telco fitness

1A Fitness Program for GCC Telcos

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


Years of strong growth and limited competition have brought telecommunications operators in the Gulf Cooperation Council (GCC) region some of the industry’s highest margins.1 Between 2004 and 2007, GCC telcos’ revenues grew 15 percent annually, with earnings before interest, taxes, depreciation, and amortization (EBITDA) margins hovering around 47 percent.

But the boom is coming to an end. GCC telecom markets have become increasingly saturated, with competition intensifying and prices falling. Annual revenue growth in GCC markets now averages just 4 percent, and it may remain flat or even decline in 20122 (see figure 1).

As a result, GCC telcos need to “get fit.” By undergoing regular health checks and staying in shape, telcos can earn a financial payoff with the potential to create an immediate impact and a long-term, sustainable advantage (see figure 2). For example, Deutsche Telekom’s “Save for Service” efficiency improvement program that focused on procurement, product portfolio standardization, and shared services resulted in $7.8 billion in savings between 2006 and 2010, with another $5.5 billion savings targeted by the end of 2012.3 The same level of savings is available to operators in developing markets. In 2010, South Africa’s MTN increased its EBITDA margin by 2 percent after building the framework for stricter cost management and optimization.4

Compounding PressuresThere 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 1The boom that brought growth and profits to GCC telecom markets is ending

Figure 1The boom that brought growth and profits to GCC telecom markets is ending

2008–2011

2004–2007

27%

44% 42% 47% 41% 38% 39%

15%

4%4%4%

30%

25%

20%

15%

10%

5%

0

-5%-1%

Developing markets GCC players Developed markets

Average EBITDAmargins

Compound annual revenue growth rate, telcos*

* Data is based on companies in 22 developed countries, 30 emerging countries, and the four largest GCC companies.

Sources: Bank of America Merrill Lynch, Bloomberg, company annual reports; A.T Kearney analysis

1 The Gulf Cooperation Council is a political and economic organization that includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates (UAE).

2 Fitch Ratings, 2012 3 Deutsche Telekom Annual Report 2011 4 MTN 2010 Annual Report


a significant portion of total revenues. Furthermore, increased competition from new mobile challengers and mobile virtual network operators (MVNOs), together with stronger regulatory interventions, including termination rate reduction, number portability, and bitstream (which allows rival operators to offer services over an incumbent’s fixed-line infrastructure), is set to erode telcos’ margins further.

Another potential area of concern is the growing use of handset subsidies to attract and retain subscribers, especially in more mature markets. In Europe and the United States, handset subsidies have had a significant impact on some operators’ direct costs and profitability. In the GCC, telcos will have to monitor this development, along with the current explosion in demand for smartphones and tablets (which have higher prices than traditional phones).

At the same time, operators will need to invest continually in expanding their network capacity and rolling out new technologies, such as fiber-optic networks and high-speed mobile broadband (4G), to meet the increasing demand for data—all while facing pressure from share-holders to limit capital expenditures and maintain healthy cash flows and attractive returns.

Compounding these commercial challenges is the fact that most GCC governments, which hold significant shares in regional telecom operators and have grown accustomed to reaping boom-era benefits, continue to seek major returns from the telecom cash cow. The taxes and royalties paid to GCC governments by telecom firms—usually a percentage of net profits—comprise between 1 percent (Saudi Arabia) and 17 percent (UAE) of GCC countries’ public budgets.5

Governments are also more than ever expecting telcos—in particular incumbents—to fulfill social goals by hiring, retaining, and training a higher percentage of nationals, rather than acquiring less-expensive expatriate workers. These government policies, which aim to reduce unemployment and strengthen the knowledge-based economy, entail higher costs for operators.

