mckinsey telecoms. recall no. 06, 2009 - networks

8/2/2019 McKinsey Telecoms. RECALL No. 06, 2009 - Networks

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Telecommunications

B2B

RECALL No6


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3RECALL No 6 B2B

Welcome ... to the 6th edition of Marketing RECALL, McKinseysregular telecoms publication for senior executives.This edition is exclusively dedicated to B2B marketing.The B2B segment already comprises about one third

of many telecoms operators revenues, and growth ratesare stil l positive (even in mature markets). This segmentis not only of current importance, but it representskey opportunities for the future as well. B2B serviceshave the potential to protect operators (core TC) marginsand at the same time trigger innovation.

Because of its attractiveness, a diverse group of playersis entering the B2B scene, with not only alternative carriersmoving into this space, but also many IT playersexpanding their offers into telco-related services as well.

As a result of this newly competitive landscape, many telcos have significantly changed the way they addressthe segment. In fixed as well as in mobile, they havegrown their serv ices well beyond the network, added

various types of managed IT, TC, and ICT services,and evolved to the full-fledged outsourcing of certaincustomer applications.

In this edition we will explore key telecoms B2B learnings. Well first look at how to capture the growth opportunity,outlining the ways in which telcos might think aboutembarking on the ICT transformation of their businessmodels to successfully move into this realm. To complementthe more medium-term focus of this art icle, well then

discuss the relatively quick wins of pragmatically boostingnear-term ICT margins while working on the longer-termindustrialization of B2B operations.

Moving beyond ICT services, we turn toward the mobilespace and examine how delivering managed mobileservices to business customers can offer operators in

maturing markets a potential path toward their revenueaspirations. As these mobile B2B customers representtwice the value of their consumer counterparts, wethen shift our attention to the mobile channel strategy

most appropriate to reaching them.

Next, we shine the spotlight on the small and medium business (SMB) end of this segment. In particular, we outline how delivering ICT services to SMBs a majorchallenge for many operators can be done successfully.

The importance of a B2B focus is not confined to maturemarkets. Our next ar ticle describes the developmentof one operators emerging market strategy as an exampleof how local telcos can shape their own markets by leveraging the exper ience of more developed ones.

There are many opportunities in B2B, but achieving eventhe most realistic aspirations requires the r ight set of key performance indicators. Our final article takes a look at the fundamentals of B2B performance managementas a means of helping to ensure optimal value creation.

We conclude this round of insights by giving the final wordto Joachim A. Langmack of T-Systems . He shares his

views on the advantages and challenges of a telecomsoperator offering end-to-end ICT services and hisprediction of the future trends in the ICT market.

The editors would like to thank Rene Langen and KatrinSuder from the leadership of our g lobal B2B TelcoInitiative for shaping the content of this issue. Our hope as always is that you will find these insights usefulfor your work. Your comments on this issue as well as yourideas regarding topics you would like to see coveredin issues to come are very much welcome.


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Jrgen MeffertEuropean Leader of McKinseys

Telecommunications Practice

Thomas BartaLeader of European Telecoms Branding / ROI, Editor Recall

Pedro MendonaLeader of McKinseys Marketingin Telecommunications Practice

Boris MaurerLeader of McKinseys

Telecommunications Extranet

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Contents01 The ICT Transformation: Delivering a Unique B2B Value Proposit ion 9

02 Getting the Basics Right: Rapidly Boosting ICT Margins 15

03 Managed Mobile Serv ices: The Path to B2B Growth 21

04 Myth Busting: A New Mobile Channel Strategy for Business Customers 27

05 Overlooked and Overshadowed: Growth in ICT Services for SMBs 33

06 Emerging Market ICT Strategies: One Local Telcos Journey 39

07 Maintaining Course: B2B Performance Management 45

08 The One-Stop Shop Meeting More of Your Customers Needs 51

Appendix

RECALL No 6 B2B


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9RECALL No 6 B2BThe ICT Transformation: Delivering a Unique B2B Value Proposition

01 The ICT Transformation: Deliveringa Unique B2B Value Proposition

ICT is the biggest growth opportunity for telcos in thecorporate segment. The value proposition is compelling,and it is well aligned with demonstrated customerneeds. To successfully deliver on the ICT promise,telcos are embarking on complete transformations of their business models.

Telco revenues in mature markets are suffering fromsevere erosion in many areas, and the enterprise segmentis no exception. The expected decline rate of 3 to 4 percent(CAGR) is attributed to price slumps and market shareerosion. As a result of this trend, some telecoms operatorsare in the midst of experimenting with expansion intoIT space, seeking revenue growth (CAGR until 2011projected between 7 and 11 percent worldwide) and trying

to benefit from reasonable margins (gross profitof 15 to 30 percent, depending on type of service). Asevidenced by a number of European telcos, the IT shareof revenue growth in the enterprise segment has already

become the key driver: 150 percent in the case of BTGlobal Services, 145 percent for T-Systems, and 80 percentfor Telefnica in 2006 over the previous year.

However, a simple bundling of TC with IT servicesdoes not seem to be a sustainable model for telcos becausethey have to compete with established, IT-exclusiveplayers. At the same time, they need to maintaintheir focus on efficiency, while developing expertise

within their core telecoms business. Moreover, simply bundling TC with IT does not fully meet enterprisecustomers increasingly demanding expectations. Asa consequence, customers perceive only limited value inthese service bundles.

Tap into growth, de end the core

McKinseys observations of these journeys into ICTshow that telcos are best served when they seek growthopportunit ies in-between the TC and IT spaces andexplore the real ICT model. Real ICT comprises anend-to-end information and communication technology solution with at least one single output-oriented SLA (service level agreement), as opposed to solely bundlingTC and IT components or marketing ICT. Thismeans sophisticated solutions with benefits for customersand providers:

End-to-end managed ICT solutions ensure simplicity i.e., no need for customers to manage multiple

providers, technologies, and SLAs; all services fromone (secure) source and improved incident recovery and security.

Technically integrated ICT solutions generate cost savingsand facilitate flexible price models (utility computing).

New ICT industry solutions open up access to new markets, segments, and business opportunities.

The two first benefits are clearly a value proposition forall customers, making real ICT the perfect value-sellingapproach to corporate customers. Beyond growthstemming from pure IT revenues, ICT services alsohave the ability to pull through connectiv ity revenues.

Additionally, integrating IT services with communicationproducts enables telcos to expand pricing f lexibility andprotect TC margins by avoiding further commoditization.


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High time for telcos to move into ICT01

The telcos unrivaled ICT advantage

Telcos are well positioned to make successful gains intothe ICT space. Technological capabilities, customerexpectations, the competitive landscape, and the telcosown core functions are all cr itical elements of success

working in their favor.

Technological capabilities. TC and IT technologies are

converging, with networks becoming more andmore critical for guaranteeing the delivery of end-to-end SLAs. Telcos already have natural ly strongnetwork management capabilities. Beyond this, many telcos have significantly developed IT capabilitiesas well. The latter is due to the fact that telecoms is anIT-heavy industry and, historically, operatorshave needed to build up significant internal ITcapabilities.

Customer expectations. Over half of large and medium business customers always (or at least almost always) buy TC and IT services f rom a single provider. Of thisgroup, over one third currently receives these servicesfrom telcos or NSPs (network service prov iders),and more than 40 percent state that they will be evenmore likely to buy IT services from telecoms companiesin the future (Exhibit 1).

Competitive landscape. Although over half of thecustomers buy TC and IT services from one IT provider,the information technology market is highly fragmented.Furthermore, IT players are struggling with problemsof their own (e.g., significant operating margin drops).This predicament allows telcos to leverage their owncurrent customer relationships and step up their businessto move into the ICT playing field.

Seizing the chance to build a new model around ICT, telcoscan achieve margins that are higher than those from merely

bundling IT services with their current TC services.

Industrializing ICT

ICT is an innovative integration of TC and IT serv icesand is based on a business model that lies at the interfaceof both industries. It requires a consistent design of products, processes, organization, and go-to-marketap proach. The journey toward ICT industrialization one that some telcos have already embarked on (see text

box) means that telcos will have to transform theircurrent delivery and operations from a highly-customizeddelivery to an industrialized approach. The three pillarsof this transformation portfolio standardizing, servicefactory industrializing, and organization restructuring are largely independent of concrete strategic positioning.


