1A Fitness Program for GCC TelcosA Fitness Programfor GCC TelcosThe boom years are coming to an end for the GulfCooperation Council region’s telecom market. Gettingin shape by reducing costs and improving productivityis now a top priority for telcos.
2A Fitness Program for GCC TelcosYears of strong growth and limited competition have brought telecommunications operators inthe Gulf Cooperation Council (GCC) region some of the industry’s highest margins.1 Between2004 and 2007, GCC telcos’ revenues grew 15 percent annually, with earnings before interest,taxes, depreciation, and amortization (EBITDA) margins hovering around 47 percent.But the boom is coming to an end. GCC telecom markets have become increasingly saturated,with competition intensifying and prices falling. Annual revenue growth in GCC markets nowaverages just 4 percent, and it may remain flat or even decline in 20122 (see figure 1).As a result, GCC telcos need to “get fit.” By undergoing regular health checks and staying inshape, telcos can earn a financial payoff with the potential to create an immediate impact anda long-term, sustainable advantage (see figure 2). For example, Deutsche Telekom’s “Save forService” efficiency improvement program that focused on procurement, product portfoliostandardization, and shared services resulted in $7.8 billion in savings between 2006 and 2010,with another $5.5 billion savings targeted by the end of 2012.3 The same level of savings isavailable to operators in developing markets. In 2010, South Africa’s MTN increased its EBITDAmargin by 2 percent after building the framework for stricter cost management and optimization.4Compounding PressuresThere are a number of reasons why getting fit has become an imperative. Increased datarevenues are unlikely to offset the ongoing decline in voice revenues, which still constituteFigure 1The boom that brought growth and profits to GCC telecom markets is endingFigure 1The boom that brought growth and profits to GCC telecom markets is ending2008–20112004–200727%44% 42% 47% 41% 38% 39%15%4%4%4%30%25%20%15%10%5%0-5%-1%Developing markets GCC players Developed marketsAverage EBITDAmarginsCompound annual revenue growth rate, telcos** Data is based on companies in 22 developed countries, 30 emerging countries, and the four largest GCC companies.Sources: Bank of America Merrill Lynch, Bloomberg, company annual reports; A.T Kearney analysis 1 The Gulf Cooperation Council is a political and economic organization that includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, andUnited Arab Emirates (UAE). 2 Fitch Ratings, 2012 3 Deutsche Telekom Annual Report 2011 4 MTN 2010 Annual Report
3A Fitness Program for GCC Telcosa significant portion of total revenues. Furthermore, increased competition from new mobilechallengers and mobile virtual network operators (MVNOs), together with stronger regulatoryinterventions, including termination rate reduction, number portability, and bitstream (whichallows rival operators to offer services over an incumbent’s fixed-line infrastructure), is set toerode telcos’ margins further.Another potential area of concern is the growing use of handset subsidies to attract and retainsubscribers, especially in more mature markets. In Europe and the United States, handsetsubsidies have had a significant impact on some operators’ direct costs and profitability. In theGCC, telcos will have to monitor this development, along with the current explosion in demandfor smartphones and tablets (which have higher prices than traditional phones).At the same time, operators will need to invest continually in expanding their network capacityand rolling out new technologies, such as fiber-optic networks and high-speed mobilebroadband (4G), to meet the increasing demand for data—all while facing pressure from share-holders to limit capital expenditures and maintain healthy cash flows and attractive returns.Compounding these commercial challenges is the fact that most GCC governments, which holdsignificant shares in regional telecom operators and have grown accustomed to reaping boom-erabenefits, continue to seek major returns from the telecom cash cow. The taxes and royalties paidto GCC governments by telecom firms—usually a percentage of net profits—comprise between1 percent (Saudi Arabia) and 17 percent (UAE) of GCC countries’ public budgets.5Governments are also more than ever expecting telcos—in particular incumbents—to fulfillsocial goals by hiring, retaining, and training a higher percentage of nationals, rather thanacquiring less-expensive expatriate workers. These government policies, which aim to reduceunemployment and strengthen the knowledge-based economy, entail higher costs for operators.Figure 2“Getting fit” helps operators decrease their costs every yearFigure 2“Getting fit” helps operators decrease their costs every year*Based on a sample of 100 operators worldwideSource: A.T. Kearney analysis1007550250-7%Average cost per customer*(Indexed: 2007 = 100)2007 201120102009200874788492100 5 Economist Intelligence Unit, company annual reports; A.T. Kearney analysis