Figure 2“Getting fit” helps operators decrease their costs every year

Figure 2“Getting fit” helps operators decrease their costs every year

*Based on a sample of 100 operators worldwide

Source: A.T. Kearney analysis

100

75

50

25

0

-7%

Average cost per customer* (Indexed: 2007 = 100)

2007 2011201020092008

7478

84

92100

5 Economist Intelligence Unit, company annual reports; A.T. Kearney analysis


Figure 3Different levers will help different functions

Figure 3Di�erent levers will help di�erent functions

* Sales acquisition costs and sales retention costs

** WC is working capital

*** Includes functions such as finance, HR, procurement, supply chain, and corporate communications


Operational eiciency improve-ment

Strategic sourcing

Optimize SACs andSRCs*

Revenue assurance

Capex prioritiza-tion

WC eiciency and asset leverage**

Disruptivebusiness models

Network

IT

Sales

Marketing

Customer management

Intercon-nection and roaming

Support and overhead***

Indicates that lever is particularly relevant to this function

Select examplesCross-functional levers

Func

tion

* Sales acquisition costs and sales retention costs

** WC is working capital.

*** Includes functions such as finance, HR, procurement, supply chain, and corporate communications


In this new era, operators will need to improve operational efficiencies while enhancing the customer experience. GCC telcos must “get fit” and stay that way. In essence, this means increasing efficiency and productivity, and reducing costs without impacting quality.

Deploying a Successful “Fitness Program”In regions with mature telecom markets, operators years ago initiated operational efficiency programs that continuously streamline operations and optimize capital expenditures. However, executing a telco “fitness program” is a challenging, long-term exercise, especially for operators attempting to get fit for the first time.

Effective fitness programs generally comprise three distinct phases:

Phase 1: Perform a check-up. A first assessment phase is crucial. It creates the case for change, defines the level of ambition required to reduce costs significantly, and pinpoints the areas with the most substantial improvement potential. Here, telcos can consider a range of performance improvement levers across many functions (see figure 3).


How and Where Telcos Can Cut Costs

Two-thirds of telecom operators’ costs are often indirect and one- third are direct (see figure 4). This split can vary, however. Mobile operators often have higher direct costs due to handsets and commissions.

Both mobile and fixed operators are grappling with falling prices brought on by competition and regulatory changes. Globally, between 2009 and 2011, mobile operators’ average revenue per user (ARPU) fell 10.3 percent, and fixed operators’ ARPU fell 3.3 percent, according to A.T. Kearney’s Global Competitive Benchmarking (GCB).

During the same period, telcos became more efficient: Mobile

operators saw average efficiency gains (as measured by total indirect cost per customer) of 11.1 percent, and fixed operators saw 5.8 percent gains. Because direct costs are more difficult to address, efficiency programs usually focus on indirect costs. The efficiency gains have come from the following areas:

Network, marketing, and IT. These three areas have the most potential for optimizing operational and capital expen-ditures, typically by reducing complexity.

Supply chain and procurement. GCC operators’ rapid inter-national growth—often through acquisitions—means there are

generally plenty of opportunities to improve supply chain and procurement capabilities. By standardizing purchasing requirements and internal technical specifications, consolidating volumes, and optimizing deals with suppliers, operators can cut costs without affecting core operations. Telenor, for example, reduced its software licensing costs by 34 percent by replacing local licensing agreements with global deals.6 GCC telcos will need to use the full scale of their groups to create synergies, reduce external spending, and benefit from solid supplier relationships, which can bring earlier access to new handsets and network equipment.

6 Bjørn Harald Brodersen, Head of Group Sourcing, Telenor, “Sourcing in Telenor Group.”

Notes: Support and overhead includes functions such as finance, human resources, procurement, supply chain, and corporate communications.Percentages may not add up to 100 because of rounding.


Figure 4Cost breakdown for telecom operators

Typical operator

Interconnection

Cost of goods sold

Commissions

Network

Information technology

Customer management

Support and overhead

Sales

Marketing and product development

57%25%

18%

58%

11%

8%

8%

7%7%

66%Indirect

cost

34%Direct

cost


Benchmarking activities can identify areas with the highest potential for improvement and the greatest need for top management attention (see sidebar: How and Where Can Telcos Cut Costs). By applying international best practices, benchmarking also identifies clear improvement targets that quantify how much value is achievable.

A useful starting point for assessing cost performance is A.T. Kearney’s Global Competitive Benchmarking (GCB). More than 100 operators around the world participate in the GCB, which provides an annual comparison of mobile, fixed, and converged operators’ costs and perfor-mance, and has become the de facto industry baseline for operational excellence.

