Getting Fit: A Fitness Program for GCC Telcos

1A Fitness Program for GCC Telcos
A Fitness Program
for GCC Telcos
The boom years are coming to an end for the Gulf
Cooperation Council region’s telecom market. Getting
in shape by reducing costs and improving productivity
is now a top priority for telcos.

Years of strong growth and limited competition have brought telecommunications operators in
the Gulf Cooperation Council (GCC) region some of the industry’s highest margins.1 Between
2004 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 now
averages 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 in
shape, telcos can earn a financial payoff with the potential to create an immediate impact and
a long-term, sustainable advantage (see figure 2). For example, Deutsche Telekom’s “Save for
Service” efficiency improvement program that focused on procurement, product portfolio
standardization, 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 is
available to operators in developing markets. In 2010, South Africa’s MTN increased its EBITDA
margin by 2 percent after building the framework for stricter cost management and optimization.4
Compounding Pressures
There are a number of reasons why getting fit has become an imperative. Increased data
revenues are unlikely to offset the ongoing decline in voice revenues, which still constitute
Figure 1
The boom that brought growth and profits to GCC telecom markets is ending
Figure 1
The boom that brought growth and profits to GCC telecom markets is ending
2008–2011
2004–2007
27%
44% 42% 47% 41% 38% 39%
15%
4%4%4%
30%
25%
20%
15%
10%
5%
0
-5%
-1%
Developing markets GCC players Developed markets
Average EBITDA
margins
Compound 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, and
United Arab Emirates (UAE).
2 Fitch Ratings, 2012
3 Deutsche Telekom Annual Report 2011
4 MTN 2010 Annual Report

a significant portion of total revenues. Furthermore, increased competition from new mobile
challengers and mobile virtual network operators (MVNOs), together with stronger regulatory
interventions, including termination rate reduction, number portability, and bitstream (which
allows rival operators to offer services over an incumbent’s fixed-line infrastructure), is set to
erode telcos’ margins further.
Another potential area of concern is the growing use of handset subsidies to attract and retain
subscribers, especially in more mature markets. In Europe and the United States, handset
subsidies have had a significant impact on some operators’ direct costs and profitability. In the
GCC, telcos will have to monitor this development, along with the current explosion in demand
for smartphones and tablets (which have higher prices than traditional phones).
At the same time, operators will need to invest continually in expanding their network capacity
and rolling out new technologies, such as fiber-optic networks and high-speed mobile
broadband (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 hold
significant shares in regional telecom operators and have grown accustomed to reaping boom-era
benefits, continue to seek major returns from the telecom cash cow. The taxes and royalties paid
to GCC governments by telecom firms—usually a percentage of net profits—comprise between
1 percent (Saudi Arabia) and 17 percent (UAE) of GCC countries’ public budgets.5
Governments are also more than ever expecting telcos—in particular incumbents—to fulfill
social goals by hiring, retaining, and training a higher percentage of nationals, rather than
acquiring less-expensive expatriate workers. These government policies, which aim to reduce
unemployment and strengthen the knowledge-based economy, entail higher costs for operators.
Figure 2
“Getting fit” helps operators decrease their costs every year
Figure 2
“Getting fit” helps operators decrease their costs every year
*Based on a sample of 100 operators worldwide
Source: A.T. Kearney analysis
100
75
50
25
0
-7%
Average cost per customer*
(Indexed: 2007 = 100)
2007 2011201020092008
74
78
84
92
100
5 Economist Intelligence Unit, company annual reports; A.T. Kearney analysis

