TeBIT 2012Executive ReportTelco’s New IT Weapon:Business Value CreationAfter years of aggressive cost-cutting, ITdepartments are discovering the potentialof delivering superior business value.
The Boston Consulting Group (BCG) is a global manage-ment consulting firm and the world’s leading advisor onbusiness strategy. We partner with clients from the pri-vate, public, and not-for-profit sectors in all regions toidentify their highest-value opportunities, address theirmost critical challenges, and transform their enterprises.Our customized approach combines deep insight into thedynamics of companies and markets with close collabora-tion at all levels of the client organization. This ensuresthat our clients achieve sustainable competitive advan-tage, build more capable organizations, and secure lastingresults. Founded in 1963, BCG is a private company with77 offices in 42 countries. For more information, pleasevisit www.bcg.com.ETIS, founded in 1991, is a membership based organisa-tion which brings together the major telecommunicationsproviders in Europe on key information and communica-tion technology issues. The mission of ETIS is to enable itsmembers to improve their business performance by per-sonal exchange of information on using ICT effectively.ETIS achieves this by engaging its members in variousworking groups, sharing best-practices, benchmarking,web-based information services, discussion forums, work-shops and conferences. ETIS Central Office is located inBrussels, Belgium. For more information, please visitwww.etis.org.
TeBIT 2012 Executive Report 1The telecommunications industry, once listedamong the recession-resistant sectors, is nowhaving a hard time keeping up with the mas-sive reduction of its profit pool. Even increasesin customer base seem unable to compensatefor declining revenue. What, then, is the wayforward? Are further cost reductions possible?If so, at what price? Is IT spending a prerequisite for business value creation? Are tel-cos even willing—or financially able—to move in that direction? These are some ofthe key questions addressed in TeBIT 2012, which as in previous years was jointlydeveloped by ETIS—The Global IT Association for Telecommunications—andThe Boston Consulting Group (BCG).The goal of this executive report is to highlight some of the insights unveiled by TeBIT2012—findings that do not just explore industry-specific IT challenges, but can helptelcos to tackle them. This year we present for the first time a tool to measure businessvalue creation and compare the IT cost associated with it among participants. We alsointroduce a new way to normalise IT cost to allow for a fair comparison for smalleroperators and pure mobile players. We will continue to listen to our members andadapt our activities and studies in line with their evolving challenges.What makes this benchmarking so unique is that it was created by the telcos for thetelcos and coordinated by an independent non-profit organisation that has no financialinterest in the outcome. By participating in this benchmark, operators get an unbiased,in-depth, telecom-specific look at the IT environment of their organisation.It has been a tradition among the TeBIT participants to openly share all data on a com-pany level to encourage discussion and exchange of knowledge. Only companies thatparticipate in the study can obtain the full results and benefits of the report. Moreover,participants are eligible for a one-on-one discussion of their company-specific resultswith the core TeBIT benchmarking team. The findings show that IT units need to chal-lenge their cost position, outsourcing activities and possibly also their strategy. If thegoal of telcos is business value creation, then IT can contribute to it. The question is dothe returns justify the costs borne—and which initiatives should be prioritised?The ETIS motto is “sharing knowledge is our strength” and both ETIS and BCG believethat benchmarking and sharing experiences among peers will be crucial for achievingsuccess in the future.Terje Tondel, ETIS Managing DirectorFrank Felden, BCG Partner and Managing DirectorPreface
2 ETISTeBIT 2012 Executive ReportAt a GlanceNo news, as the saying goes, is good news, buttelecom operators may beg to differ. A marketlandscape largely unchanged from a year agomeans revenues continue to drop for many providers,with price—and budget—pressure remaining nearlyuniversal. For telco IT departments, a further chal-lenge remains: How to cut costs while spurring theinnovation that yields profits.One thing, however, has changed. As revealed by themost recent ETIS Telco IT Benchmarking Study(TeBIT)—a survey of IT spending and performance ofEuropean operators that was completed in September2012—the aggressive cost cutting telcos successfullycarried out in the past could not be repeated last year.That makes sense, of course: the “easy” cuts have al-ready been made and providers can only hold off onIT updates for so long. But how do telco IT depart-ments compensate?Here the news is encouraging. TeBIT 2012 homes inon a second lever IT departments can pull: businessvalue creation. The benchmark finds a general corre-lation between IT spending and generating businessvalue in key telco processes. While cost cutting remainsessential, spending can be focused in ways that movethe business forward. With that realisation, telcos arestarting to align their IT cost position with the com-pany’s long-term strategy—and they are starting to seeresults.An analysis of the TeBIT data revealed the followingkey findings:◊ Most telcos did not manage spending in line withrevenue change. For TeBIT participants, 2011 rev-enues were down by an average of 2.7 percent,butIT spending declined just 0.6 percent. IT CAPEXdropped by 2.1 percent, while IT OPEX remainedstable.