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Three models for integrating TC and IT organizations02

Pillar 1: Developing a standardized ICT portfolio. It meansthat telcos will move away from customized solutions withunique, customer-specific SLAs, terms, and conditionstoward product-like services created from common

building blocks, which are the unit pieces or atomsmanaged in the factory. For telcos whose core voice anddata business is highly standardized and yields morethan 30 percent in gross profit margins, this shif t iseven more critical, as it allows them to better address

customer needs and protect their margins.

A detailed analysis of all delivery activities for a WesternEuropean telco showed that almost 65 percent of itsactivities could be standardized (e.g., contact centers,desktop management, managed security). The remaining,highly customer-specific activities consisted of consultancy-type projects such as BPO (business processoutsourcing) services and system integration.

Pillar 2: Building an industrialized serv ice factory. Tocapture the benefits of a standardized port folio, telcos

will migrate from customer-specific processes anddelivery models and move toward centralized platformsfor service delivery, replication factory (i.e., a continuousindustrialization process, which ensures ongoing identifi-cation and replication of best practices in the delivery of building blocks and solutions), and global sourcing.

This will mean investing in platforms for centralizeddelivery, while capturing economies of scale and, thus,improving margins. Balancing horizontal activities(to gain scale and drive standardization) and verticalactivities (to time-eff iciently serve and satisfy customers)is a delicate undertaking that requires skill and dexterity.Telcos that have succeeded in striking this balance,however, have enjoyed EBIT margin improvement of 10to 25 percent with capital investments of up to 10 percent

of revenues.

Pillar 3: Restructuring the organization. Making thetransformation from a patchwork of IT-like services andTC legacy structures to integrated ICT requires telcosto leverage technology expertise and integrate TC and ITin sales and delivery and then establish an appropriateorganizational steering of the new model. Such anintegrated organization is crucial to facilitating the creationof a standardized port folio, enabling industrializationof the service f actory and developing a unifiedcommercial interface.

Our experience with clients shows that ICT organizationscan be shaped along three different models (Exhibit 2),characterized by the integration level in functions likesales, presales/engineering, marketing, and operations/factory. Integrating the commercial funct ions enables

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bundling and cross-selling opportunities, increasescommercial efficiency, and coordinates the go-to-marketapproach. It also supports the portfolio discipline with inthe organization and distances it from a pull model,

where the factory is asked to deliver whatever the clientordered, to a push model, where factory areas serve

to proactively drive horizontal solutions. By integratingTC and IT operations, companies can also leverageadditional synergies and economies of scale in the factory.

acquired the service division Debis from DaimlerChryslerat the start of its ICT transformation in 2001. BT GlobalServices benefited from a head start by having already

begun in the late 1990s. Orange Business Services grew by means of small and medium-sized acquisi-tions with ongoing transformations, while Telefnica mainly focused on internal transformation programs.

When it comes to service offerings, all players havepursued a network-centric model, focusing oninfrastructure services and solutions. Nevertheless,

T-Systems has differentiated itself by moving towardapplication services, including application provisioning,management services, and system integration. BTGlobal Services, in contrast, has developed a relativelystrong position in network-centric services and leveragespartnerships to cover the broader ICT/service integrationportfolio.

The Road to True Service Integration

ITC transformations of some European players

We took a closer look at several European ICT players T-Systems, Orange Business Services, Telefnica,and BT Global Services to better understand what

approach they took while transforming their businessmodels.

What was common to each players ICT transformationwas the fundamental shift from a customized to anindustrialized approach along three specific levers:portfolio standardizing, service factory industrializing,and IT-TC organizational integration (especially atthe customer interface level). The main differencesin their approaches are a function of their individualstarting positions and their particular service offerings.

The two forerunners in entering the IT space are T-Systems and BT Global Services . T-Systems,which already had significant IT capabilities in-house,

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ICT is no longer a f luffy buzzword with a vague valueproposition. It is a set of sophisticated and valuableclient solutions with very clear benef its. The telcostransformation is not just a project, but a fundamental

redefinition of the business model whose success dependson the development of a standardized ICT portfolio,the building of an industrialized service factory, and arestructuring of the organization. A successful trans-formation can y ield gross profit increases of 15 to 30percent depending on the type of service, so there is no

wonder that major players from the TC and IT spaces are joining the battle.


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13RECALL No 6 B2BThe ICT Transformation: Delivering a Unique B2B Value Proposition

Iris Kornackeris an Associate Principal in McKinseys

Vienna [email protected]

Luis Miguel Santosis an Associate Principal in McKinseysMadrid [email protected]

Katrin Suderis a Principal in McKinseys Berlin [email protected]


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Even as telcos work toward longer-term industrialization,they can quickly boost their near-term B2B ICT marginsthrough a number of simple and pragmatic levers.

A variety of factors is driv ing the telecoms industrysinterest in expanding into ICT. These range from fallingrevenues in their core corporate telecoms servicedomain to the blurring of formerly clear boundaries

between traditional IT and TC solutions exemplified by the rise of VoIP offerings. Further, sophisticated corporatecustomers increasingly combine their IT and TCrequests for proposals, searching for one main provideracross the two domains. A recent B2B example involvesthe Dutch telecoms company KPN, which boughtregional IT player Getronics in an attempt to fur ther

bolster its ICT offering.

However, while an increasing number of telecomsoperators have positioned themselves as ICT players,few have done so profitably to date. This is often due toheavy customization for almost all customers, insuf-ficiently defined standards and SLAs (service levelagreements), as well as the lack of financial discipline inmanaging suppliers and customers. In addition, many telcos focus their sales and presales activities almostexclusively on large accounts, which require signif icantpresales investments. To prevent this profitability drain, most telcos are seeking to industrialize theirapproaches, focusing on standardization and introducingthe concept of a low-cost service factory delivery model. While this move away from customization isclearly the right direction, it involves a lengthy processthat easily takes several years to implement fully.

McKinsey research indicates that, while getting thelonger-term factors in place, telcos should also focuson getting the basics right with a simple set of levers.By bolstering presales activity performance throughhigher individual staff effectiveness, managing productdelivery and product mix more tightly, and redesigning

back-office and field force processes that deliver customizedservices di rectly to customers, these companies canimprove EBITDA by as much as 10 percent within a year.

Bolstering presales activities

Telcos sometimes under-manage their ICT presalesactivit ies with the mispercept ion that it is impossibleto objectively compare the performance of knowledge

workers. We observed that employee assignments were

not of similar size and sometimes not in the companysinterest. For instance, we found that a group of programmanagers and business consultants at one particulartelco was supporting a revenue stream 10 to 20 times

below an acceptable ambition level. Experience revealsthat companies can achieve productivity increases of 20percent or more for each presales group (e.g., programmanagers, business consultants, project managers),generating an additional EBITDA percentage point.Managers can steer individual presales staff performanceusing a number of measurement techniques. For example,management can rank the performance of their programmanagers tasked to coordinate a project from the startof implementation through contract completion by revenues under management. Business consultants,

who support the sales force in making the business case,can be incentivized to minimize their involvement in the

02 Getting the Basics Right:Rapidly Boosting ICT Margins

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initia l sales phase (i.e., qualification and lead) and focusmore on the total value of prospective projects per year.Furthermore, project managers can increase revenues

by establishing more effective billing processes, especially for project changes that lead to rework and out-of-scope

work. They can increase the projects speed by applyinga process blueprint with timelines specifically for therequirement/design phase that includes making clearagreements with suppliers to reduce overall waiting

times. Achieving this goal is relatively simple, requiringno more than periodic reviews of the individuals inquestion, with management taking action to improvetheir performance.

Better contract and product mix management

ICT players often deliver a product mix determinedpurely by customer requests rather than one that isproactively shaped. Often, when delivering the product,the telco receives higher than expected charges from thesupplier. We have observed cases where the telco paidthe supplier 10 to 20 percentage points of EBITDA percustomer program more than initially agreed upon.Furthermore, the telco often has a number of incorrectly structured, money-losing contracts. To improve productdelivery performance, managers must tightly controltheir internal and external suppliers and work to optimize

their revenue opportunities. This approach alone candeliver an EBITDA improvement of up to 5 percentagepoints.