Figure 3
Different levers will help different functions
Figure 3
Different 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 communications
Operational
efficiency
improve-
ment
Strategic
sourcing
Optimize
SACs and
SRCs*
Revenue
assurance
Capex
prioritiza-
tion
WC
efficiency
and asset
leverage**
Disruptive
business
models
Network
IT
Sales
Marketing
Customer
management
Intercon-
nection and
roaming
Support and
overhead***
Indicates that lever is particularly relevant to this function
Select examples
Cross-functional levers
Function
* Subscribers acquisition costs and subscribers retention costs
** WC is working capital.
*** Includes functions such as finance, HR, procurement, supply chain, and corporate communications
In this new era, operators will need to improve operational efficiencies while enhancing the
customer experience. GCC telcos must “get fit” and stay that way. In essence, this means
increasing 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 efficiency
programs that continuously streamline operations and optimize capital expenditures. However,
executing a telco “fitness program” is a challenging, long-term exercise, especially for operators
attempting 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 with
the most substantial improvement potential. Here, telcos can consider a range of performance
improvement levers across many functions (see figure 3).

How and Where Telcos Can Cut Costs
Two-thirds of telecom operators’
costsareoftenindirectandone-
third are direct (see figure 4).
This split can vary, however.
Mobile operators often have
higher direct costs due to
handsets and commissions.
Both mobile and fixed operators
are grappling with falling prices
brought on by competition and
regulatory changes. Globally,
between 2009 and 2011, mobile
operators’ average revenue
per user (ARPU) fell 10.3 percent,
and fixed operators’ ARPU
fell 3.3 percent, according to
A.T. Kearney’s Global Competitive
Benchmarking (GCB).
During the same period, telcos
became more efficient: Mobile
operatorssawaverageefficiency
gains (as measured by total
indirect cost per customer) of
11.1 percent, and fixed operators
saw 5.8 percent gains. Because
direct costs are more difficult
to address, efficiency programs
usually focus on indirect costs.
The efficiency gains have come
from the following areas:
Network, marketing, and IT.
These three areas have the
most potential for optimizing
operational and capital expen-
ditures, typically by reducing
complexity.
Supply chain and procurement.
GCC operators’ rapid inter-
national growth—often through
acquisitions—means there are
generally plenty of opportuni-
ties to improve supply chain
and procurement capabilities.
By standardizing purchasing
requirements and internal
technical specifications, con-
solidating volumes, and
optimizing deals with suppliers,
operators can cut costs without
affecting core operations.
Telenor, for example, reduced
its software licensing costs by
34 percent by replacing local
licensing agreements with global
deals.6 GCC telcos will need to
use the full scale of their groups
to create synergies, reduce
external spending, and benefit
from solid supplier relationships,
which can bring earlier access
to new handsets and network
equipment.
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.
Figure 4
Cost breakdown for telecom operators
Typical operator
Interconnection
Cost of goods sold
Commissions
Network
Information technology
Customer management
Support and overhead
Sales
Marketing and product development
57%
25%
18%
58%
11%
8%
8%
7%
7%
66%
Indirect
cost
34%
Direct
cost