◊ A general correlation between IT spending andbusiness value creation was found in most, butnot all, telco processes. Telcos appear to be selec-tively choosing which areas to prioritise—or arehaving the choice made for them by burningplatforms. Either way, no telco leads in all busi-ness areas.◊ The aggressive cost cutting IT departments car-ried out last year could not be repeated. Indeed,challenges in cost-cutting—resulting from eitherless “low-hanging fruit” or necessary IT updates—make value generation a key lever to be pulled inconjunction with spending reductions.◊ The benchmark’s new “normalisation” analysis—adjusting IT spending for a telco’s size, businessmix and business value creation—reveals thatmost operators have closely aligned spendinglevels. Normalisation also enables telcos to moreaccurately determine how their spending comparesto other telcos.◊ Telcos are ahead of where they need to be to keepspending constant with 2009 levels.But if revenuesand spending continue to drop at last year’s rates,they will surpass those levels in 2014.Thisgivestelcosa couple of years to fine-tune their cost position.◊ IT investments appear to be more fragmented thanfocused.On average,just 23 percent of each partici-pating telco’s IT CAPEX went into their top fiveIT projects. Automation remains a sound area forinvestment,with a correlation between automationand satisfaction seen in key telco processes.◊ Outsourcing continues to be popular, accountingfor 33 percent of IT spending, but the savingsmany participants expect may not be materialis-ing. In fact, outsourcing may actually be drivingcosts. Telcos may want to take a closer look attheir own outsourced processes and see if theirgoals are truly being met.◊ Telcos should think carefully about both cost cut-ting and value generation, and how each strategycan be used to align the IT cost position—andinvestments—with the telco’s long-term businessstrategy. Whether the focus is on growth, on sav-ings or middle ground, alignment is vital for mov-ing the company, and its prospects, forward.
The Boston Consulting Group 3TeBIT 2012 Executive ReportContentAt a Glance 2Introduction 4IT Does Matter in Business Value Creation 4Cost Reductions Continue, But Not at a Record Pace 8IT Cost Levels: Not Comparing Apples to Oranges, After All 11Fragmented, not Focused, Investment? 12IT Outsourcing: Does It Drive Costs? 13Aligning Cost Position With Business Strategy 14Note to the Reader 16
4 ETISTeBIT 2012 Executive ReportIntroductionIT Does Matter in BusinessValue CreationFor Europe’s telecom market, the story is more of thesame—which means less of just about everything. Reve-nues are still dropping, prices continue to erode and thatall-important metric, average revenue per user, remainson a downward trajectory. Even where there have beengains, the news is bittersweet: an increase in mobile sub-scribers countered by a loss of fixed-line customers andcoming at the price of higher OPEX.To be sure, telecom companies have been hard at workthe past few years trying to cut costs and their IT depart-ments have been the focal point of their efforts. Tradi-tionally, this report—the Telco IT Benchmarking Study(TeBIT)—has taken a detailed look at the IT expenses ofparticipating telcos: how they compare to revenue andprevious years; how they break down over various cate-gories; what patterns and strategies can be seen in thespending. Last year’s benchmark brought encouragingnews: Telco IT departments contributed more than theirshare to cost reduction, while making investments—inareas such as automation—that looked to be the rightones to spur and support innovation.Are telcos continuing down that path? That is the ques-tion this year’s survey, once again conducted by ETIS—the Global IT Association for Telecommunications—andThe Boston Consulting Group (BCG), set out to tackle. Butto truly answer it, the benchmark had to look not only atcosts, but also at where those costs are going—and whattelcos are getting in return. This is something the TeBITsurvey touched upon last year, but now it goes further,looking at the output of IT and the value it helps tocreate for the business.That this deeper dive is essential is clear from a key find-ing of this year’s benchmark: It is getting harder to cutcosts. The low-hanging fruit is gone, or going fast; systemsneed to be updated, IT architectures changed. Cost cut-ting has yet to reach its limit—and continues to be essen-tial—but the huge reductions we saw last year were notrepeated. While IT expenses did drop overall for the sur-vey’s participating companies, most did not manage costsin line with revenues.The benchmark makes clear, however, that cost cutting isjust one lever telco IT units can pull to help move thebusiness forward. Its closer look at the output of IT findsa general correlation between spending and value crea-tion. Thus, the cost position can and should, be alignedwith long-term business strategy. We are already seeingthis happen