Managers can work to improve the profitability of theirdeals through a three-stage process. The first stageof the process focuses on making sure the programmanagers of all accounts leave no money on the table(Exhibit 1). One part of this manager ial mandate is

holding suppliers to the negotiated terms and not payingfor cancelled services. They should also consider chargingcustomers fully for services. For example, when telcosfail to charge for additional work caused by errors fromanother vendor or the client company itself, an oppor-tunity is missed. Known as outside domain work, upto 50 percent of all incidents on some programs fit thisdescript ion and thus can have a major cost impact on anorganization. Specifica lly speaking, one customer hadabout 2,500 outside domain incidents per year on whichthe back office averaged one hour of work. This amountedto EUR 250,000 in non-billed activit ies. Companiescan also increase their margins by up-selling additionalproducts and services. This requires a rigorous review of the full customer base during which managers determine

where opportunities exist to upgrade the product portfoliothey are delivering. Exhibit 2 describes the outcome of such a review, highlighting the up-sell opportunities of

Simple profit improvement levers can reduce cost of product delivery01


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specific accounts and the corresponding revenue potential.During the second stage, if the program remainsunprofitable, the company should work to renegotiatepoorly-structured contracts. If this proves unsuccessful,then the final stage requires managers to make a decisive

judgment: if an account cannot be made profitable on acompany level, then consider terminating the contract.To achieve this overall impact, a company needs toinvest in the financial discipline of its presales department,

specifically the program managers responsible forcoordinating the process.

Optimized back-o fce processes

A third area we investigated is the departments thatprovide customized back-office services for simpleand complex data and voice products (e.g., installation,change requests, and incident handling) and that actas an interface between the customer and the supplier.There was a strong belief in these departments that this

work could not be standardized among customers andthat a service factory model would not be feasible.

When measuring activities among customer programs, we found that activities between customers are actually very comparable but that there was a large difference inemployee performance. For instance, for similar mobilephone installs, the average employee installation time

varied between 2 and 18 minutes. Another observation was that employees were spending lots of time trackingsupplier orders. Within the back-office activities fordata request fulfi llment, this amounted to 25 percentof total working time. Improving productivity in thesedepartments can lift EBITDA by up to 5 additionalpercentage points.

To capture these additional margins, companies should

work to ingrain individual performance managementin the organization, eliminate reserved overcapacity,improve planning practices, and institutionalizemechanisms to identify and eliminate bottlenecks at theshop floor level on a continuous basis:

Achieve better operational management by definingstandard times for activities, creating transparency onthe team and individual performance levels relative tothese standards, and setting up regular reviews (weekly for teams and daily for individuals) to coach employeestoward reaching these targets.

Eliminate structurally-reserved overcapacity and moreclosely match the current capacity to the actual needfor field force and back-office activ ities. This can beachieved through using team capacity more dynamically for activities in other teams and putting in place a systematic

Increase margin by up-selling through a rigorous review of full client base02

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and fact-based long- and short-term capacity planningprocess that creates transparency on over- and under-capacity.

Improve planning by creating distinct groups of activities,e.g., installations vs. service for the f ield force and simple

vs. complex orders for the back office. It is also necessary to outline very explicit planning rules and practices,

establish weekly reviews, and create transparency onefficiency through operational metrics.

Pursue the ongoing identification and elimination of bottlenecks at the projects lowest level to ensure focusedand sustainable process improvements, as this is key tomaximizing the ef fectiveness of all resources involvedin the end-to-end service and delivery chain. Obtainingclear request order forms from customers, improvingthe logistics chain for overnight delivery of materialsand spare parts, and reducing the time spent on trackingare examples of how telcos might address these bottlenecks.Procurement can also reduce external spend by approx-imately 5 to 10 percent by consolidating/renegotiatingcontracts.

To achieve this impact, however, managers must clearly establish an operational management mindset withinthe back-office and field force departments. Spendingsignificant time on the work f loor closely coaching theiremployees can help them become leaders instead of merely managers.

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ICT players in the business-to-business market canrealize a 10-percentage-point EBITDA increase inroughly a year by engaging simple levers. We call thisgetting the basics right, and ICT players should focuson these elements of performance improvement parallelto their industrialization pursuits, which represent a moretime-consuming but highly beneficial longer-term goal.

Bart Delmulleis an Associate Principal in McKinseysBrussels [email protected]

Joris Hppeneris an Engagement Manager in McKinseys

Amsterdam office. [email protected]

Suraj Morajeis a Principal in McKinseysJohannesburg [email protected]

Matthias Winteris a Principal in McKinseys Zurich [email protected]


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As shift ing market conditions depress mobile network operators growth prospects, actively broadening theservice portfolio to business customers into managedservices and the ICT territory could provide a much-needed revenue boost.

After years of gravity-defying, double-digit growth,mobile network operators (MNOs) face a much moremodest future where revenue growth either stagnatesor well undershoots GDP growth levels. The quest tooffer new mobile serv ices to consumers continually makes headlines, but until very recently, relatively littleattention has been paid to how to boost mobile revenuesfrom enterprises i.e., B2B revenues even though they account for up to one third of MNO revenues and 40percent of their profits. This neglect of business customers

is remarkably uniform across most developed anddeveloping markets but is potentially risky, as increasedcompetitive dynamics and a lack of ki ller applications

beyond voice push e-mail and erode MNOs enterpriserevenues and margins even faster than they affect consumersegment revenues. Even in countries where the outlook for B2B growth is better than it is for consumer segments(such as the Americas and the developed areas of Asia),MNOs are facing a paradox: the faster mobile broadbandaccess speeds catch up to f ixed broadband, the easierit is to dismiss such access as just another commodity alternative thereby allowing f ixed-line operators andsystem integrators to tighten their grip on enterprisecustomers through their ICT portfolios. To maintainrelevance in the B2B market, MNOs worldwide shouldproactively embrace enterprise mobility (EM) andexplore innovative ways to capture value, includingmanaged serv ices and selected forays into ICT.

One such opportunity involves expanding the set of managed services provided on top of the existing mobile

voice and data products. So far, most MNOs havefocused on peripheral mobility services, including value-added services (VAS) such as consulting, design, andintegration solutions. Some operators, however, havefinally begun to set their sights even farther and targetlarge multinational corporations by offering globally-managed telecoms services. In this case, the valueproposition hinges on reducing the total cost of ownership

while augmenting services such as expense management,customer and service procurement, and network andsecurity services. Other operators have chosen to pursuethe local small and medium business (SMB) segment

with integrated solutions. Typical SMB service offeringsmight include remote access service bundling that provides

multiple access technologies (e.g., 3G, WiFi, and DSL) oran integrated offering that includes broadband delivered

by multiple access technologies, an integrated suite of security, authentication, administrative and reporting tools,as well as global support for IT managers and employees.

MNOs worldwide enter the ICT ray

A recent scan of MNOs initiatives worldwide shows anemerging flurry of activity in wireless ICT and enterprisemobility applications. Operators have begun the processof introducing wireless ICT applications. Specifically, inNorth America, these have taken the form of sales, field,and fleet management solutions. Between 40 and 55percent of the enterprises that participated in a recentsurvey indicated that they were engaging in someform ofexperimentation beyond personalized contacts/calendars and wireless e-mail/Blackberry, thus

03 Managed Mobile Services:The Path to B2B Growth

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revealing a growing demand for more sophisticatedICT services.

In Asia, mobile players have begun to develop industry-specif ic mobility solutions for large enterprises. OneChinese MNO, in particular, is providing a global shippingcompany with the ability to transfer shipment informationto its central system using PDA scanners equipped withGSM-/GPRS-capable cell phones, bar code scanners, and

pagers. As a result, the companys pickup times dropped by a third, while its business volume climbed over 50percent. Somewhat counter-intuitively, given the countrysleading-edge mobile reputation, Japanese enterpriseshave yet to embrace most aspects of enterprise mobility.Mobile applications focused on office work productivity,such as instant messaging and videoconferencing, havehigh potential but remain outside of the mainstream.For example, another recent survey indicated that only 3 percent of companies have deployed instant messagingand just a third make use of mobile videoconferencing.