The GCB measures opex (operating expenses), capex (capital expenditures), working capital, and other key performance indicators (KPIs) against comparable operators, thus allowing detailed analysis of performance for any given costs. Cost transparency, supported by detailed benchmarking results, forms the basis for a sound health check and is the foundation upon which to build a strong case for change (see figure 5 on page 7). Benchmarking not only identifies and quantifies areas of potential overspending or low productivity, but also points out areas of under-investment, or insufficient service maintenance, leading to higher costs in other areas.

Recently, A.T. Kearney benchmarked a GCC telco’s operations in its home market. The benchmark showed low IT spending compared to similar operators, but in other functional

Back office. Consolidating back-office functions such as HR and finance, potentially by estab-lishing central or regional shared services, can increase efficiency.

Information technology. Centralizing IT services and standardizing or consolidating applications and hardware can substantially reduce costs and often improve service.

Infrastructure sharing. Sharing infrastructure among operators is another way to optimize costs and leverage economies of scale. For example, Bharti, Millicom, and Vodafone (Spain, Germany, U.K., India, and Ireland) have shared networks with other operators. In Sweden, 3 and Telenor’s joint venture, 3GIS, covers around 70 percent of its network with shared infrastructure.

Outsourcing. Outsourcing non-core activities, such as

fleet services and facility management, can improve efficiency and allow more management focus on customers. Newer outsourcing models include managed capacity, where an outsourcer is paid on a variable utilization or capacity basis. These models, besides increasing efficiency, reduce risk, and limit financing needs while fundamentally shifting the focus from opera-tions to customer experience and partnership management. Bharti Airtel’s so-called “Minutes Factory” has enabled it to target millions of pre-paid customers that would have been too costly to serve using the conventional subscriber-led model.7 The factory’s key elements include outsourced network equipment, which enables fixed costs to convert to variable costs. Bharti’s partnerships enable it to add network and IT capacity quickly and efficiently, as needed.

Energy efficiency. Energy efficiency can cut costs while reducing environmental impact. France Telecom-Orange, for example, is aiming to reduce energy consumption by 15 percent between 2006 and 2020.8 By the end of 2010, the group had fitted more than 8,000 network sites with optimized ventilation systems, cut energy consumption at data centers, and installed solar-powered base stations (mainly in Africa and the Middle East).

Cross-functional processes. Streamlining, strengthening, or re-engineering certain cross-functional processes can make them more customer-oriented while eliminating departmental silos that lead to duplication and inefficiency. Further organiza-tional changes, such as consoli-dating departments, optimizing span of control, and can improve service and cut costs.

7 Rohin Dharmakumar & Shishir Prasad, “Bharti Minutes in Africa,” Forbes India, 28 April 2010

8 FTN-Orange 2010 Annual Report


areas, particularly sales, customer management, and finance, the operator was spending far more than its competitors. In these functional areas, staff costs were high, and quality in some areas was suffering because the operator hadn’t automated its labor-intensive processes.

Phase 2: Develop a fitness program. A tailored cost and productivity improvement program starts by delving deep into benchmark results to find the root causes of performance gaps. A company-wide effort can identify core areas to address while also stimulating awareness and creating a more cost-conscious corporate culture. Such an exercise must involve many functional areas and levels of responsibility and combine leadership with a willingness to welcome, and understand in detail, the excellent ideas that employees from across the organization can contribute. Involving the entire workforce ensures a thorough approach that addresses the identified cost-performance opportunities and supports the successful imple-mentation of any initiatives.

Cost and productivity improvement initiatives can be categorized into different groups, taking into account the implementation effort, time required, and expected outcomes in terms of cost savings or increased productivity. They usually fall into three categories: quick wins, structural improvements, and transformation (see figure 6 on page 8):

Figure 5A.T. Kearney’s Global Competitive Benchmarking (GCB) is the telecommunications industry’s largest database

Figure 5A.T. Kearney’s Global Competitive Benchmarking (GCB) is the telecommunications industry’s largest database

Note: KPI is key performance indicator.


Global Competitive Benchmarkingfor Telecoms

Compare cost e�iciency

levels

Obtain regular input

to budget and business

planning

Analyze root �causes and

improvement �actions

Identify areas for cost improvement

Achieve best-in-class

cost structure

Compare KPIs and

share best �practices

Note: KPI is key performance indicator.