and the TeBIT shows how IT units can im-prove their alignment still.Indeed, this year’s benchmark does not just provide thenumbers. It gives telcos a lens through which to examinetheir own spending for flaws. The TeBIT finds, for exam-ple, that the varying cost levels among participants aremuch more in line once factors such as size and businessmix are accounted for. This “normalisation” analysis en-ables telcos to better understand how their cost levelscompare to those of other companies.For telco IT units, the challenge is no longer simply to cutcosts, but to align spending with long-term development.It is a strategy that can boost competitiveness and growth.And it is a strategy, as telcos are already discovering, thatworks.The pressure on IT budgets continues. For participatingtelcos, 2011 revenues were down an average of 2.7 per-cent from the previous year (worse even, than the marketaverage of 1.7 percent). ARPU declined by 4.3 percent,steep enough that a modest uptick in subscribers, by1.8 percent, could not rescue revenues. EBITDA droppedtoo, by a sizable 7 percent—the result of lower revenuescombined with rising OPEX (up 1.2 percent).The shrinking pie does not just mean that telcos need tocut where they can, but that the money they do spendshould be spent wisely, with optimal impact on theContinued on page 7
The Boston Consulting Group 5TeBIT 2012 Executive ReportScore10080604020010028 28 24 2013 13 10 4913Telco BAverage3391294Telco Z5612 18 17 9Telco ATelco Y10181922 68419101111Max. possible scoreBusiness value scoreBilling and CollectionAssurance/Customer ServiceFulﬁlmentProduct Mgmt., Market Sales Mgmt.••••••Source: TeBIT 2012Figure 1 | Limited variation in participants business value scoresCalculated value score based on business KPIsCyta is a comparatively small incumbent Telco. Howdoes that fact impact your IT efforts? Are there cer-tain advantages that an IT unit at a small Telco canleverage?The main difficulty we face in IT is one shared by largeincumbents in bigger countries: How to provide supportfor the entire product range—from mobile to fixed lineto IT services—and provide it for both private and busi-ness customers. However, we cannot afford to have an ITdepartment as big as that of an incumbent in a largercountry.This means that our IT people need to spread theirefforts across a wide range of topics, at the expense ofdepth and specialisation. So, when very specific expertiseis required, we end up creating non replaceable internalexperts, or we need to rely on third-party suppliers.On the other hand, the small size of our company andphysical proximity allows our IT professionals to be wellconnected—not just to each other but also to the busi-ness departments. This enables business issues to beresolved much more quickly and gives our IT unit greateragility than IT units of large companies.Cyta’s revenues from its mobile and fixed businessesare of very similar size. Does this result in specific chal-lenges for the IT unit?While half of our revenues come from mobile services,the other half comes from a broad range of servicesbesides fixed line telephony. This includes broadbandinternet, IPTV, national and international wholesaleproducts, and business products including services andsolutions. Despite the lower contribution to overallrevenue from some services, we have never considered“Be very realistic and involve all stakeholders”Aristos Ririsis Senior Manager Networks at Cyta.Costas Psillidesis IT Applications Manager at Cyta.
6 ETISTeBIT 2012 Executive Reportabandoning these, since their existence adds to ourbrand and differentiates us from our competition. How-ever, this diversity naturally creates a much greaterchallenge to IT than if we were a mobile-only provider.We have undertaken efforts in the past to streamlineour IT and offer fixed-mobile convergent services butnot with the expected success. To be successful it isvital to approach such projects in a very realistic manner,and make sure that all stakeholders are included andheard.ERP has been one of Cyta’s major investment areas.What were the reasons for focusing here,and what bene-fits have been realised? Have there been any lessonslearned?The reason for the ERP investment was to increase produc-tivity, exploiting the ERP ability to have an integratedview of our business activities. But it was also a fore-runner for our IT transformation project.The main lessonwe learned is that good change management is impera-tive and that we need to apply a different set of skills tothis type of projects. We realised that it takes more timethan initially anticipated for the users to see the benefits,and technical problems always exist on the road even forERP systems which are well established in the market.We learned too, that in order to achieve the right ba-lance between internal application management and in-tegrator support as well as challenging the recommen-dations of third-party vendors and integrators, we needto build a good level of expertise and competencies in-house, and this takes time.What do you see as the most important trends for Telcosin the coming years? Which IT trends do you adopt?First, we see the upgrade of the access network as animportant task for Telcos. This includes fibre to the homeon the fixed side, and the upgrade of the radio access tosingle RAN on the mobile side. This will have significantimplications on