4A Fitness Program for GCC TelcosFigure 3Different levers will help different functionsFigure 3Different levers will help different functions* Subscribers acquisition costs and subscribers retention costs** WC is working capital*** Includes functions such as finance, HR, procurement, supply chain, and corporate communicationsSource: A.T. Kearney analysisOperationalefficiencyimprove-mentStrategicsourcingOptimizeSACs andSRCs*RevenueassuranceCapexprioritiza-tionWCefficiencyand assetleverage**DisruptivebusinessmodelsNetworkITSalesMarketingCustomermanagementIntercon-nection androamingSupport andoverhead***Indicates that lever is particularly relevant to this functionSelect examplesCross-functional leversFunction * Subscribers acquisition costs and subscribers retention costs ** WC is working capital. *** Includes functions such as finance, HR, procurement, supply chain, and corporate communications Source: A.T. Kearney analysisIn this new era, operators will need to improve operational efficiencies while enhancing thecustomer experience. GCC telcos must “get fit” and stay that way. In essence, this meansincreasing efficiency and productivity, and reducing costs without impacting quality.Deploying a Successful “Fitness Program”In regions with mature telecom markets, operators years ago initiated operational efficiencyprograms that continuously streamline operations and optimize capital expenditures. However,executing a telco “fitness program” is a challenging, long-term exercise, especially for operatorsattempting to get fit for the first time.Effective fitness programs generally comprise three distinct phases:Phase 1: Perform a check-up. A first assessment phase is crucial. It creates the case for change,defines the level of ambition required to reduce costs significantly, and pinpoints the areas withthe most substantial improvement potential. Here, telcos can consider a range of performanceimprovement levers across many functions (see figure 3).
5A Fitness Program for GCC TelcosHow and Where Telcos Can Cut CostsTwo-thirds of telecom operators’costsareoftenindirectandone-third are direct (see figure 4).This split can vary, however.Mobile operators often havehigher direct costs due tohandsets and commissions.Both mobile and fixed operatorsare grappling with falling pricesbrought on by competition andregulatory changes. Globally,between 2009 and 2011, mobileoperators’ average revenueper user (ARPU) fell 10.3 percent,and fixed operators’ ARPUfell 3.3 percent, according toA.T. Kearney’s Global CompetitiveBenchmarking (GCB).During the same period, telcosbecame more efficient: Mobileoperatorssawaverageefficiencygains (as measured by totalindirect cost per customer) of11.1 percent, and fixed operatorssaw 5.8 percent gains. Becausedirect costs are more difficultto address, efficiency programsusually focus on indirect costs.The efficiency gains have comefrom the following areas:Network, marketing, and IT.These three areas have themost potential for optimizingoperational and capital expen-ditures, typically by reducingcomplexity.Supply chain and procurement.GCC operators’ rapid inter-national growth—often throughacquisitions—means there aregenerally plenty of opportuni-ties to improve supply chainand procurement capabilities.By standardizing purchasingrequirements and internaltechnical specifications, con-solidating volumes, andoptimizing deals with suppliers,operators can cut costs withoutaffecting core operations.Telenor, for example, reducedits software licensing costs by34 percent by replacing locallicensing agreements with globaldeals.6 GCC telcos will need touse the full scale of their groupsto create synergies, reduceexternal spending, and benefitfrom solid supplier relationships,which can bring earlier accessto new handsets and networkequipment. 6 Bjørn Harald Brodersen, Head of Group Sourcing, Telenor, “Sourcing in Telenor Group.”Notes: Support and overhead includes functions such as finance, human resources, procurement, supply chain, and corporate communications.Percentages may not add up to 100 because of rounding.Source: A.T. Kearney analysisFigure 4Cost breakdown for telecom operatorsTypical operatorInterconnectionCost of goods soldCommissionsNetworkInformation technologyCustomer managementSupport and overheadSalesMarketing and product development57%25%18%58%11%8%8%7%7%66%Indirectcost34%Directcost