Quick wins. Telcos can often find immediate results from simple pragmatic steps that create immediate impact. For example, we recently helped a Middle East operator adjust its travel and expense policies and reduced annual spending in this area by 10 percent.

Structural improvements. These are initiatives with a short- and medium-term impact. For example, by using online reverse auctions for a proportion of its procurement, Telefonica reduced its sourcing cycle time by 50 percent and its procurement management costs by 27 percent, while achieving considerable savings on external spending.9

One potential structural improvement is balancing capital spending on replacement equipment with spending on new equipment, while ensuring that each investment is based on a strong business case with attractive returns. For example, some telcos, such as British Telecom, are

Figure 6Cost and productivity improvement activities fall into three categories

Figure 6Cost and productivity improvement activities fall into three categories


Quick winsStructural improvements Transformation

Scope

Approach

Level of e�ort

Examples

Results horizon

• Focus on avoidingcertain activities

• Base on decisions, such as a policy change

• Take a top-down approach to speed up results

• Develop plans, business case, and implementation simultaneously

• Implement quickly and easily once management approves

• Adjust specific policies, such as travel and entertainment

• Review outstanding tenders and capital expenditures

• Dispose of old inventory

• Obtain immediate results through one-time cost improvements

• Focus on improving current operations, including re-engineering processes

• Outline detailed implementation plans and targets up front

• Involve stakeholders early to get buy-in

• Require substantial e�orts at all levels of the organization

• Manage resistance to change

• Establish training programs for all employees to ensure success

• Re-engineer call center processes

• Launch strategic sourcing initiatives

• Optimize spectrum usage

• Achieve more cost savings in the short- to mid-term

• Transform the operating model

• Take a forward-looking view

• Prepare for a complex implementation because of numerous interdependencies

• Perform deep pre-execution analysis

• Build a dedicated, experienced team to implement the transformation

• Command senior management and board support to lead the transformation

• Outsource network operations

• Share some or all network infrastructure

• Consolidate functions and shared services centers

• Gain long-term advantage (this may require considerable investments)

9 Tim Minahan, “e-Sourcing is A-LIVE and Well in Europe,” Supply Excellence, 13 June 2008


rolling out fiber networks in a phased manner determined by the level of customer demand, an approach known as “value-based network roll-out.”

Some operators have cut costs significantly by optimizing their backhaul transmission networks, for example by carrying mobile and fixed traffic on a common transport network. One leading telecom operator we recently worked with implemented a number of measures to lower its capex investments, including more efficient use of spectrum and reduction of peak loads on its networks by throttling peer-to-peer traffic at busy times.

Transformation. Transforming all or part of the existing operating model can cut costs signifi-cantly. One large European telco client deployed a lean approach to its call centers and network field operations in its home market, improving productivity 25 percent.

These three categories differ substantially in terms of implementation (straightforward versus complex) and their impact on how a company carries out its business. Whereas “quick wins” might be simple measures such as adjusting travel and entertainment policies, struc-tural improvements tend to focus on initiatives that take a longer time to implement, such as re-engineering processes.

GCC telcos that implement cost- optimization programs can improve their bottom lines by 20 percent. That’s about $500 million more in total annual net profits for large GCC telecom groups.Transformation initiatives often have the biggest impact, but usually take the longest time. They might include consolidating functions, eliminating duplicate activities, reducing the scale of operations, and outsourcing non-core and even some core activities to third parties. Clearly, an organizational transformation may take several years to complete and have a considerable impact on employees.

While some management teams are prepared to implement cost and productivity initiatives that have a direct impact on headcount, others prefer to avoid such measures. Figure 7 on page 10 shows examples of initiatives and their impact on full-time equivalent (FTE) headcount.

Whatever route a company takes in its fitness program, successful implementation requires total top-management commitment to the point that it should be included in executives’ annual performance targets and incentive packages. Strong program management is also required. Solid governance with regular steering-committee meetings will help coordinate the implemen-tation effort by acknowledging units that are delivering results while identifying those that are struggling and need internal or external help.

