Telco Fitness

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Cost efficiency in telecoms

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  • Etisalat engineering is almost destroyed now. The employees (transformed from FTE to PTE) became frustrated and non functioning at all. There is not clear policy from the management to retain the lost trust of the staff. the Fixed Access Network is totally garbage and no boday cares. It is hurting for people who brought Etisalat to a peak untill 2012.
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Telco Fitness

  1. 1. A 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. A Fitness Program for GCC Telcos 1
  2. 2. 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 Figure 1 The boom that brought growth and profits to GCC telecom markets is ending The boom that brought growth and profits to GCC telecom markets is ending Compound annual revenue growth rate, telcos * 30% 2004–2007 25% 27% 2008–2011 20% 15% 15% 10% 5% 4% 4% 4% 0 -1% -5% 44% 42% 47% 41% 38% 39% Average EBITDA margins Developing markets GCC players Developed markets * 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 Fitness Program for GCC Telcos 2
  3. 3. Figure 2 Figure 2 “Getting fit” helps operators decrease their costs every year “Getting fit” helps operators decrease their costs every year Average cost per customer* (Indexed: 2007 = 100) 100 100 -7% 92 84 75 78 74 50 25 0 2007 2008 2009 2010 2011 *Based on a sample of 100 operators worldwide Source: A.T. Kearney analysis 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. 5 Economist Intelligence Unit, company annual reports; A.T. Kearney analysis A Fitness Program for GCC Telcos 3
  4. 4. 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). Figure 3 Figure 3 Different levers will help different functions Different levers will help different functions Select examples Cross-functional levers Operational Strategic Optimize Revenue Capex WC Disruptive efficiency sourcing SACs and assurance prioritiza- efficiency business improve- SRCs* tion and asset models ment leverage** Network IT SalesFunction Marketing Customer management Intercon- nection and roaming Support and overhead*** Indicates that lever is particularly relevant to this function * Sales acquisition costs and sales retention costs * Sales acquisition costs and sales retention costs ** WC is working capital. ** WC is working capital *** Includes functions such as finance, HR, procurement, supply chain, and corporate communications *** Includes functions such as finance, HR, procurement, supply chain, and corporate communications Source: Kearney analysis Source: A.T. A.T. Kearney analysis A Fitness Program for GCC Telcos 4
  5. 5. How and Where Telcos Can Cut Costs Two-thirds of telecom operators’ operators saw average efficiency generally plenty of opportuni- costs are often indirect and one- gains (as measured by total ties to improve supply chain third are direct (see figure 4). indirect cost per customer) of and procurement capabilities. This split can vary, however. 11.1 percent, and fixed operators By standardizing purchasing Mobile operators often have saw 5.8 percent gains. Because requirements and internal higher direct costs due to direct costs are more difficult technical specifications, con- handsets and commissions. to address, efficiency programs solidating volumes, and usually focus on indirect costs. optimizing deals with suppliers, Both mobile and fixed operators The efficiency gains have come operators can cut costs without are grappling with falling prices from the following areas: affecting core operations. brought on by competition and Telenor, for example, reduced regulatory changes. Globally, Network, marketing, and IT. its software licensing costs by between 2009 and 2011, mobile These three areas have the 34 percent by replacing local operators’ average revenue most potential for optimizing licensing agreements with global per user (ARPU) fell 10.3 percent, operational and capital expen- deals.6 GCC telcos will need to and fixed operators’ ARPU ditures, typically by reducing use the full scale of their groups fell 3.3 percent, according to complexity. to create synergies, reduce A.T. Kearney’s Global Competitive external spending, and benefit Benchmarking (GCB). Supply chain and procurement. from solid supplier relationships, GCC operators’ rapid inter- which can bring earlier access During the same period, telcos national growth—often through to new handsets and network became more efficient: Mobile acquisitions—means there are equipment. Figure 4 Cost breakdown for telecom operators 34% Interconnection 18% Direct cost Cost of goods sold 57% 25% Commissions 66% Indirect cost 7% Network 7% 8% Information technology 8% 58% Customer management 11% Support and overhead Sales Marketing and product development Typical operator 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 analysis 6 Bjørn Harald Brodersen, Head of Group Sourcing, Telenor, “Sourcing in Telenor Group.” A Fitness Program for GCC Telcos 5
  6. 6. Back office. Consolidating back- fleet services and facility Energy efficiency. Energy office functions such as HR and management, can improve efficiency can cut costs while finance, potentially by estab- efficiency and allow more reducing environmental impact. lishing central or regional shared management focus on customers. France Telecom-Orange, for services, can increase efficiency. Newer outsourcing models example, is aiming to reduce include managed capacity, energy consumption by 15 Information technology. where an outsourcer is paid percent between 2006 and Centralizing IT services and on a variable utilization or 2020.8 By the end of 2010, the standardizing or consolidating capacity basis. These models, group had fitted more than 8,000 applications and hardware can besides increasing efficiency, network sites with optimized substantially reduce costs and reduce risk, and limit financing ventilation systems, cut energy often improve service. needs while fundamentally consumption at data centers, shifting the focus from opera- and installed solar-powered base Infrastructure sharing. Sharing tions to customer experience stations (mainly in Africa and the infrastructure among operators and partnership management. Middle East). is another way to optimize costs Bharti Airtel’s so-called “Minutes and leverage economies of scale. Factory” has enabled it to target Cross-functional processes. For example, Bharti, Millicom, and millions of pre-paid customers Streamlining, strengthening, or Vodafone (Spain, Germany, U.K., that would have been too costly re-engineering certain cross- India, and Ireland) have shared to serve using the conventional functional processes can make networks with other operators. subscriber-led model.7 The them more customer-oriented In Sweden, 3 and Telenor’s joint factory’s key elements include while eliminating departmental venture, 3GIS, covers around 70 outsourced network equipment, silos that lead to duplication and percent of its network with shared which enables fixed costs to inefficiency. Further organiza- infrastructure. convert to variable costs. Bharti’s tional changes, such as consoli- partnerships enable it to add dating departments, optimizing Outsourcing. Outsourcing network and IT capacity quickly span of control, and can improve non-core activities, such as and efficiently, as needed. service and cut costs. 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 7 Rohin Dharmakumar & Shishir Prasad, “Bharti Minutes in Africa,” Forbes India, 28 April 2010 8 FTN-Orange 2010 Annual Report A Fitness Program for GCC Telcos 6