6A Fitness Program for GCC TelcosBenchmarking activities can identify areas with the highest potential for improvement andthe greatest need for top management attention (see sidebar: How and Where Can TelcosCut Costs). By applying international best practices, benchmarking also identifies clearimprovement targets that quantify how much value is achievable.A useful starting point for assessing cost performance is A.T. Kearney’s Global CompetitiveBenchmarking (GCB). More than 100 operators around the world participate in the GCB, whichprovides an annual comparison of mobile, fixed, and converged operators’ costs and perfor-mance, and has become the de facto industry baseline for operational excellence.The GCB measures opex (operating expenses), capex (capital expenditures), working capital,and other key performance indicators (KPIs) against comparable operators, thus allowingdetailed analysis of performance for any given costs. Cost transparency, supported by detailedbenchmarking results, forms the basis for a sound health check and is the foundation upon whichto build a strong case for change (see figure 5 on page 7). Benchmarking not only identifies andquantifies areas of potential overspending or low productivity, but also points out areas of under-investment, or insufficient service maintenance, leading to higher costs in other areas.Recently, A.T. Kearney benchmarked a GCC telco’s operations in its home market. Thebenchmark showed low IT spending compared to similar operators, but in other functionalBack office. Consolidating back-office functions such as HR andfinance, potentially by estab-lishing central or regional sharedservices, can increase efficiency.Information technology.Centralizing IT services andstandardizing or consolidatingapplications and hardware cansubstantially reduce costs andoften improve service.Infrastructure sharing. Sharinginfrastructure among operatorsis another way to optimize costsand leverage economies of scale.For example, Bharti, Millicom, andVodafone (Spain, Germany, U.K.,India, and Ireland) have sharednetworks with other operators.In Sweden, 3 and Telenor’s jointventure, 3GIS, covers around 70percentofitsnetworkwithsharedinfrastructure.Outsourcing. Outsourcingnon-core activities, such asfleet services and facilitymanagement, can improveefficiency and allow moremanagement focus on customers.Newer outsourcing modelsinclude managed capacity,where an outsourcer is paidon a variable utilization orcapacity basis. These models,besides increasing efficiency,reduce risk, and limit financingneeds while fundamentallyshifting the focus from opera-tions to customer experienceand partnership management.Bharti Airtel’s so-called “MinutesFactory” has enabled it to targetmillions of pre-paid customersthat would have been too costlyto serve using the conventionalsubscriber-led model.7 Thefactory’s key elements includeoutsourced network equipment,which enables fixed costs toconvert to variable costs. Bharti’spartnerships enable it to addnetwork and IT capacity quicklyand efficiently, as needed.Energy efficiency. Energyefficiency can cut costs whilereducing environmental impact.France Telecom-Orange, forexample, is aiming to reduceenergy consumption by 15percent between 2006 and2020.8 By the end of 2010, thegroup had fitted more than 8,000network sites with optimizedventilation systems, cut energyconsumption at data centers,and installed solar-powered basestations (mainly in Africa and theMiddle East).Cross-functional processes.Streamlining, strengthening, orre-engineering certain cross-functional processes can makethem more customer-orientedwhile eliminating departmentalsilos that lead to duplication andinefficiency. Further organiza-tional changes, such as consoli-dating departments, optimizingspan of control, and can improveservice and cut costs. 7 Rohin Dharmakumar & Shishir Prasad, “Bharti Minutes in Africa,” Forbes India, 28 April 2010 8 FTN-Orange 2010 Annual Report
7A Fitness Program for GCC Telcosareas, particularly sales, customer management, and finance, the operator was spending farmore than its competitors. In these functional areas, staff costs were high, and quality in someareas was suffering because the operator hadn’t automated its labor-intensive processes.Phase 2: Develop a fitness program. A tailored cost and productivity improvement programstarts by delving deep into benchmark results to find the root causes of performance gaps.A company-wide effort can identify core areas to address while also stimulating awarenessand creating a more cost-conscious corporate culture. Such an exercise must involve manyfunctional areas and levels of responsibility and combine leadership with a willingness towelcome, and understand in detail, the excellent ideas that employees from across theorganization can contribute. Involving the entire workforce ensures a thorough approach thataddresses the identified cost-performance opportunities and supports the successful imple-mentation of any initiatives.Cost and productivity improvement initiatives can be categorized into different groups, takinginto account the implementation effort, time required, and expected outcomes