These initiatives underscore the diff iculty in findingthe path to success in enterprise mobility. While EMhas been described as the next growth wave ever sinceGPRS data services made their appearance, it has failedso far to create a signif icant upside for MNOs. The

bottlenecks have been numerous: the lack of reliable

and widespread wireless data connectivity, security concerns, the absence of a clear business case for adoptionthat could justify resources at the customer side,limited customer understanding of mobile technology,and the poor reputation of MNOs for the developmentof complex solutions.

Another reason for many enterprises unsteady mobility footing comes from the fragmentation of platform

suppliers, which prevents participating vendors fromgaining the scale-dr iven market insights they need toserve their corporate customers effectively. For example,in 2006, the mobile middleware vendor with the largest

worldwide market share controlled less than a quarterof the market, while the second largest had only 10 percent.

Chasing a USD 30 billion global market

McKinsey analysis shows that the latent or uncapturedportion of the B2B mobility market for MNOs couldreach USD 30 billion worldwide by 2011. The largestopportunity will likely emerge in the managed servicesand mobile IT VAS spaces, which together are expectedto grow to over USD 11 billion by 2011.

At first glance, entering the wireless ICT market may seem of questionable value to an MNO, given the limited

Value pricing is an opportunity for exponential growth01


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potential compared to the total mobile market. Oncloser examination, however, part icipating in wirelessICT has two important value multipliers. It can helpan operator retain its exist ing customer base becauseit both locks in corporate customers and providessuperior service compared to the traditional voice anddata services. Using Western Europe as an example, theincremental revenue from mobile ICT wil l only directly add about 5 to 10 percent in terms of customer lifetime

value (CLV), but ICT will likely lower churn by morethan 10 percent due to the higher cost of switching,

which itself generates an additional 35 to 40 percentCLV increase. As a result, the ICT play could deliver aCLV boost of 40 to 50 percent. Secondly, it can posit ionMNOs as credible one-stop shops for bundled fixedand mobile services for the SMB segments that do notrequire sophisticated, tailored solutions.

Furthermore, we believe that the market for VAS may be underestimated in two ways: by potentially failingto accurately identify the catalysts of growth and by ignoring the potential impact of innovative new pricingmodels.

Growth catalysts. Smartphones in the North Americanenterprise environment are an example of the potentialunderestimation of drivers of growth. Specif ically, in

the context of smartphones capabilities nearing thoseof PCs, current hardware and VAS spending ratiosappear to be misaligned against historical trends. Whencompared to the corporate evolution of the PC market,it becomes apparent that VAS spend could be underesti-mated by as much as 25 to 40 percent for a numberof reasons. For example, industry analysts could be under-rating the present amount of smartphone integrationservice spend dr iven by rapid device proliferation and

the democratization of enterprise smartphone usage(i.e., the rapidly increasing deployment of consumer-likepersonal applications on corporate devices supported

by a central IT function), which will generate increasedsupport needs. Other reasons that the market could belarger include the need to manage multiple applications,

which will likely expand network security and quality of service demands, thus increasing costs.

Future pricing models. In addition to gaining a moreaccurate outlook on growth drivers, MNOs also have anopportunity to increase value by shifting the focus of their pricing models from cost to value creation (Exhibit 1).Many operators use pricing models that are only slightly

better than traditional cost-plus pricing schemes.Using the deployment of a US MNO as an example, wefound that shifting from typical metered pricing to asolutions contract that considered the annual customer

Investment and capability building needs to increase as growth optionsmove farther away from the core02



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benefit could lift carrier revenues for the same servicenearly eightfold. With innovative solutions pricing,the North American mobility services market could besubstantially larger than current analyst estimates.

Navigating the enterprise mobility path

Our experience has shown that MNOs can pursuefour B2B growth options of increasing complexity and

investment:

Option 1: Capture the maximum value possible fromthe core business. Penetration of corporate contractsand basic data services is still low in many countries,especially in the US and in emerging markets. Tacticsto deepen the reach include working to maximize bothmarket penetration and average revenue per user.

Option 2: Expand managed mobile services. This isthe most promising opportunity in the short term.Operators can expand into ancillary services thesemay include expense management or network andsecurity services and provide basic bundles with fixed

broadband (especially for SMBs).

Option 3: Partner with system integrators and equipmentmanufacturers to push the mobile application space.

The bottlenecks that have plagued enterprise mobility so far are on their way to presenting less of a problemthanks to technology strides and new market dynamics.Now more than ever MNOs and manufacturers canprovide the platform to develop an independent software

vendor (ISV) ecosystem.

Option 4: Address the integrated ICT space. Investmentsin wireless ICT can be effectively leveraged into the broader

ICT market. If an operator decides to invest in systemsintegration capabilities, entering fixed-line ICT becomesan additional option, especially for integrated providers.

The required capabilities increase in complexity thedeeper MNOs expand into ICT (Exhibit 2). The risk-returnproposition is highly dependent on the type of operator(integrated or pure mobile), the degree of sophisticationof the business customers, and the competitive dynamicin the country. At the highest level, three country clusterscan be identified (Exhibit 3). Operators in WesternEurope, North America, and the Asia-Pacific region

would all benefit from following the first strategicoption of maximizing core business value. After this,the impact varies by region: for operators in WesternEurope, pursuing managed services and applicationspartnerships are no regrets actions because maximizingcore business will do little more than reduce the rate of

The relative importance of the options varies across regions03


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revenue loss going forward. For North American operators,maximizing core business could probably deliver overhalf of the potentially avai lable revenue, but the factthat all major players are integrated will make thepursuit of partnerships and entering the ICT space anatural evolution of their current offering. Asia-PacificMNOs (excluding Japan), on the other hand, shouldpostpone investments in anything beyond their core

business, as they sti ll have a lot to do in the way of covering the basics.

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Pascal Aguirreis a Principal in McKinseys Boston [email protected].

Giorgio Migliarinais a Principal in McKinseys Beijing [email protected]

Janet Tangis an Engagement Manager in McKinseysBeijing office.

[email protected]


* * *

With core B2B markets tightening, MNOs need to findnew sources of profitable growth. Managed servicesand mobile ICT are a unique opportunity to ensure thatexpansion. The ICT play amplifies revenue growth

by effectively locking in corporate customers dueto improved customer satisfaction rates and higher

switching costs.


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Mobile business customers represent tw ice the va lueof their consumer counterparts. Successful operatorsmust develop channel strategies with this value in mind.

As mobile markets have reached adulthood in WesternEurope, industry players must contend with slowergrowth, increasingly competitive pricing, and pinchedoperating margins. To succeed in this newly pressurizedmarket environment, mobile network operators (MNOs)should focus simultaneously on optimizing their operatingstructures and on extracting value from their existingcustomer bases. Many of them will find the businesssegment to be of particular importance since it represents,on average, 30 percent of the overall revenue base, andcustomers in this segment are twice as valuable interms of their average customer lifetime value (CLV)

than consumers. However, to capture this prize, MNOsmust rethink their approach to sales, more carefully considering the unique needs of the corporate, SMB(small and medium business), and SOHO (small office/home office) segments. This revamped sales and channelstrategy must focus on maximizing revenue upsideacross the customer life cycle while optimizing the salesand channel costs.

Channel management paradigm shi t

Operators hoping to capture the most value possible fromthe business segment have to undertake a paradigmshift in their sales and channel management strategies.This means moving away f rom three misconceptions,

which have traditionally guided their approaches:

Myth 1: Indirect channels are cost-efficient. Indirectchannels actually tend to represent a disproport ionately large share of cost relative to their revenue contribution;a result of higher commission and acquisition costs.In a typical situation, while indirect channels mightgenerate 40 percent of the total revenue, their associatedacquisition and retention (A&R) costs would likely exceed 50 percent of total A&R spending.