IT.Second,the cloud will definitely impactour business as well as our clients’.The needs of our busi-ness customers are changing significantly. We are seeingan increasing demand for more flexible, customised solu-tions—increasingly for vertical services along the com-plete Telco and IT product portfolio.As a result, Cyta needs to rely on flexible IT systems andIT professionals who understand the business and canhelp clients be successful in the future.In this context,webelieve in a “right-sourcing” approach,aiming for the rightmix of in-house application management, outsourcing,and third-party software, utilising Commercial-Off-The-Shelf applications and Service Oriented Architecture.Do you expect Telco operators to invest significantlyin Business Intelligence (BI)?At Cyta, we have a very comprehensive data warehousesystem handling a large amount of information, however,currently we are not utilising its full potential and thereis no specific BI function at Cyta. This is certainly an areawe would like to look into further. Identifying what speci-fic information is useful to the businesses and how topresent it in a more tangible and actionable way, is whatBI should be all about and, at the end of the day, we be-lieve this can make a big difference to the business.What can Telco IT units learn from Internet companies?Internet companies changed the world through innova-tion and flexibility. They involved their customers in thedevelopment of new applications and services—the cus-tomers essentially became part of the ecosystem. Wecan also benefit from this type of thinking. We shouldcollaborate with customers to quickly detect their chang-ing needs. We should collaborate with third-party ven-dors to provide better value to our customers.Agility and flexibility need to be built into the entirebusiness model. The IT operations model is beingpushed towards service delivery and Service OrientedArchitecture. However, this orientation should be expan-ded to the whole organization, as it is applicable to thewhole business, not just IT.How important is a stable IT architecture for a highlyproductive and efficient IT?My short answer is that it is absolutely necessary. Weneed to have a clear vision of where we are heading inthe future and an IT architecture that supports the stepstowards this future. This is of course a challenge—but itis a necessity by all means.How long do you expect the pressure on IT costs tocontinue?Right now, everybody is changing IT systems to decreasecosts, us too. Unfortunately, we have to invest first, socosts go up in the short term. Down the road, thesesystems, besides improving the position of our businessin the market, should result in savings. We see thisperiod of change as a good opportunity to introduceappropriate KPIs and metrics that can help ensuresuccess—and these can also be used for continuoustracking of IT costs.
The Boston Consulting Group 7TeBIT 2012 Executive Reportbusiness. In short, more bang for the buck. Traditionally,IT departments have pointed to value creation to justifytheir cost position: higher IT costs meant higher businessvalue. But is this really the case? This year’s benchmarkdrilled down on that claim.The survey asked participants for an assortment of KPIs,such as average provisioning time, average churn andnumber of customer complaints. These were thengrouped along key processes: product and sales manage-ment; fulfilment; billing and collection; and assuranceand customer service. While the KPIs are impacted bymany factors, IT plays an important role for each of them.Thus, comparing the IT spending telcos allocated to theseprocesses with how well they performed should give agood idea of how spending correlates to business valuecreation.This analysis revealed that there was a general correla-tion between spending and value creation, though thelink was stronger in some areas (such as product manage-ment and sales) than others (like billing and collection).For one area—fulfilment—higher spending did not neces-sarily result in higher quality in the process.A second key finding was that no telco led in all businessareas. For each of the four processes, the telcos receivedscores based on the related KPIs (the maximum possiblescore varied for each process, corresponding to its shareof overall IT spending). Some operators led for one oreven two of the processes, but all lagged somewhere. Thiscould mean that telcos were selectively targeting certainareas for value creation. Or it could mean that they hadburning platforms that required special attention. Mostlikely, some telcos fell into one category and some intothe other.But perhaps the most important takeaway from thisanalysis is that telcos have to make a choice about their costposition: Do they want “no-frills IT” (low value creation,but low cost) or “premium IT” (high value creation, but ata high cost)? This choice should be aligned with their over-all business strategy. No-frills IT, for example, would bethe ideal position for a telco prioritising cost reduction.Premium IT would suit a telco focusing on growth.Of course, telcos have to ensure that their cost positionactually is what it claims to be. The TeBIT’s KPI analysislets them put it to the test. The benchmark found thatmost of the telcos were getting what they paid for—oreven more (see Figure 2). But the analysis also revealedthat some were spending above-average amounts but get-ting below-average value. That is neither no-frills IT norpremium IT, but an IT position that may benefit fromsome adjustment.Continued from page 4IT spending in % of revenue5 74 60Totalbusiness value scoreØ =4.6%Premium IT?No frills ITValue for money IT706050400Business value scoreBestAverageWorstNote: Some data points have been added to ensure confidentiality of participantsSource: TeBIT 2012Figure 2 | Higher business value creation seems to drive IT cost