in terms of costsavings or increased productivity. They usually fall into three categories: quick wins, structuralimprovements, and transformation (see figure 6 on page 8):Figure 5A.T. Kearney’s Global Competitive Benchmarking (GCB) is the telecommunicationsindustry’s largest databaseFigure 5A.T. Kearney’s Global Competitive Benchmarking (GCB) is the telecommunicationsindustry’s largest databaseNote: KPI is key performance indicator.Source: A.T. Kearney analysisGlobalCompetitiveBenchmarkingfor TelecomsComparecost efficiencylevelsObtainregular inputto budgetand businessplanningAnalyze rootcauses andimprovementactionsIdentifyareas for costimprovementAchievebest-in-classcost structureCompareKPIs andshare bestpractices Note: KPI is key performance indicator. Source: A.T. Kearney analysis
8A Fitness Program for GCC TelcosQuick wins. Telcos can often find immediate results from simple pragmatic steps that createimmediate impact. For example, we recently helped a Middle East operator adjust its travel andexpense policies and reduced annual spending in this area by 10 percent.Structural improvements. These are initiatives with a short- and medium-term impact. Forexample, by using online reverse auctions for a proportion of its procurement, Telefonicareduced its sourcing cycle time by 50 percent and its procurement management costs by27 percent, while achieving considerable savings on external spending.9One potential structural improvement is balancing capital spending on replacement equipmentwith spending on new equipment, while ensuring that each investment is based on a strongbusiness case with attractive returns. For example, some telcos, such as British Telecom, areFigure 6Cost and productivity improvement activities fall into three categoriesFigure 6Cost and productivity improvement activities fall into three categoriesSource: A.T. Kearney analysisQuick winsStructuralimprovements TransformationScopeApproachLevel ofeffortExamplesResultshorizon• Focus on avoidingcertain activities• Base on decisions, such asa policy change• Take a top-down approachto speed up results• Develop plans, businesscase, and implementationsimultaneously• Implement quickly andeasily once managementapproves• Adjust specific policies,such as travel andentertainment• Review outstanding tendersand capital expenditures• Dispose of old inventory• Obtain immediate resultsthrough one-time costimprovements• Focus on improving currentoperations, includingre-engineering processes• Outline detailedimplementation plans andtargets up front• Involve stakeholders earlyto get buy-in• Require substantial effortsat all levels of theorganization• Manage resistance tochange• Establish training programsfor all employees to ensuresuccess• Re-engineer call centerprocesses• Launch strategic sourcinginitiatives• Optimize spectrum usage• Achieve more cost savingsin the short- to mid-term• Transform the operatingmodel• Take a forward-looking view• Prepare for a compleximplementation because ofnumerousinterdependencies• Perform deep pre-executionanalysis• Build a dedicated,experienced team toimplement thetransformation• Command seniormanagement and boardsupport to lead thetransformation• Outsource networkoperations• Share some or all networkinfrastructure• Consolidate functions andshared services centers• Gain long-term advantage(this may requireconsiderable investments) 9 Tim Minahan, “e-Sourcing is A-LIVE and Well in Europe,” Supply Excellence, 13 June 2008
9A Fitness Program for GCC Telcosrolling out fiber networks in a phased manner determined by the level of customer demand, anapproach known as “value-based network roll-out.”Some operators have cut costs significantly by optimizing their backhaul transmission networks,for example by carrying mobile and fixed traffic on a common transport network. One leadingtelecom operator we recently worked with implemented a number of measures to lower itscapex investments, including more efficient use of spectrum and reduction of peak loads on itsnetworks by throttling peer-to-peer traffic at busy times.Transformation. Transforming all or part of the existing operating model can cut costs signifi-cantly. One large European telco client deployed a lean approach to its call centers and networkfield operations in its home market, improving productivity 25 percent.These three categories differ substantially in terms of implementation (straightforwardversus complex) and their impact on how a company carries out its business. Whereas “quickwins” might be simple measures such as adjusting travel and entertainment policies, struc-tural improvements tend to focus on initiatives that take a longer time to implement, such asre-engineering processes.GCC telcos that implement cost-optimization programs can improve theirbottom lines by 20 percent. That’s about$500 million more in total annual netprofits for large GCC telecom