Myth 2: Indirect channels are value contributors. Onthe contrary, operators have historically employed indirectchannels to drive mass-scale acquisitions and volumelevels by offering dealers and retailers incentives (Exhibit 1),leading to high acquisition costs. Furthermore, as marketssaturate, indirect channels have a tendency to churnthe customer base in order to capture commissions. Our

analysis of one mobile player revealed that while indirectdealers and distr ibutors did add to revenue volume,the true value contributors tended to be the direc tcorporate and business sales forces.

Myth 3: Indirect channels are eff icient modes of customer acquisition. Not true. In mature markets, thenet acquisition cost of a customer (i.e., gross additionsminus disconnects/churners) can be 6 to 35 times higherthrough indirect channels due to the high-churn levelsthese channels experience. In addition, traditional indirectchannels are not effective at pushing data products andsolutions for three reasons: indirect dealers and distribu-tors typically only make limited investments in the dataand solutions markets; they offer litt le control overthe quality of training; and they represent traditional voice/SIM-driven businesses with little incentive to sell data.

04 Myth Busting: A New Mobile ChannelStrategy for Business Customers

RECALL No 6 B2BMyth Busting: A New Mobile Channel Strategy for Business Customers


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Three cornerstones o the new channel model

The new sales and channel model that operators use whenit comes to their business customers must simultaneously deliver the maximum value while satisfying customerneeds (Exhibit 2). Reflecting these mandates, the modelis based on the following three cornerstones:

1. Building capabilities in direct channels. Two potential

initiatives emerge in this category. The first involvesrefining corporate and SMB sales forces, while the secondrecommends that operators aggressively invest in

boosting their telesales capabilities. Operators thatpursue these initiatives can generate an uplift in EBITDA of 7 to 9 percent.

Operators focused on refining their corporate and medium business sales forces likely need to change their coveragemodels in terms of how they deploy their corporateaccount managers. Many players loosely base theirestimates of potential revenue per account manager onthe size of current accounts. Doing so can cause MNOsto overpopulate some less promising corporatesegments with account managers, while starv ing otheraccounts that have greater growth potential. Instead,operators should refine their strategies regardingaccount coverage, making sure customer segments that

represent high current revenues and high incrementalgrowth potential receive a suff icient number of accountmanagers to proactively drive opportunity identificationand support. Meanwhile, less dynamic segments mightfeature low day-to-day account manager involvementand focus on retaining current customers.

Another option for MNOs is to aggressively invest in building telesales capabilities in order to reach the small

business and SOHO segments. Developing an integratedtelesales model enables an operator to cover smalleraccounts cost-effectively while focusing the direct salesteam on large, high-potential accounts. Our experienceshows that a dedicated telesales model works well up tothe SMB segment, where a typical company might requireabout 50 handsets. Furthermore, operators should developin-store and telesales capabilities aimed at identifyinghigh-potentia l customers in this segment who can behanded over to a higher-touch channel. For SOHOcustomers, telesales should develop the customer baseproactively and focus on up-selling. This will allow themto either capture a greater share of a customers walletor move that customer to a new product platform. Toaccomplish this effectively, the telesales agents must beproperly trained in lead generation and conversion, andthe operator must develop appropriate handover rules formoving high-value customers to the most effective channel.

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2. Managing indirect channels for value. MNOs canpursue two initiatives in the indirect channel area as

well. Rationalizing their portfolio of indirect dealers andminimizing their dependency on distributors can helpoperators to capture a 1 to 2 percent uplift in EBITDA.Operators rationalize their por tfolios of indirect dealers

by creating a tiered accreditation model. Such a modelcan enable operators to increase their control overthis channel while simultaneously lowering costs. The

operators objective is to align the commission andincentive systems to the dealers value contribution,rewarding high performers while encouragingimprovement or exit for lower performers. By quanti-tatively ranking dealers based on their value contribution(ARPU, churn, and size of the base) and net subscriberadditions, operators can ultimately tier the dealer base

by region, balancing geographic coverage and performance.

In the second initiative, regarding the management of indirect sales channels for value, operators can minimizetheir dependency on distributors by shifting the basetoward higher-value channels. In th is scenario, theoperator ends up directly managing a greater numberof sub-dealers (made possible by the fact that the MNOtechnically owns the customer through the billingrelationship). This task requires MNOs to undertake aseries of steps with two goals in mind. First, operators

need to identify attractive sub-dealers and develop a workable engagement model. They begin this process by building a knowledge base regarding the relationships between sub-dealers and distributors, assessingthe risks of approaching this relatively removed groupdirectly (e.g., legal issues and revenue loss) andidentify ing a preliminary, high-potential set to beginengaging as direct dealers. This is followed by anapproach to working with the sub-dealers that focuses

on value leveraging the accreditation program, which is piloted with a few sub-dealers. Operators wouldthen target a larger set of priority sub-dealers.Next, they need to retain high CLV customers within thedistributor base, systematically tracking service anddisconnect requests through their customer carecenters and redirecting certain requests to the telesalescapabilities.

3. Developing an integrated channel strategy withhandover capabilities. Here, operators create an integratedmodel that guides the telesales, retail, and direct salesforces as to how they should hand over customer leadsto the most relevant channel. The criteria for this modelare based on existing revenues, incremental potential,and customer needs (e.g., face-to-face interaction, dataneeds). Done right, this phase can deliver EBITDA upliftin the 3 to 4 percent range.

Operators would then realign channel strategies to focus on value,not volume02

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* * *

Faced with heightened competition and waveringmargins, mobile operators need to exploit every availablechannel to capture the maximum value possible. Thethree levers and the respective channel initiativesdiscussed here can help MNOs identify, attract, andcost-effectively serve the most valuable business

customers in their markets.

Nay Ghorayebis an alumna of McKinseys London office.

Conor Jonesis an Engagement Manager in McKinseysDublin [email protected]

Philipp Nattermannis a Principal in McKinseys London [email protected]

Julien Pestiauxis an Associate in McKinseys Brussels office.

[email protected]


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ICT services targeting small and medium businesses(SMBs) represent a growing and largely untappedopportunity. Communicating a compelling valueproposition, launching the right go-to-market strategy,and deploying an appropriate service delivery modelare the keys to catering to the needs of this highly diverse segment.

Over the last several years, largely in response toprice pressure on legacy services and new competitionfrom IT companies, most telcos have expanded theirscope of operations to include infrastructure-centricICT services, such as LAN, integration, security,data center, or call center services. So far, such inroadsinto the ICT world have been mainly geared towardlarge enterprise customers and have focused on highly-

customized offers. In this equation, SMBs have been largely ignored when it comes to end-to-end ICT value propositions.

Yet, SOHOs (small off ices/home offices) and SMBscan represent depending on the country in question more than 50 percent of the market in value and areexpected to significantly outpace their large enterprisecounterparts in the coming years. Based on recentMcKinsey research across Europe, the value opportunitiesfor telcos in this new ICT wave will initially remain

within the communications services realm in particular,fur ther mobile voice and data uptake, VoIP, and Webconferencing solutions. Looking at the medium-termhorizon, however, data center and applications (Softwareas a Serv ice SaaS), desktop provision, configurationand maintenance, as well as call center solutions will beattractive areas of opportunity.

At first sight, telcos would seem to be well positioned tocapture this opportunity, as over 60 percent of SMBsprefer one-stop shopping and recognize telcos specificadvantages, such as the ability to provide integratedoffers and higher quality of service. The reality, however,is that incumbent telco players tend to struggle tosuccessfully grow this segment. Relying on a customersegmentation mainly based on size, their service offeringsto SMBs often resemble scaled-down large enterpriseoffers or upgraded residential offers. Attackers, onthe other hand, have developed more SMB-specific,shrink-wrapped packaged offers, though with a morelimited breadth and lacking the required reach and/orquality of service to optimally address the demand.

To successfully deliver the ICT services the SMB market

demands, telcos might look to the following four-stepapproach: conduct a needs-based customer segmentation,design a segment-specific value proposition, develop ago-to-market model, and create a communication strategy.

1. Building a needs-based SMB customersegmentation

Reliability of products and after-sales service quality are the key buying criteria for SMBs who want to focuson their core business and not have to deal with thecomplex ICT environment. However, one size does notfit all, and McKinseys in-depth survey of 1,000European SMBs needs and behaviors reveals five distinctsegments no frills, cautious relationship seekers,service seekers, trust seekers, and best-technology seekers with fundamentally dif ferent expectations of ICT services (Exhibit 1).