8 ETISTeBIT 2012 Executive ReportCost Reductions Continue,But Not at a Record PaceLast year’s survey was notable for the aggressive costcutting undertaken by telecom companies; on average,IT costs declined even faster than revenue. The 2012benchmark finds that the momentum has slowed.While participating telcos did reduce their IT spendingoverall, they averaged just a 0.6 percent drop—com-pared to an average revenue decline of 2.7 percent.IT CAPEX dropped by 2.1 percent, while IT OPEXremained stable.Moreover, unlike last year, when nearly every telco wasparing its IT budget, strategies were all over the map. Ofthe 70 percent telcos that saw falling revenues, around 45percent decreased their IT spending by more than 5 per-cent, but another around 45 percent increased it by morethan 5 percent (the remaining increased it by around 2percent). Of the 30 percent telcos that saw positive reve-nue change, only a third boosted its IT spending andeven in that case, IT spending as a percentage of reve-nues dropped.A possible explanation for this cloudier picture: sometelcos may have determined that they could not cutfurther—or hold off on IT upgrades—without impact-ing business. Outdated IT after all, can be just as hazar-dous to the bottom line as any obstacle the markettosses a telco. This theory seems particularly plausiblefor operators in the mature telco markets, where ITOPEX decreased by 6.3 percent (showing a continuingcommitment to cost reduction), but IT CAPEX rose by1.7 percent (showing more investment in IT infrastruc-ture).Yet while cloudy, the forecast is certainly not gloomy.Overall, the telcos are still on track with—and actuallya bit ahead of—the long-term IT cost reductions theymust make to keep spending as a percentage of reve-nues constant with 2009 levels. The loss of momentumdid eat into some of the breathing room they hadcreated with 2010’s aggressive cuts, but there is stillaround a 5 percent buffer. Even if spending and revenuescontinue to drop as they did last year, the buffer willremain until 2014. That gives telcos a couple of yearsto fine-tune their cost position and make sure it isaligned with business strategy—whether that strategy isto lower costs or to spur growth.IT OPEX as % of revenuesIT OPEX, changes 2010–11%0-104.4-6.30.15-5%0-10 5-5%0-10 5-5% 4204202.22.02.1Share of IT OPEX%422.214.171.124IT CAPEX as % of revenues%2.03.12.4Share of IT CAPEX% 2010014.916.915.7IT CAPEX, changes 2010–11-4.71.7-2.1IT spending as % of revenues% 64126.96.36.199Share of IT spending% 10506.46.56.5IT spending, changes 2010–11-0.5-0.9-0.6Market avg. Mature market avg. Emerging market avg.Source: TeBIT 2012Figure 3 | IT OPEX stable, IT CAPEX dropped by 2.1%
The Boston Consulting Group 9TeBIT 2012 Executive ReportIT spending grewfaster than revenueIT spending declinedfaster than revenue-5-10Changes in ITspending in %105050-5-10 10Changes in revenues 2010 to 2011 in %Note: Some data points have been added to ensure confidentiality of participantsSource: TeBIT 2012Figure 4 | Not all operators could adjust IT cost to declining revenuesTelenor is active in various, very different markets—both emerging and mature—across the world. Canthese be served and supported by one unified or evenconsolidated IT?Given that IT comprises a large number of componentsfrom data centers to customer-facing applications, thereare certainly areas that have the potential to be unified.all in all, we aim to further improve the efficiency of ouroperations and hence naturally look at exploiting econo-mies of scale wherever this makes sense.The basic opera-tions structure, i.e., IT infrastructure and end-userequipment, provides a great lever to achieve this goal.all our operations are cost-sensitive, but this is evenmore important in emerging markets. Therefore, we fol-low an approach to design a common platform in asiaand then roll this over into mature markets. The nextquestion is whether we should unify the full BSS stackacross all markets. From a technological standpoint,there are no major barriers to do this. In fact, we aredeveloping a platform that can support all businessunits. However, I am not yet sure whether we shouldreally follow this unification for all business units.What are specific customer expectations in emergingmarkets, and how does this impact/influence therequirements of an IT unit in these markets?In mature markets, we see a shift in demand to inte-grated, advanced services comprising voice, messaging,data,and additional mobile services.In emerging markets,the main focus is still on traditional voice and messagingservices. We see growing demand for data services andInternet-based services in parts of asia, and I stronglybelieve that the growth in data services will come fromthe asian markets, not the european market.“TelcOS HaVe Been FenceD GarDenS FOr Many yearS.THeSe WallS are cOMInG DOWn.”Trond-Ove Breivikis Telenor’s Group CIO.