groups.Transformation initiatives often have the biggest impact, but usually take the longest time. Theymight include consolidating functions, eliminating duplicate activities, reducing the scale ofoperations, and outsourcing non-core and even some core activities to third parties. Clearly,an organizational transformation may take several years to complete and have a considerableimpact on employees.While some management teams are prepared to implement cost and productivity initiativesthat have a direct impact on headcount, others prefer to avoid such measures. Figure 7 on page10 shows examples of initiatives and their impact on full-time equivalent (FTE) headcount.Whatever route a company takes in its fitness program, successful implementation requirestotal top-management commitment to the point that it should be included in executives’ annualperformance targets and incentive packages. Strong program management is also required.Solid governance with regular steering-committee meetings will help coordinate the implemen-tation effort by acknowledging units that are delivering results while identifying those that arestruggling and need internal or external help.Phase 3: Stay fit by exercising regularly. Staying fit is not a one-time endeavor. It requiresa sustained marathon effort focused on continually improving performance. Leading inter-national telecom groups establish special units, mechanisms, and systems that constantly
10A Fitness Program for GCC Telcosmonitor, benchmark, and, ultimately, improve cost performance. They embed cost perfor-mance into management KPIs and targets. Leading telecom firms in mature markets typicallydesignate a unit (for example, within finance) responsible for benchmarking and monitoringoverall cost performance. These units identify cost optimization best practices within operatingcompanies and disseminate them across the group, driving effective group synergies. Theyalso set cost reduction targets for business units and specific activities—used as input into theannual budgeting cycle—and regularly follow up to measure the achievements. In essence,employees in these units become cost-and-productivity experts and play a pivotal role increating a more cost-conscious culture. GCC telecom operators could benefit from employingexperts from firms in more mature markets where cost optimization has been an integral part oftheir business.Again, top-management leadership is critical. Cost-optimization programs are best led by theCFO, COO, or CEO with support from the management team, while telecom groups shouldcombine both group-led and country-specific initiatives. Cost optimization must be a strategicFigure 7Cost and productivity initiatives and their impact on headcountFigure 7Cost and productivity initiatives and their impact on headcount* CPE is customer premise equipment.Source: A.T. Kearney analysisExamplesQuick winsStructuralimprovements TransformationActions withdirectheadcountimpactActions withno directheadcountimpact• Release non-performingemployees• Change CPE*specs• Rationalize laptop-desktopmix• Reduce sponsorship• Reduce certain employeeallowances• Adjust travel andentertainment policy• Optimize mobile-site poweruse• Adjust training policy• Dispose of old inventory• Re-engineer call centerprocess• Optimize span-of-control• Optimize deployment androll out• Consolidate data centers• Optimize inventorymanagement• Manage fleet demand• Reduce office space• Conduct strategic sourcingand e-auctions for suppliers• Standardize and centralizeIT• Phase out legacy systems• Create shared servicescenters• Conduct overhead valueanalysis• Eliminate overlaps betweenfunctions• Outsource core andnon-core activities• Conduct companywidebusiness processre-engineering• Share networkinfrastructure
11A Fitness Program for GCC Telcospriority with cost-reduction targets and KPIs embedded in employees’ objectives. All componentscombined will drive the transition toward a more cost-conscious corporate culture where costmanagement is a day-to-day strategic priority for all employees.Executing a telco “fitness program” isa challenging, long-term exercise,especially for operators attempting toget fit for the first time.Would-Be Winners Have No Time to LoseAs competition intensifies in the Gulf region, GCC telecom operators have no time to wasteif they want to protect their profitability. Yet getting and staying fit takes time—the quickwins must be followed up by structural changes that can generate immediate savings whileembedding a long-term advantage. As the GCC telco market matures, those that invest the timeand effort to transform their businesses and get healthy will last the course.AuthorsMarc Biosca, partner, Middle Eastmarc.email@example.comLaurent Viviez, partner,London and Johannesburglaurent.firstname.lastname@example.orgRob van Dale, consultant, Middle Eastrob.email@example.com