05 Overlooked and Overshadowed:Growth in ICT Services for SMBs

RECALL No 6 B2BOverlooked and Overshadowed: Growth in ICT Services for SMBs


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No-frills SMBs have a small ICT appetite and limitedor no concern for product performance and af ter-salesservices. This segment mainly seeks basic solutions atthe cheapest price.

Cautious relationship seekers exhibit aver age ICTpenetration and a moderate appetite for new services/technologies. Their priority is a quality,face-to-face relationship with expert ICT sales reps,

and price/operating cost is not a primary concernfor them.

Service seekers, with their average concern for operatingcost, show a healthy appetite for life-simplifyingICT services (e.g., converged/unified communications,collaboration tools) and have very high standardsfor product reliability, quality, and speed of servicesupport.

Trust seekers with an average ICT appetite but higherthan average interest in outsourced solutions, e.g.,SaaS base their buying on brand/external advice, witha limited concern for operating cost.

Best-technology seekers also have a healthy ICTappetite and seek product performance, reliability,and scalability.

2. Designing a compelling segment-specifcvalue proposition

With such a deep understanding of ICT servicerequirements and key decision drivers for dif ferentSMB customers, telcos can build truly di fferentiated,packaged value propositions for each segment,each one a combination of 10 to 15 ICT building blocks.

The communications in a box package for the no-frillsSMB segment, for instance, should include basicconnectivity services. This package might consist of anIP gateway with WLAN and embedded firewall, 8 Mb/s

ADSL Internet access, VoIP calls together with a voice/data mobility pack and 9 to 5 service support.

The ICT key account package for cautious relationshipseekers might be similar in connectivity to the communi-cations in a box package for the no-fr ills segment. It

would, however, use SDSL instead of ADSL and IP VPNservice and be complemented by server/company por talhosting and network equipment maintenance service.

The ICT service plus package including fiber opticaccess, managed PBX/centrex, and premium service levelagreements (e.g., four-hour repair, seven days a week)

would constitute a best-in-class offer for service seekers.

Five SMB segments have markedly different purchasing priorities01


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The comprehensive ICT package , offering completeICT services, would be appealing to trust seekers. It

would include 20 Mb/s SDSL connectiv ity, security,fully-managed IP VPN, SaaS solutions for ERP/collabo-ration tools, and hosted servers. This pack age shouldalso include the provision and maintenance of a desktop/laptop equipped with office applications (Exhibit 2).

The high-end ICT package would be the offer of choice

for best-technology seekers, as it provides the fiberaccess, managed IP VPN with Web conferencing servicesand remote access solution, server hosting, and disasterrecovery solutions that are important to this segment.

3. Developing a go-to-market model to ensureoptimal reach

Having the appropriate standardized product solutionis an important prerequisite but it alone is not a sufficientcriterion for success in the SMB market. Finding theright interaction mode with customers providing reachat an affordable cost is equally important, since SMBsare geographically dispersed, thus costly to serve.

The McKinsey customer survey also revealed that mostSMBs prefer purchasing their services v ia multiplechannels, especially through field sales, in stores, and

online. Call centers, while still important in theinformation gathering phase, fall to the bottom of thechannel list when it comes to actual sales. For 48 percent,most product categories are purchased through twoto three channels. Another 22 percent prefer a distinctchannel for each of their ICT product categories. Only 30 percent would rather purchase all of their ICTproducts and services through a single channel. Thispreference for a multichannel approach holds true for

all SMBs, but the exact composition of this channel mix varies by needs-based segment (Exhibit 3).

When engaging with f ield sales reps or visiting a retailstore, SMBs are essentially seeking advice and exper tiseto help them select the ICT solution that best fits thei rneeds. When looking for information or purchasingonline, they expec t to find a simple Web site, offeringa menu of possible ICT solutions and straightforwardexplanations.

Unsurprisingly, cautious relationship seekers show thestrongest desire for a single channel (47 percent) andprefer field sales. No-frills SMBs share th is preference,expecting that reps would typically have more flexibility in pricing than a store manager would and that theonline channel would afford them no f lexibility at all.Meanwhile, service seekers and best-technology seekers

Offers need to be designed around segment appetite for ITC sample for trust seekers02



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often perceive field sales reps to be deceptive and unableto deliver the expertise and quality they require.

To adequately serve SMBs, telcos should not only apply an integrated multichannel approach (field, store,online, and even call center for information sharing andlead generation), but also ensure that each channelfulfills the customers channel-specific needs.

In order to cater to SMB customers most interested inface-to-face interact ions, it is important for telcos toensure that the sales force a) has sufficient ICT expertiseto interact with decision makers and b) can adequately cover local markets across a given territory. Building apartnership with one or several local partners (typically

value-added resellers or independent medium-sized ITintegrators) will complement core telco knowledge withIT capabilities and increase reach with limitedfixed cost. For instance, a European telco developed anapproach that transformed its own sales force into anetwork of local partners, each with an exclusive area,

within a distribution, commission-based businessmodel. Similarly, to support the sale and delivery of itspuesto de trabajo (workspace) offer, Telefnica signedagreements with several partners, including nationwideplayers such as HP as well as local IT shops (which signedon to a Telefnica-drafted serv ice quality charter).

SMB customers with a preference for online ICT sourcingsolutions consistently list very specific requirementsfor a providers Web site: straightforward, well-structuredinformation and an ICT solution a self-configurationtool where they can specify their IT environment(e.g., number of sites, number of desktops, type of usage,mobility needs) and select dif ferent options/packagesfrom a menu. To meet such demand, incumbenttelcos should revamp their Web sites, reducing complexity

to make the information as self-explanatory as it iscomprehensive and staying away from either long listsof features or lengthy and highly technical explanations.Celeste, an attacker focused on the SMB market inFrance, has such a Web site where customers can choose lacarte configurations based on predefined building blocks.

4. Developing an e ective communicationstrategy

Finally, an SMB-targeted ICT strategy requires a significantcommunication/credibility-building effort. SMBs areoften unaware that a telecoms operator might actually have the requisite capability set and expertise to takecare of all of their ICT serv ice needs. Consequently, they generally perceive that telcos do not fully understandtheir unique needs. Telefnicas initiative in Spain is agood example of how a packaged offer (mainly targeted

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at SMBs with simple needs), selected local par tnershipsto ensure local sales and service reach, and an aggressivecampaign to create awareness can result in a signif icantincrease in SMBs ICT appetite and openness to atelco as provider, ultimately yielding high revenue growth.In particular, Telefnica launched a series of TV ads consisting of mini real-life work situations thatdemonstrated how the range of their ICT value propositions

could be adapted to the specific context of each SMB(for example, size, type of activity performed by each groupof employees, and ICT usage). As a result, when surveyedon their openness to sourcing ICT services f rom atelco, the percentage of SMBs responding positively issignificantly higher in Spain than it is, for example, inFrance or Germany.

Pierre Gattais an Associate Principal in McKinseysParis [email protected]

Rene Langenis a Principal in McKinseys Athens [email protected]

Giovanni Romerois a Customer Insights Specialist/Marketingin McKinseys London [email protected]

Maximilian Scherris an Associate Principal in McKinseys



* * *

ICT services are a clear growth opportunity for telcos.Successful telcos are focusing their effor ts on offeringthese services to SMBs, as this segment is expected togrow faster than its large enterprise counterpart overthe next several years. A careful SMB segmentation,segment-specific value propositions, an optimized

go-to-market model, and a compelling communicationstrategy will put telcos on the path to profitably servingthis rapidly growing group.


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Despite their focus on basic services, operators in emergingcountries may still realize significant ICT growth andprofit margins. Local telco incumbents can shape themarkets in these countries by leveraging the exper ienceof players in more developed markets.

In an emerging country with average growth rates of 10 percent in ICT (with indiv idual segments growing atrates of approximately 15 percent) and EBIT margins of around 20 percent in areas like data centers, EmergingMarket ICT Telco the fictionalized name of an actuallocal telco incumbent set the aspiration to becomea leading ICT player in its home market. To achieve this,it defined a ver y concrete revenue aspiration for 2010,

based on three goals.