Benchmarking activities can identify areas with the highest potential for improvement and
the greatest need for top management attention (see sidebar: How and Where Can Telcos
Cut Costs). By applying international best practices, benchmarking also identifies clear
improvement targets that quantify how much value is achievable.
A useful starting point for assessing cost performance is A.T. Kearney’s Global Competitive
Benchmarking (GCB). More than 100 operators around the world participate in the GCB, which
provides 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 allowing
detailed analysis of performance for any given costs. Cost transparency, supported by detailed
benchmarking results, forms the basis for a sound health check and is the foundation upon which
to build a strong case for change (see figure 5 on page 7). Benchmarking not only identifies and
quantifies 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. The
benchmark showed low IT spending compared to similar operators, but in other functional
Back office. Consolidating back-
office functions such as HR and
finance, potentially by estab-
lishing central or regional shared
services, can increase efficiency.
Information technology.
Centralizing IT services and
standardizing or consolidating
applications and hardware can
substantially reduce costs and
often improve service.
Infrastructure sharing. Sharing
infrastructure among operators
is another way to optimize costs
and leverage economies of scale.
For example, Bharti, Millicom, and
Vodafone (Spain, Germany, U.K.,
India, and Ireland) have shared
networks with other operators.
In Sweden, 3 and Telenor’s joint
venture, 3GIS, covers around 70
percentofitsnetworkwithshared
infrastructure.
Outsourcing. Outsourcing
non-core activities, such as
fleet services and facility
management, can improve
efficiency and allow more
management focus on customers.
Newer outsourcing models
include managed capacity,
where an outsourcer is paid
on a variable utilization or
capacity basis. These models,
besides increasing efficiency,
reduce risk, and limit financing
needs while fundamentally
shifting the focus from opera-
tions to customer experience
and partnership management.
Bharti Airtel’s so-called “Minutes
Factory” has enabled it to target
millions of pre-paid customers
that would have been too costly
to serve using the conventional
subscriber-led model.7 The
factory’s key elements include
outsourced network equipment,
which enables fixed costs to
convert to variable costs. Bharti’s
partnerships enable it to add
network and IT capacity quickly
and efficiently, as needed.
Energy efficiency. Energy
efficiency can cut costs while
reducing environmental impact.
France Telecom-Orange, for
example, is aiming to reduce
energy consumption by 15
percent between 2006 and
2020.8 By the end of 2010, the
group had fitted more than 8,000
network sites with optimized
ventilation systems, cut energy
consumption at data centers,
and installed solar-powered base
stations (mainly in Africa and the
Middle East).
Cross-functional processes.
Streamlining, strengthening, or
re-engineering certain cross-
functional processes can make
them more customer-oriented
while eliminating departmental
silos that lead to duplication and
inefficiency. Further organiza-
tional changes, such as consoli-
dating departments, optimizing
span of control, and can improve
service and cut costs.
7 Rohin Dharmakumar & Shishir Prasad, “Bharti Minutes in Africa,” Forbes India, 28 April 2010
8 FTN-Orange 2010 Annual Report

areas, particularly sales, customer management, and finance, the operator was spending far
more than its competitors. In these functional areas, staff costs were high, and quality in some
areas was suffering because the operator hadn’t automated its labor-intensive processes.
Phase 2: Develop a fitness program. A tailored cost and productivity improvement program
starts 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 awareness
and creating a more cost-conscious corporate culture. Such an exercise must involve many
functional areas and levels of responsibility and combine leadership with a willingness to
welcome, and understand in detail, the excellent ideas that employees from across the
organization can contribute. Involving the entire workforce ensures a thorough approach that
addresses 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, taking
into account the implementation effort, time required, and expected outcomes in terms of cost
savings or increased productivity. They usually fall into three categories: quick wins, structural
improvements, and transformation (see figure 6 on page 8):
Figure 5
A.T. Kearney’s Global Competitive Benchmarking (GCB) is the telecommunications
industry’s largest database
Figure 5
A.T. Kearney’s Global Competitive Benchmarking (GCB) is the telecommunications
industry’s largest database
Note: KPI is key performance indicator.
Global
Competitive
Benchmarking
for Telecoms
Compare
cost efficiency
levels
Obtain
regular input
to budget
and business
planning
Analyze root
causes and
improvement
actions
Identify
areas for cost
improvement
Achieve
best-in-class
cost structure
Compare
KPIs and
share best
practices
Note: KPI is key performance indicator.