  7. 7. Figure 5 Figure 5 A.T. Kearney’s Global Competitive Benchmarking (GCB) is the telecommunications A.T. Kearney’s Global Competitive Benchmarking (GCB) is the telecommunications industry’s largest database industry’s largest database Compare cost efficiency levels Achieve Identify best-in-class areas for cost cost structure improvement Global Competitive Benchmarking for Telecoms Compare Analyze root KPIs and causes and share best improvement practices actions Obtain regular input to budget and business planning Note: KPI is key performance indicator. Note: KPI is key performance indicator. Source: A.T. Kearney analysis Source: A.T. Kearney analysis 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): A Fitness Program for GCC Telcos 7
  8. 8. Figure 6 Figure 6 productivity improvement activities fall into three categories Cost and Cost and productivity improvement activities fall into three categories Structural Quick wins improvements Transformation • Focus on avoiding • Focus on improving current • Transform the operating Scope certain activities operations, including model • Base on decisions, such as re-engineering processes • Take a forward-looking view a policy change • Take a top-down approach • Outline detailed • Prepare for a complex Approach to speed up results implementation plans and implementation because of • Develop plans, business targets up front numerous case, and implementation • Involve stakeholders early interdependencies simultaneously to get buy-in • Perform deep pre-execution analysis • Implement quickly and • Require substantial efforts • Build a dedicated, Level of easily once management at all levels of the experienced team to effort approves organization implement the • Manage resistance to transformation change • Command senior • Establish training programs management and board for all employees to ensure support to lead the success transformation • Adjust specific policies, • Re-engineer call center • Outsource network Examples such as travel and processes operations entertainment • Launch strategic sourcing • Share some or all network • Review outstanding tenders initiatives infrastructure and capital expenditures • Optimize spectrum usage • Consolidate functions and • Dispose of old inventory shared services centers • Obtain immediate results • Achieve more cost savings • Gain long-term advantage Results through one-time cost in the short- to mid-term (this may require horizon improvements considerable investments) Source: A.T. Kearney analysis 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 9 Tim Minahan, “e-Sourcing is A-LIVE and Well in Europe,” Supply Excellence, 13 June 2008 A Fitness Program for GCC Telcos 8
  9. 9. rolling 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 A Fitness Program for GCC Telcos 9
  10. 10. Figure 7Figure 7Cost and productivity initiatives and their impact on headcountCost and productivity initiatives and their impact on headcount Examples Structural Quick wins improvements TransformationActions with • Release non-performing • Re-engineer call center • Create shared servicesdirect employees process centersheadcount • Optimize span-of-control • Conduct overhead valueimpact analysis • Eliminate overlaps between functions • Outsource core and non-core activities • Conduct companywide business process re-engineeringActions with • Change CPE* specs • Optimize deployment and • Share networkno direct • Rationalize laptop-desktop roll out infrastructureheadcount mix • Consolidate data centersimpact • Reduce sponsorship • Optimize inventory • Reduce certain employee management allowances • Manage fleet demand • Adjust travel and • Reduce office space entertainment policy • Conduct strategic sourcing • Optimize mobile-site power and e-auctions for suppliers use • Standardize and centralize • Adjust training policy IT • Dispose of old inventory • Phase out legacy systems* CPE is customer premise equipment.Source: A.T. Kearney analysismonitor, 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 strategic A Fitness Program for GCC Telcos 10
  11. 11. priority 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.Authors Marc Biosca, partner, Middle East Rob van Dale, consultant, Middle East marc.biosca@atkearney.com rob.van.dale@atkearney.com Laurent Viviez, partner, London and Johannesburg laurent.viviez@atkearney.com A Fitness Program for GCC Telcos 11
  12. 12. A.T. Kearney is a global team of forward-thinking, collaborative partners that deliversimmediate, meaningful results and long-term transformative advantage to clients.Since 1926, we have been trusted advisors on CEO-agenda issues to the world’sleading organizations across all major industries and sectors. A.T. Kearney’s officesare located in major business centers in 39 countries.Americas Atlanta Detroit San Francisco Calgary Houston São Paulo Chicago Mexico City Toronto Dallas New York Washington, D.C.Europe Amsterdam Istanbul Oslo Berlin Kiev Paris Brussels Lisbon Prague Bucharest Ljubljana Rome Budapest London Stockholm Copenhagen Madrid Stuttgart Düsseldorf Milan Vienna Frankfurt Moscow Warsaw Helsinki Munich ZurichAsia Pacific Bangkok Melbourne Singapore Beijing Mumbai Sydney Hong Kong New Delhi Tokyo Jakarta Seoul Kuala Lumpur ShanghaiMiddle East Abu Dhabi Johannesburg Riyadhand Africa Dubai ManamaFor more information, permission to reprint or translate this work, and all other correspondence,please email: insight@atkearney.com.A.T. Kearney Korea LLC is a separate andindependent legal entity operating underthe 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 thisdocument represents our pledge to live the values he instilled in our firm and uphold hiscommitment to ensuring “essential rightness” in all that we do.

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