Goal 1: Capture a 5 percent market share in its focusservice areas. Based on the market share that otherincumbents have achieved in more developed markets(e.g., 15 percent for T-Systems in Germany, 8 percentfor BT Global Services in the UK, 5 to 6 percent each forTelefnica in Spain and France Telecom in France), it

became clear that 5 percent was a challenging but alsorealistic goal.

Goal 2: Become the largest domestic telco in the ICT business. Emerging Market ICT Telcos second aspiration was to outpace the 10-percentage-points-above-marketgrowth rates that it anticipated its counterparts wouldachieve for their ICT businesses.

Goal 3: Become the largest domestic IT infrastructureplayer. Also an ambitious vision, Emerging Market ICT

Telco sought to leverage its current IT infrastructureorientation in pursuit of taking the top domesticinfrastructure position.

Staged approach to achieve the aspiration

To analyze market oppor tunities and select its focusareas, Emerging Market ICT Telco grouped itsICT services into three major areas, based on its owncompetitive advantages as well as on overall marketattractiveness (defined as a mix of market size, growthrates, and profit margins):

Natural telco territory, which includes WAN, LAN, andsecurity, is the area that was closest to EmergingMarket ICT Telcos DNA and where it was already well

positioned in the market, especia lly in WAN.

IT infrastructure ICT, which includes data centers anddesktops, was not Emerg ing Market ICT Telcos hometurf, but this area was close enough to its core competencies,as telcos typically need to run heavy IT infrast ructure -centric operations to support their own administrativeactivities (e.g., IT-intensive billing processes).

Natural IT provider terr itory, which includes applicationmanagement and development as well as businessprocess outsourcing (BPO) though very attract ive interms of growth rates and margins was an area whereEmerging Market ICT Telco had a clear disadvantage

vs. IT services providers, especially in the mostpeople-intensive areas like application development andsystem integration.

06 Emerging Market ICT Strategies:One Local Telcos Journey

RECALL No 6 B2BEmerging Market ICT Strategies: One Local Telcos Journey


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Drawing lessons from the approach taken by other largetelcos to enter the ICT market in developed countries(e.g., Bell Canadas gradual building of leading positionsin selected ICT areas from 2000 to 2005), the decision

was made to first enter those areas closest to its corecapabilities and then move into other areas.

Dominate the natural telco territory by offering LANservices and climbing up the value chain toward higher

value-added services, typically with managed WAN andend-to-end security offers.

Address the IT infrastructure ICT market by focusingon data centers and offering desktop outsourcing aspart of larger deals. Desktops were not a focus area, butavoiding this area was not an option, as large outsourcingdeals typically include desktops.

Expand into selected topics within the IT providerterritory by offering basic application operations andapplication management and looking for a handful of cherry-picked opportunities in BPO.

The viability of this three-staged approach was confirmed by research showing that IT managers from some of the largest corporations in the country would turn to

telcos to provide ICT services mainly in WAN, LAN, callcenters, and data centers (Exhibit 1).

Major gaps and the approach to overcomingthem

While Emerging Market ICT Telco could obviously buildon some of its core skills to deliver on its ICT expansionstrategy, an in-depth capability assessment revealed a

number of skill gaps on the way to achieving its revenueaspiration for 2010. As shown in Exhibit 2, specific gapsexisted in LAN, security, and data centers; in applications,it didnt have any relevant skil ls.

First, Emerging Market ICT Telco brought key outsourcedIT operations back in-house in order to build its skillset and to give credibility to the ICT business as well. Italso focused on selected accounts (i.e., leveraging existingclient relationships from the traditional TC business) tofurther grow in WAN and data center services.

Second, Emerging Market ICT Telco added selectedcapabilities and skills (e.g., through recruiting) asneeded to provide more value-added services (VAS) tonew and existing customers. The capture of a few largeoutsourcing contracts (again, leveraging existing customer

The defined ICT growth strategy has been validated by the results of a market survey01


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relationships from the traditional TC business) was neededto provide credible reference cases.

Finally, the operator considered inorganic moves withthe acquisitions of both small and medium-sizedcompanies to achieve its growth aspiration. In selectingprospective target companies, Emerging Market ICTTelco employed a very rigorous, multistage filter ingprocess that prioritized the targets based not only on

their willingness to sell but also on their focus on theselected relevant service areas.

Organizing or success

In choosing the best organizational structure for thenew ICT business, Emerging Market ICT Telcos managershad two viable options: either create separate businessunits for ICT and TC services or integrate them within acorporate client business unit.

The former option would have the benefit of imposingminimal change on the existing structure and ensuringa stronger focus on ICT critical in the early business

building phase. Following that path, however, the telco would run the risk of creating sales conflicts betweenTC and ICT sales forces, making integrated proposals

to large corporate customers more complex and potentially accelerating TC commoditization (as own ICT unit

would typically adopt integrator posture).

The latter choice which was eventually preferred by Emerging Market ICT Telcos management impliedgreater change to the existing organizational format and

would require significant management attention to ensurethat the new entity, where legacy TC was obviously domi-

nant, would push ICT with the same effort and dedication.However, it would also allow them to design and deliverintegrated end-to-end value propositions to corporatecustomers, leveraging existing relationships and yieldingmaximum long-term value from the ICT lines of business.

Regardless of the organizational structure chosen, tosuccessfully implement the ICT strategy, EmergingMarket ICT Telco identified six important activities(Exhibit 3). The first involves its management and lead-ership, which required it to establish a strong positionas an IT serv ices expert. In terms of governance andorganization issues, managers had to develop a detailedorganization model and select service industry-adaptedfinancial key performance indicators, namely the EBIT

vs. EBITDA measures generally used in TC business.Regarding acquisitions, in order to quickly gain scale,

Assessing skills and exposing gaps is key to an ICT ambition02



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Emerging Market ICT Telco needed to acquire oneor more small or medium-sized companies and prepareto manage post-merger integration issues. It even hadto develop new capabilities in project and risk manage-ment as well as specific technical skills and value-basedsales exper tise. Emerging Market ICT Telcos go-to-market approach also changed, as it began to developICT-focused sales knowledge and relationships andevolves its sales model toward higher value-added

services. Finally, operations, or the operational elementsof an ICT factory, required a more agile and dynamicapproach to delivering solutions, a focus on ensuring theprofitable delivery of complex projects, and the need toidentify and interact effectively with a network of partners.

To successfully conduct this transformation, a dedicatedstructure was set up with a strong project management

office, ensuring rigorous progress monitoring, adequatepacing, and the staffing of key initiatives with themost talented people. Additionally, top managementcommitted significant time to the transformation andled broad communication to ensure that the new ICT posture was well understood across all operationalteams.

* * *

Very attractive opportunities can be captured by telcosin emerging markets, as these companies are often inthe advantageous posit ion of being able to shape new ICT demand. Following a staged approach, identifyingand addressing skil ls gaps, and designing an appropri-ate organizational structure can mean hefty growth andlimited competition from large international players.

A diverse set of levers was identified to reach the 2010 revenue aspiration03


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Rodrigo Diehlis an Engagement Manager in McKinseysMunich [email protected]

Paulo Fernandesis a Principal in McKinseys So [email protected]

Pierre Gattais an Associate Principal in McKinseys [email protected]



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You can only manage, what you can measure. Withoutthe right set of key performance indicators (KPIs), eventhe most realistic aspirations are impossible to achieve.Five simple rules help to ensure that the telco maintainsits path toward B2B value creation.

In a recent survey, the University of St. Gallen askedtop executives of the FT Europe Top 500 companies abouttheir three priority projects to improve managementcapabilities. Only 20 percent answered that they hadlaunched projects to further develop their managementsupport systems with a focus not only on improvingdata quality within the systems, but also on aligning thereport ing to the new strategic goals. Much too rarely do organizations find time to adjust KPIs and incentives

based on their conformity with strategy and the most

optimal way to support business goals. Aiming at ambitiousrevenue growth, for example, but holding on to the old,absolute expense targets simply does not work. Beyondthese mismatches, other reasons for failure are overly complex targets that are difficult to understand and thepresence of corrupt data in KPI calculations.