10 ETISTeBIT 2012 Executive ReportGiven the expected, continued growth in mobile cus-tomers in emerging markets, what is your strategy forthe IT in those markets going forward?Given the much lower ARPU in emerging markets thanin traditional telco markets, the main focus has to be costefficiency. Customer demand revolves around low-cost,good-quality basic voice and messaging services. We alsosee demand for data services, but there are huge regionaldifferences. For example, the data market in Malaysia ishuge given the broad penetration by the Internet. In ruralPakistan, however, the picture is entirely different. Thebottom line is that it is essential to be an extremely cost-efficient operator. Based on these roots, we have the op-portunity to move the Asian markets to the Internet age.Do you see strategic components for Telenor IT thatare important for emerging as well as mature marketsand that you try to establish across Telenor Group?The basic pillar of being successful in any market is costefficiency. We aim to reduce our spend on the “run” partof our operations to a minimum to free up resources forinvesting in new customer services.How does Telenor align business with IT strategy?Do you follow specific processes or do you have specificgovernance bodies installed?At Telenor, each business unit is required to have astrategy documented in a business plan. This strategyneeds to be aligned with the group strategy and thetechnology strategy, which is ensured by review and revi-sion at group level. At this point, we are transitioningfrom extremely autonomous business units to a moreintegrated group, where strategies are more and moredefined at group level. In this process, we introduceshared services for, e.g., finance, HR, and IT. However,we do not want to deprive the business units of settingtheir own strategy but rather make room for thebusiness units to focus more on strategies how to bestserve their customers in their respective markets.To what extent do you automate your processes or doyou work with manual interfaces? Do you foresee a needto strongly increase automation in the near future?Our philosophy is to automate activities that can be auto-mated and use automation where quality can beimproved by eliminating sources of error. At the sametime, however, we pay close attention to not destroyingthe customer interface. We do not want to lose the hu-man touch by turning Telenor into an automated inboxfor customer complaints. We need to be good at dealingwith humans, since at the end of the day, our customersare humans.Which areas are you currently most heavily investing inand why?We see the main investments being driven by end-of-lifescenarios. In our case, this means replacing CRM, billingplatforms, to name a few. However, while replacing olderplatforms, we aim to remove the silos that exist betweenclassic voice and messaging and new data services, aswell as post- and prepaid services and move to a moreconvergent platform. We have done quite a lot of that inAsia already, but our European operations also requirerenewal of some of their systems soon.Apart from the BSSarea,we also need to invest in the OSS area,especially forthose operations that offer fixed, broadband services.What do you see as the most important trends for telcosin the coming years? Which IT trends do you adopt?Telcos have been fenced gardens for many years withproprietary technology and very nice regulatory walls.These walls are coming down quite quickly, especiallywith telco equipment becoming more IP-based. With newcommerce on top of Internet-based services and smallerMVNOs entering the market, our business is challenged.Hence the traditional thinking within telcos has to be re-vised. One focus for us is to provide smart connectivity sothat our customers can trust in Telenor services to bemodern, reliable, and scalable. At the same time, weneed to look at our cost position. Typical ICT players,such as Skype, come in with a global delivery platform,one interface, and almost fully automated services— allwithout local assets. This is very different from the tradi-tional, resource-demanding services our business it builton. However, I believe in our potential to run our businessdifferently, while remaining a trusted brand and posi-tioning ourselves as a high-quality operator that providesservices at a reasonable cost and that is accessible forthe customers when needed.Furthermore, we closely follow IT trends, such as cloudservices and Software as a Service, and see where they fit.These IT trends make the landscape more blurry andallow us to go to market with non-traditional telco services.As an example, we see opportunities for us in providingSOHOs and large enterprises with value-added servicesthat bundle cloud services and communication services.How would you summarise the challenges for telcostoday?My key reflections are: First, protective walls are comingdown, and we need to transform the traditional telcobusiness into a more fluid and dynamic world. Second,the cost levels that we can afford at least in the Europeanmarket will be challenged as we move forward.