Quick wins. Telcos can often find immediate results from simple pragmatic steps that create
immediate impact. For example, we recently helped a Middle East operator adjust its travel and
expense policies and reduced annual spending in this area by 10 percent.
Structural improvements. These are initiatives with a short- and medium-term impact. For
example, by using online reverse auctions for a proportion of its procurement, Telefonica
reduced its sourcing cycle time by 50 percent and its procurement management costs by
27 percent, while achieving considerable savings on external spending.9
One potential structural improvement is balancing capital spending on replacement equipment
with spending on new equipment, while ensuring that each investment is based on a strong
business case with attractive returns. For example, some telcos, such as British Telecom, are
Figure 6
Cost and productivity improvement activities fall into three categories
Figure 6
Cost and productivity improvement activities fall into three categories
Quick wins
Structural
improvements Transformation
Scope
Approach
Level of
effort
Examples
Results
horizon
• Focus on avoiding
certain activities
• Base on decisions, such as
a policy change
• Take a top-down approach
to speed up results
• Develop plans, business
case, and implementation
simultaneously
• Implement quickly and
easily once management
approves
• Adjust specific policies,
such as travel and
entertainment
• Review outstanding tenders
and capital expenditures
• Dispose of old inventory
• Obtain immediate results
through one-time cost
improvements
• Focus on improving current
operations, including
re-engineering processes
• Outline detailed
implementation plans and
targets up front
• Involve stakeholders early
to get buy-in
• Require substantial efforts
at all levels of the
organization
• Manage resistance to
change
• Establish training programs
for all employees to ensure
success
• Re-engineer call center
processes
• Launch strategic sourcing
initiatives
• Optimize spectrum usage
• Achieve more cost savings
in the short- to mid-term
• Transform the operating
model
• Take a forward-looking view
• Prepare for a complex
implementation because of
numerous
interdependencies
• Perform deep pre-execution
analysis
• Build a dedicated,
experienced team to
implement the
transformation
• Command senior
management and board
support to lead the
transformation
• Outsource network
operations
• Share some or all network
infrastructure
• Consolidate functions and
shared services centers
• Gain long-term advantage
(this may require
considerable investments)
9 Tim Minahan, “e-Sourcing is A-LIVE and Well in Europe,” Supply Excellence, 13 June 2008

rolling out fiber networks in a phased manner determined by the level of customer demand, an
approach 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 leading
telecom operator we recently worked with implemented a number of measures to lower its
capex investments, including more efficient use of spectrum and reduction of peak loads on its
networks 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 network
field operations in its home market, improving productivity 25 percent.
These three categories differ substantially in terms of implementation (straightforward
versus complex) and their impact on how a company carries out its business. Whereas “quick
wins” 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 as
re-engineering processes.
GCC telcos that implement cost-
optimization programs can improve their
bottom lines by 20 percent. That’s about
$500 million more in total annual net
profits for large GCC telecom groups.
Transformation initiatives often have the biggest impact, but usually take the longest time. They
might include consolidating functions, eliminating duplicate activities, reducing the scale of
operations, 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 considerable
impact on employees.
While some management teams are prepared to implement cost and productivity initiatives
that have a direct impact on headcount, others prefer to avoid such measures. Figure 7 on page
10 shows examples of initiatives and their impact on full-time equivalent (FTE) headcount.
Whatever route a company takes in its fitness program, successful implementation requires
total top-management commitment to the point that it should be included in executives’ annual
performance 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 are
struggling and need internal or external help.
Phase 3: Stay fit by exercising regularly. Staying fit is not a one-time endeavor. It requires
a sustained marathon effort focused on continually improving performance. Leading inter-
national telecom groups establish special units, mechanisms, and systems that constantly

