GCC telcos are facing declining revenue growth and increased competition which is putting pressure on their margins. To address this, they need to undergo a "fitness program" to reduce costs and improve productivity through measures like operational efficiency improvements, strategic sourcing, optimizing subsidies and retention costs, prioritizing capital expenditures, and increasing workforce efficiency. An effective program involves performing an initial assessment to identify improvement opportunities, implementing targeted initiatives, and continuously monitoring metrics to ensure fitness goals are met.

1. 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.
A Fitness Program for GCC Telcos 1

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. 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. 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
Sales
Function
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. 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. 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. 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. 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. 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
A Fitness Program for GCC Telcos 9

10. Figure 7
Figure 7
Cost and productivity initiatives and their impact on headcount
Cost and productivity initiatives and their impact on headcount
Examples
Structural
Quick wins improvements Transformation
Actions with • Release non-performing • Re-engineer call center • Create shared services
direct employees process centers
headcount • Optimize span-of-control • Conduct overhead value
impact analysis
• Eliminate overlaps between
functions
• Outsource core and
non-core activities
• Conduct companywide
business process
re-engineering
Actions with • Change CPE* specs • Optimize deployment and • Share network
no direct • Rationalize laptop-desktop roll out infrastructure
headcount mix • Consolidate data centers
impact • 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 analysis
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
A Fitness Program for GCC Telcos 10

11. 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 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

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