Telecoms organizations that have their own sales andproduction units can apply five rules to manage theirB2B performance and, ultimately, support value creation.

Establish a centrally-managed P&L

To focus the business on profitability, companies haveoften derived unit/country/customer segment-specificprofitability calculations, i.e., designed the delivery unitas profit center or (in times of global delivery) continuedto steer different country operations with individual

profitabil ities. This has led to a unit/country/customersegment internal optimization that often contradictsthe overall business goals. For example, incentivized

with a profitability target, the delivery profit centeraims at maximizing its charging on customer contractsfor which it gets paid by the sales unit. With minimizeddelivery cost, this increases the individual delivery units profit. High charging on customer contracts onthe other hand reduces the profit generated by the sales unitand thereby might lead to misguided business decisions.

To foster a collaborative environment in which sales anddelivery units work hand in hand, a centrally-managed,company-wide profit and loss statement (P&L) should

be established. In this new framework, the sales and serviceunits would then directly af fect items such as revenues

and selling expenses and indirect ly impact the generaland administrative (G&A) expenses. On the other side,the delivery units would directly impact the materialand production cost and have an indirect influence ontheir part of the G&A expenses (Exhibit 1).

This type of joint responsibility for profitabilit y of theoperator provides for a more integrated businessmanagement along two core dimensions: 1) the customerdimension, which allows steer ing the customer/contract

via its profitability and 2) the product dimension, which among other things, helps to bring profitability issuesalong various product categories to the surface.

Centrally-managed profitability makes sense evencross-country in the case of similar business mixes andglobal delivery, especially given the fact that more andmore global customers are emerging. By looking into the

07 Maintaining Course:B2B Performance Management

RECALL No 6 B2BMaintaining Course: B2B Performance Management


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steering logic of big telco/ICT players across Europe and Asia, we learned that most of them have established thistype of joint profit responsibility.

Depending on the customer segment served, there might be preferences for which steering dimension should beprimar y. The customer dimension is often used as theprimary dimension for the enterprise segment, whereasSMB activity is often steered via the product dimension.

Most valuable for all steering purposes is when the productdimension can be directly translated to the customerdimension, requiring high data transparency and quality.

Switch rom EBITDA to EBIT

Large investments into network infrastructure were the base for todays successful telco business. Due to theensuing high depreciation, EBITDA has been establishedas a key measure in telecommunications. More recently,

based on their heavy internal IT needs and capabilities,many telcos have started to enlarge their portfolio tooffer IT services (leading to a convergence of IT and TCservices into ICT services) whose investment needs aresignificantly lower.

Based on these developments, the classical telco steeringlogic should be adjusted. Specif ically, comparing the

profitabilities of the various services via an EBITDA measure would be unfair due to the relatively highcapex portion of TC vs. ICT vs. IT services. By takingEBIT (and its margins) instead of EBITDA as the KPIof choice, depreciation effects would not be taken intoaccount and the services can be more accurately compared(Exhibit 2). Fifty percent of the TC/ICT companies westudied have adjusted their measurements and areusing EBIT for internal decision making. EBITDA, however,

still remains their official, publically-reported KPI.

Manage the operating business by ocusing ongross proft margin

In general, it works best not to steer v ia absolute targets but rather according to relative margin targets. Insales, for example, it does not make sense to keep thesales force number constant (and therewith the sellingexpense cost) if an increase in numbers might meanthe opportunity to achieve greater revenue growth and

better profit margins. Assigning the sales unit a sellingexpense margin target allows them to achieve thedesired revenues while still maintaining control of theselling expenses.

Setting the gross profit margin as a KPI will ensurecooperation between the sales and delivery units and

Sales and delivery share responsibility for overall profitability01


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maximize value for the company (Exhibit 3). Whereassales tries to optimize revenue and order entry, thedelivery units will seek to optimize the cost of goodssold (including material and production cost) by, forexample, optimizing their make or buy decisions or by considering global sourcing. Having the delivery unitsincentivized against a gross profit margin target wouldensure that only those services would be offered thatcan be delivered at a cost that meets the gross profit target.

Derive fve to ten more KPIs rom strategy/ business pain points

To optimize value generation, additional KPIs should beset to cover all key levers of value creation. For salescost efficiency, setting the right sales cost margin target

will encourage the sales units to deploy their forces in value-maximizing ways, reducing sales structures wherepossible, but not to an extent that risks losing revenueopportunities. Our observations of telcos point to thefact that defining sales cost margins on a sales segmentlevel leads to productive discussions on determiningthe appropriate market segment/customer focus.

Beyond financial indicators, nonfinancial KPIs (e.g.,a win rate for deal-based business) should be set tofur ther support pulling the revenue generation lever.

Depending on the strategic focus of the company, itmight make sense to promote certain business or servicetypes. KPIs such as share of new business orderentry will support the respective sales push objectives.

McKinseys research into the efforts of several telcosalso indicates that the number of KPIs for one functionshould be somewhere between five and ten. Thisensures enough targets to keep the business on track but

no more than can be realistically addressed.

Adjust steering and communicate The envisioned impact will, of course, only materializeif a consistent set of targets and metrics is used in allactivities f rom strategic planning to budgeting to regularperformance reviews. The KPIs should cover all necessary levers to steer the business toward value, and any changesto this set of indicators should be carefully considered.

Once the steering logic has been def ined, the KPIs should be clearly communicated either in specific performancereports or as part of the general communication of strategic goals. We have even seen examples of the CFOpublishing a short letter in the internal newsletterdetailing the key pillars of the new steering logic andexplaining their necessity.

In the ICT realm, EBIT is more indicative of performance than EBITDA02

RECALL No 6 B2BMaintaining Course: B2B Performance Management


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Finally, top management buy-in is key to establishingand living the described steering logic. The CFO has to

be accountable for the overall steering logic definition,the execution process, and for fact-based and independentinsights to drive the performance management system.The chief strategy officers responsibility is to dr ivethe strategy discussion as well as to ensure its couplingto plans, budgets, and targets. Last but not least, thecommitment of the CEO/management and willingness

to role model are vital to this change.

* * *

The new strategies, transformation objectives, or growthambitions that telcos embark upon will only materializeif incentives are set to support these goals and if KPIs arein place to keep performance on course. Industry observations have demonstrated that a well-definedsteering logic is necessary to transmit goals into allcorners of the organization and cause all involved to act in

concert along a set of levers that leads to behavioral change.

Gross profit margin becomes key KPI for project management03

Iris Kornackeris an Associate Principal in McKinseys



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T-Systems is the business customer brand of DeutscheTelekom. With about 56,500 employees, this divisionoffers integrated ICT solutions from a single source.

Joachim A. Langmack began his career at IBM Germany and has since held a variety of management positions in

business and consulting. He became T-Systems Chief Sales & Service Officer in February 2008 and is responsiblefor a EUR 9 billion enterprise business.

McKINSEY: Deutsche Telekom is, at its hear t, atelecommunications company. What are the advantagesof providing IT services as well?

JOACHIM A. LANGMACK: The advantage in offeringIT applications maintenance and integration services

in addition to network services is that we can provideend-to-end services. This lowers the total cost of ownership for our customers. The creation of our ICTfactory integrated the TC, desktop, and computingservices factories under a single, overarching monitoringand customer support process, improving the quality of our customer support. For a customer it is not important

whether it is the WAN, the router, or the data centerthat causes the issue. What matters is that it gets resolvedquickly end to end.

McKINSEY: Does your ICT factory have implications beyond incident management and disaster recover y?

JOACHIM A. LANGMACK: Certainly. T-Systems is alsoa global leader for SAP applications outsourcing, and wehave a large systems integration business with strongSAP integration expert ise. Combining our applications

integration with our operations know-how gives us theability to help our customers design their entire applicationslandscape. Our combined applications-operations pointof view saves costs for our customers.

McKINSEY: There has been talk about how to improvethe offshoring of Deutsche Telekoms/T-Systems systemsi

mckinsey telecoms. recall no. 06, 2009 - networks

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