The Boston Consulting Group 11TeBIT 2012 Executive ReportIT Cost Levels: Not ComparingApples to Oranges, After AllThis year’s TeBIT once again finds that cost levels varysignificantly among participants. While IT spending aver-aged 4.6 percent of revenues, the spread was wide, rang-ing from 2.8 percent to 6.2 percent. In the past, outliershave justified their results by saying the numbers are notcomparable: A smaller operator cannot benefit fromeconomies of scale; an integrated player has more com-plicated IT. True enough—but that does not mean anoperator is as efficient as it could be.To better show whether providers were under- or over-performing, this year’s benchmark attempts to normaliseIT spending, accounting for three factors that influencecost: a telco’s size, its business mix and its business valuecreation. Granted, other factors play a role too, but bylooking at those considered to have the highest impact,the TeBIT gives telcos a view into how their cost levelstruly compare with those of other operators.What this analysis found was that cost levels were muchmore closely aligned when adjusted for these three fac-tors. Now the gaps did mean something and outlierscould not dismiss their results as unique and non compa-rable. Once normalised, IT spending accounted, on aver-age, for 4.8 percent of revenue. Most participants fellaround that figure, but interestingly several telcoswhose unadjusted IT spending marked them as under-performers, were actually outperformers once their costlevels were normalised.The key message here is that, yes, there is no single,simple target for IT spending—the amount will varydepending on a telco’s circumstances. But it is possibleto see whether spending is really aligned with thosecircumstances. For the majority of telcos, the TeBITshows that it is.Actual IT spendingin % of rev.Sizecorrection¹Business mixcorrection¹Business valuecorrection¹Normalised ITspending in % of rev.0Telco B6.2Telco Z2Telco Y645.7Mean 4.784.2Telco A 2.810-1-0.20.00.20.2-0.8210-1-0.1-0.11.00.60.810-10.0-0.1-0.8-0.2-0.3864205.05.56.5Ø =4.8%••••••••••••Adjusting that smallerplayers do not beneﬁtfrom economies of scaleAdjusting that mobileonly players tend tohave a much simpler ITAdjusting that highbusiness value creationdrives IT cost3.73.21. ∆ IT spend in percent of revenueSource: TeBIT 2012Figure 5 | However, adjusted for size, business mix and business value creation,IT cost levels are much more aligned
12 ETISTeBIT 2012 Executive ReportFragmented, not Focused,Investment?Given the tight budgets and tough competition in thetelecom market, one might reasonably assume that ITinvestments are being narrowly focused on high prior-ity projects: a select group of initiatives most likely tospur innovation, efficiency or reduced process costs. Butthe TeBIT data suggests otherwise.This year’s survey drilled down on IT CAPEX in farmore detail than in the past. What we found was sur-prising. On average, just 23 percent of each partici-pating telco’s investment went into their top five IT pro-jects. For no telco was the figure more than 40 percent,and for one it was only 13 percent. Indeed, when welooked across all TeBIT participants, analysing howmuch, as a group, they spent on any initiative that hadbeen named as a top-five project, the figure was just 17percent. So much for the notion that telcos were con-centrating their investments on a few strategic issues.What explains this finding? It could be that last year’sbig reductions killed or severely curtailed funding forsome major projects. It is possible too, that many smallerprojects have been funded to comply with regulatoryrequirements, or because they do not cost too much. Itmight also be the case that some telcos are indeed,focusing on a core group of projects but are having diffi-culty allocating costs to them—a lack of transparencythat will cause more problems down the road if notaddressed. Then there is the simplest and perhaps mosttroubling, explanation of all: that telcos have not yetdecided to focus their investments.Or, perhaps more accurately, they have not focused themenough. The benchmark does show the telcos priori-tising areas where they see the biggest payoff. Thelargest shares of IT CAPEX are going into general infra-structure and billing and collection projects and indeed,those are the areas where survey respondents say theyexpect the most beneficial impact. But with theseprojects receiving just 4.9 percent and 3.8 percent ofIT CAPEX respectively, the question is whether thetelcos are hedging their bets.The TeBIT also finds that some activities, even if theyare not receiving a significant share of investment capi-tal, are popular among the telcos. Of the ~70 percentShare of IT CAPEX on initiative to total IT CAPEX in %88.04.02.00.0Other85.0SOA0.0BI0.0ITSecurity0.0CRM2.7BillingandCollection3.8GeneralInfra4.90.2ERP0.1ITDigitizationand Automation0.01.4ITarchi-tectureCOTS1.9SDP1.8¹1. Other initiatives named as Top 5 initiavtivesSource: TeBIT 2012Figure 6 | Project fragmentation—85% spent on smaller projects
The Boston Consulting Group 13TeBIT 2012 Executive ReportØ =4.6%Ø =33.1%IT spending as % of revenue7.06.05.04.00.00 20 25 30 35 40 45 50Outsourcing costas % of IT spending 2011Note: Outsourcing as defined here includes standard outsourced services and temporary project work undertaken by external IT service providers;Some data points have been added to ensure confidentiality of participantsSource: TeBIT 2012Figure 7 | Does outsourcing drive IT spending?participants that broke down their IT CAPEX spending,all were pursuing CRM projects and ~85 percent ofthem had ongoing activity relating to IT security, busi-ness intelligence and commercial off-the-shelf softwareapplications. How COTS was being used varied; whilesome participants used it for 90 percent or more oftheir marketing and product management processes,others used it for around 10 percent of those processes.Sales and order, customer service, technology manage-ment and cross-functional services were other areaswhere the use of COTS varied widely. What this demon-strates is the applicability of COTS to many telco pro-cesses—and the potential for expanding it furtheracross each organisation.The benchmark also shows that many operators arecontinuing to invest in automation—a smart strategy,as the TeBIT data demonstrates a link between auto-mation and satisfaction. The correlation, however, isnot uniform or universal. While sales and order, fulfil-ment, billing and collection, retain and winback allhave a good correlation of automation and satisfaction,customer service does not. The data also shows thatbilling and collection is already highly automated, withsales, fulfilment, and retain and winback less so. Theseare all points telcos should consider when decidingwhere to focus their automation investments.IT Outsourcing: Does ItDrive Costs?Outsourcing continues to be a popular strategy for TeBITparticipants, accounting for an average of 33 percent ofIT costs. The data can certainly be interpreted to call itsuccessful: participants are largely satisfied with theiroutsourced services, which have a particularly strongfoothold in the areas of application development andmaintenance, infrastructure development and supportand training. About half of the telcos anticipate increa-sing their level of outsourcing; just two plan to decreaseit. But the number-one reason participants cite for out-sourcing is cost reduction—and the TeBIT data suggeststhat this may not be happening.
