on the whole situation Lance. You’ve been preaching this stuff about Ferrit from day one, pity nobody at Telecom in a position to do something bothered to read it!

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  4. Lance says:

    Chris – great post. This is a wonderful lesson for old media versus new media. A veritable laundry list of what not to do.

    Rua – that’s pretty amazing. I knew about the advertising agency switch, but not the technology juggling.

    Marshall – I’m pretty sure that these were read by at least some of those that could change things.
    The head of Marketing at Ferrit even commented back in the day. I’m also sure that a half-decent news clipping service would have brought the articles to the attention of Telecom senior folk. But they were pretty bull-headed about the whole thing, and compounded that by having a not invested here attitude to the lessons of Trade Me.

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  5. adamsmith1922 says:

    Lance

    Very interesting. Excellent post

    I hated the ads.

    The whole concept was in my view wrong from the beginning.

    Personally, I cannot see how the business case ever stacked up.

    The lack of a payment mechanism at Day One was astounding.

    It was a textbook illustration of what I call ‘The Emperor’s New Clothes’ as presumably there was an Executive of Interest championing this at very high level and no one dared to point out the inherent faccies of the proposition.

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