Phone Co-op proves there's life yet in the old consumer co-operative model

This article by Andrew Bibby, in a slightly different form, was first published in the Financial Times, 2008

Vivian Woodell knew little about the telecommunications industry 10 years ago. But he did know his telephone bills were unnecessarily high and that he wanted to do something about it. Today he is chief executive of a fast-growing telecoms business, with a turnover of £7m and about 40 staff, mostly based at the head offices in Chipping Norton, Oxfordshire.

This is not a typical story of a small start-up, however. It is one of a tiny number of new ventures in recent years to have dusted off the Victorian legislation for co-operatives, rather than incorporating under the Companies Act. As a result it is the phone customers who legally own the business, elect the board and share the dividends. For Mr Woodell, 46, the Phone Co-op shows there is life in the old consumer co-operative model yet.

Mr Woodell accepts that the business model means he personally gets considerably less back from the business: "If I'd wanted a lot of money, I'd have done something else," he says simply. He also ac-cepts some may find his motivation strange, although he was heartened by positive reactions from more orthodox fellow entrepreneurswhom he met recently.

"I took part in a small-business development course at Cranfield University in 2006-07 and thought [they] would think I was some kind of weirdo. In fact, the others were anything but sceptical, and took real interest in what the Phone Co-op was about," he says. Some additional sales even ensued.

But the benefit of Cranfield was to learn about managing growth. The business had started in classic fashion in Mr Woodell's spare room and had grown organically. It reached £1m turnover in 2001 and £4m in 2004, and turned in profits each year until 2005. But then came a difficult period.

"When I was on the course, we were just coming to the end of the one year when we made a loss. Our confidence had been knocked," he says. The problems followed the Phone Co-op's acquisition of an internet company's retail business and, although a trading loss had been expected, revenue was down on forecasts. "We had not fully integrated the acquisition," he says, before adding: "But we followed that year with a year of record growth and record profits."

The issue of how a small business grows - including questions such as which business opportunities to pursue and which to turn down - was one that featured strongly in discussions with other entrepreneurs Mr Woodell met at Cranfield. With the benefit of hindsight, he can now identify some early areas of business he might have avoided - such as a highly complex deal to acquire residential customers that proved expensive and complicated to administer.

But if he is prepared to acknow-ledge past mistakes, he is also clear that the strength of the business he has built owes much to its status as a customer-owned cooperative. Its core business is to buy telephone capacity wholesale and sell retail, a market where it is in direct competition with several big groups, including BT.

It reaches and retains its own customers partly by using commercial agents but particularly through more than 300 affinity schemes, signed with a wide range of environmental, campaigning, political and charitable organisations, each of which is rewarded with 6 per cent of the new business generated. Those signed up include the World Development Movement, Quaker Voluntary Action and the Soil Association, as well as political parties like the Labour party and the Liberal Democrats.

"This is how we reach customers. We would far rather support [voluntary organisations and social enterprises] in the 'third sector' than spend money paying big media organisations for advertising," Mr Woodell says, claiming that the total paid out in affinity payments has now reached about £500,000.

Membership of the Phone Co-op is not obligatory for customers but members (currently numbering about 7,000) benefit from the traditional co-op dividend, set last year for each individual at 1.5 per cent of the amount billed in the previous year.

In addition, members can choose to invest by buying shares in the co-operative (see left). Unlike conventional equities these remain fixed at £1 par but attract interest, at present at a generous 5.5 per cent. The Phone Co-op has roughly £1.6m in members' capital, on average about £200 for each member. For Mr Woodell, it means both customer commitment and a healthy balance sheet.

Mr Woodell first became in-volved in the co-operative world in the early 1980s as a protester. At that time Britain had a large num-ber of independent co-operative societies, many floundering commercially and philosophically. When a friend pointed out that his local Co-op store in 1983 was breaking the ANC anti-apartheid boycott call by selling South African oran-ges, Mr Woodell took up the cudgels through the Co-op's democratic structures. By 1985 he had not only had his boycott resolution endors-ed but had also been elected to his local society's board.

One criticism levelled against the co-operative model is that the directly elected nature of the boards can hinder businesses; but Mr Woodell strongly rejects this in the case of the Phone Co-op. "We have been very fortunate with the boards we've had, with people with a wide range of co-operative and business experience," he says. The 2008 election brought to the board, among others, the heavyweight presence of Bob Burlton, chairman of Co-operative Financial Services, parent of both the Co-operative Bank and Co-operative Insurance Services.

Mr Woodell's own role has changed: what was once his responsibility alone is now shared with the senior management team. Here the Phone Co-op has combined a policy of bringing on existing members of staff with a small number of external appointments, including most recently that of Sven Trogstad to the new post of head of business operations, responsible for sales, customer service and back-office functions. Mr Woodell's task, as the Phone Co-op enters its second decade, is clear: "My role is strategy, it's business development, and it's to do with our business culture."

Compared with venerable parts of the mainstream co-operative movement such as CFS, the Phone Co-op is a minnow. But Mr Woodell believes his business has something to contribute. "The co-op movement has to an extent reinvented itself in the past decade," he says. "I think it's important for people to see co-operatives doing something in completely new areas. And I hope a little bit of energy can rub off on the traditional movement."

Legislation, members' share capital and international accounting

The Phone Co-op is incorporated under the Industrial and Provident Societies Act, a form of co-operative legislation dating back to 1852. There are approximately 8,000 live businesses and societies operating under the IPS Act under the regulatory control of the Financial Services Authority.

The legislation is generally regarded as being in need of reform and the government last June initiated a consultation with the aim of identifying possible changes.

Members' share capital, such as that invested in the Phone Co-op, occupies a curious position, having some of the attributes of both loan capital and equity.

A minimum investment of £1 is necessary for co-op membership, and individuals are limited by legislation to a maximum shareholding of £20,000. Shares attract interest (at rates set by co-op boards) and interest is payable gross of tax. Share values remain at par. The capital itself can normally be withdrawn on demand, although boards have the right to vary this condition.

Co-ops consider this use of member capital to be a fundamental part of their way of operating, and in recent years have fought to have this kind of capital recognised in international accounting standards.

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