14 ETISTeBIT 2012 Executive ReportAligning Cost Position WithBusiness StrategyTelcos over-achieved target IT cost reductions in 2010,but could not repeat this feat in 2011.Is that cause for alarm? Probably not. IT expenses tendto rise and fall in cycles and spending that improves sys-tems is likely to be more beneficial in the long run thansavings that let systems become obsolete. And that isreally the key message of TeBIT 2012: telco IT unitshave to think about long-term development. They needto make a deliberate choice about the business valuegeneration they want to achieve and what a fair cost forthat position would be. The new analyses added to thebenchmark this year—looking at the correlationbetween IT cost and value creation and normalising ITlevels among very different telcos—should help opera-tors hone their cost position.Cost cutting must continue, of course and that meanstelcos should take a hard look at their outsourcing. Is itreally bringing the expected cost savings? If not, is itadding value in other ways, and enough of it? Theyneed to take a closer look too, at their investments. Arethey focused, and most importantly, are they focused inthe right places? Automation should be pursued; inTeBIT 2011TeBIT 201020080.002014201320122011201020090.900.850.800.750.70Change in ITspending1.000.95Average change in IT spending across all participants comparedto change required (= average decline in revenue)Required change in ITspending (as calculatedfrom change in revenuein TeBIT 2011 and 2012)Required change in ITspending predicted byTeBIT 20105% bufferremainingTeBIT 2012Actual change in ITspending as achievedby participantsNote: The change in revenue and IT spending has been calculated from the revenue and IT spending of the participants of the respective TeBIT yearSource: TeBIT 2012Figure 8 | TeBIT ‘10 stated Telcos have to heavily cut costs to keep IT as % of revenues stable—actually, telcos outperformed thisIndeed, what the survey does show is that higher levelsof outsourcing seem to correlate with higher IT spending.This does not necessarily mean that outsourcing is dri-ving costs; it could be that the telcos which spend moreon IT just happen to have more outsourcing. But it doesnot back up the notion—shared by many telcos—thatwhen you outsource IT you lower your costs. It is worthnoting that a link between outsourcing and cost savingshas not been seen in other IT-intensive industries such asbanking and insurance. Telcos may want to take a closerlook at their own outsourcing and see if their results aretruly consistent with their goals.
The Boston Consulting Group 15TeBIT 2012 Executive Reportsome areas perhaps, more than others. So too, shouldcommercial off-the-shelf software and less complex ITarchitecture—which can lower costs as well as head-aches.No doubt, these are challenging times for telco IT units.But for those that think carefully about the issues raisedby TeBIT 2012 and plan accordingly, this can be a timefor opportunity too—to create not just value, but growth.
16 ETISTeBIT 2012 Executive ReportNote to the ReaderAbout the authorsEirini Markoula is BenchmarkingProject Coordinator in the ETISCentral Office in Brussels.Frank Felden is a Partner andManaging Director in the Cologneoffice of The Boston ConsultingGroup and the global leader forthe IT in Telco segment.Thomas Krüger is a Principal inthe Düsseldorf office of The BostonConsulting Group and topicchampion for IT architecturein telco.Diana Siegel is an Associate inthe Munich office of The BostonConsulting Group.AcknowledgmentsThe authors thank all partici-pating telecom operators andindividuals who contributed toTeBIT and to this publication,including Aristos Riris, CostasPsillides, and Trond-Ove Breivik.We also thank Astrid Blumstengel,Alan Cohen, Sebastian Puia, andMathias Richter for their help inthe data validation, writing, editing,design, and production of thispublication.For further contactEirini MarkoulaETIS Brussels+32 488 463 email@example.comFrank FeldenBCG Cologne+49 221 firstname.lastname@example.orgThomas KrügerBCG Düsseldorf+49 211 email@example.comDiana SiegelBCG Munich+49 89 firstname.lastname@example.org