monitor, benchmark, and, ultimately, improve cost performance. They embed cost perfor-
mance into management KPIs and targets. Leading telecom firms in mature markets typically
designate a unit (for example, within finance) responsible for benchmarking and monitoring
overall cost performance. These units identify cost optimization best practices within operating
companies and disseminate them across the group, driving effective group synergies. They
also set cost reduction targets for business units and specific activities—used as input into the
annual 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 in
creating a more cost-conscious culture. GCC telecom operators could benefit from employing
experts from firms in more mature markets where cost optimization has been an integral part of
their business.
Again, top-management leadership is critical. Cost-optimization programs are best led by the
CFO, COO, or CEO with support from the management team, while telecom groups should
combine both group-led and country-specific initiatives. Cost optimization must be a strategic
Figure 7
Cost and productivity initiatives and their impact on headcountFigure 7
Cost and productivity initiatives and their impact on headcount
* CPE is customer premise equipment.
Examples
Quick wins
Structural
improvements Transformation
Actions with
direct
headcount
impact
Actions with
no direct
headcount
impact
• Release non-performing
employees
• Change CPE*
specs
• Rationalize laptop-desktop
mix
• Reduce sponsorship
• Reduce certain employee
allowances
• Adjust travel and
entertainment policy
• Optimize mobile-site power
use
• Adjust training policy
• Dispose of old inventory
• Re-engineer call center
process
• Optimize span-of-control
• Optimize deployment and
roll out
• Consolidate data centers
• Optimize inventory
management
• Manage fleet demand
• Reduce office space
• Conduct strategic sourcing
and e-auctions for suppliers
• Standardize and centralize
IT
• Phase out legacy systems
• Create shared services
centers
• Conduct overhead value
analysis
• Eliminate overlaps between
functions
• Outsource core and
non-core activities
• Conduct companywide
business process
re-engineering
• Share network
infrastructure

priority with cost-reduction targets and KPIs embedded in employees’ objectives. All components
combined will drive the transition toward a more cost-conscious corporate culture where cost
management is a day-to-day strategic priority for all employees.
Executing a telco “fitness program” is
a challenging, long-term exercise,
especially for operators attempting to
get fit for the first time.
Would-Be Winners Have No Time to Lose
As competition intensifies in the Gulf region, GCC telecom operators have no time to waste
if they want to protect their profitability. Yet getting and staying fit takes time—the quick
wins must be followed up by structural changes that can generate immediate savings while
embedding a long-term advantage. As the GCC telco market matures, those that invest the time
and effort to transform their businesses and get healthy will last the course.
Authors
Marc Biosca, partner, Middle East
marc.biosca@atkearney.com
Laurent Viviez, partner,
London and Johannesburg
laurent.viviez@atkearney.com
Rob van Dale, consultant, Middle East
rob.van.dale@atkearney.com

A.T. Kearney is a global team of forward-thinking, collaborative partners that delivers
immediate, meaningful results and long-term transformative advantage to clients.
Since 1926, we have been trusted advisors on CEO-agenda issues to the world’s
leading organizations across all major industries and sectors. A.T. Kearney’s ofﬁces
are located in major business centers in 39 countries.
Americas
Europe
Asia Pacific
Middle East
and Africa
Atlanta
Calgary
Chicago
Dallas
Detroit
Houston
Mexico City
New York
San Francisco
São Paulo
Toronto
Washington, D.C.
Bangkok
Beijing
Hong Kong
Jakarta
Kuala Lumpur
Melbourne
Mumbai
New Delhi
Seoul
Shanghai
Singapore
Sydney
Tokyo
Amsterdam
Berlin
Brussels
Bucharest
Budapest
Copenhagen
Düsseldorf
Frankfurt
Helsinki
Istanbul
Kiev
Lisbon
Ljubljana
London
Madrid
Milan
Moscow
Munich
Oslo
Paris
Prague
Rome
Stockholm
Stuttgart
Vienna
Warsaw
Zurich
Abu Dhabi
Dubai
Johannesburg
Manama
Riyadh
A.T. Kearney Korea LLC is a separate and
independent legal entity operating under
the A.T. Kearney name in Korea.
© 2012, A.T. Kearney, Inc. All rights reserved.
The signature of our namesake and founder, Andrew Thomas Kearney, on the cover of this
document represents our pledge to live the values he instilled in our firm and uphold his
commitment to ensuring “essential rightness” in all that we do.
For more information, permission to reprint or translate this work, and all other correspondence,
please email: insight@atkearney.com.

Getting Fit: A Fitness Program for GCC Telcos

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Getting Fit: A Fitness Program for GCC Telcos

Similar to Getting Fit: A Fitness Program for GCC Telcos (20)

Recently uploaded

Recently uploaded (20)

Getting Fit: A Fitness Program for GCC Telcos