Phase 3: Stay fit by exercising regularly. Staying fit is not a one-time endeavor. It requires a sustained marathon effort focused on continually improving performance. Leading inter-national telecom groups establish special units, mechanisms, and systems that constantly


monitor, benchmark, and, ultimately, improve cost performance. They embed cost perfor-mance into management KPIs and targets. Leading telecom firms in mature markets typically designate a unit (for example, within finance) responsible for benchmarking and monitoring overall cost performance. These units identify cost optimization best practices within operating companies and disseminate them across the group, driving effective group synergies. They also set cost reduction targets for business units and specific activities—used as input into the annual budgeting cycle—and regularly follow up to measure the achievements. In essence, employees in these units become cost-and-productivity experts and play a pivotal role in creating a more cost-conscious culture. GCC telecom operators could benefit from employing experts from firms in more mature markets where cost optimization has been an integral part of their business.

Again, top-management leadership is critical. Cost-optimization programs are best led by the CFO, COO, or CEO with support from the management team, while telecom groups should combine both group-led and country-specific initiatives. Cost optimization must be a strategic

Figure 7Cost and productivity initiatives and their impact on headcountFigure 7Cost and productivity initiatives and their impact on headcount

* CPE is customer premise equipment.


Examples

Quick winsStructural improvements Transformation

Actions withdirectheadcountimpact

Actions with no direct headcount impact

• Release non-performing employees

• Change CPE* specs• Rationalize laptop-desktop

mix• Reduce sponsorship• Reduce certain employee

allowances• Adjust travel and

entertainment policy• Optimize mobile-site power

use• Adjust training policy• Dispose of old inventory

• Re-engineer call center process

• Optimize span-of-control

• Optimize deployment and roll out

• Consolidate data centers• Optimize inventory

management• Manage fleet demand• Reduce o�ice space• Conduct strategic sourcing

and e-auctions for suppliers• Standardize and centralize

IT• Phase out legacy systems

• Create shared services centers

• Conduct overhead value analysis

• Eliminate overlaps between functions

• Outsource core and non-core activities

• Conduct companywide business process re-engineering

• Share network infrastructure


priority with cost-reduction targets and KPIs embedded in employees’ objectives. All components combined will drive the transition toward a more cost-conscious corporate culture where cost management is a day-to-day strategic priority for all employees.

Executing a telco “fitness program” is a challenging, long-term exercise, especially for operators attempting to get fit for the first time.

Would-Be Winners Have No Time to LoseAs 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 [email protected]

Laurent Viviez, partner, London and Johannesburg [email protected]

Rob van Dale, consultant, Middle East [email protected]

A.T. Kearney is a global team of forward-thinking, collaborative partners that delivers immediate, meaningful results and long-term transformative advantage to clients. Since 1926, we have been trusted advisors on CEO-agenda issues to the world’s leading organizations across all major industries and sectors. A.T. Kearney’s offices are located in major business centers in 39 countries.

Americas

Europe

Asia Pacific

Middle East and Africa

AtlantaCalgary ChicagoDallas

DetroitHoustonMexico CityNew York

San FranciscoSão PauloTorontoWashington, D.C.

BangkokBeijingHong KongJakartaKuala Lumpur

MelbourneMumbaiNew DelhiSeoulShanghai

SingaporeSydneyTokyo

AmsterdamBerlinBrusselsBucharestBudapestCopenhagenDüsseldorfFrankfurtHelsinki

IstanbulKievLisbonLjubljanaLondonMadridMilanMoscowMunich

OsloParisPragueRomeStockholmStuttgartViennaWarsawZurich

Abu DhabiDubai

JohannesburgManama

Riyadh

A.T. Kearney Korea LLC is a separate and independent legal entity operating under the A.T. Kearney name in Korea.

© 2012, A.T. Kearney, Inc. All rights reserved.

The signature of our namesake and founder, Andrew Thomas Kearney, on the cover of this document represents our pledge to live the values he instilled in our firm and uphold his commitment to ensuring “essential rightness” in all that we do.

For more information, permission to reprint or translate this work, and all other correspondence, please email: [email protected].

telco fitness

Documents

gcc markets

gcc telecom markets

gcc telcos revenues

gcc governments

regional telecom operators

largest gcc companies

telecommunications operators

rival operators