Telecom operators worldwide face a raft of challenges that could impede their path to pre-recessionary growth levels. Competition is heating up from other telecom operators, as well as new entrants, including Apple, Google, Skype and Facebook. Meanwhile, demanding consumers expect operators to provide an “all you can consume” Internet model via ubiquitous bandwidth and the latest services at low flat rates.
Telecom operators worldwide face numerous obstacles to continued success: stagnating growth; heightened competition; and growing consumer sophistication. As these trends are still nascent in the region, GCC telecom operators have thus far implemented tactical, short-term initiatives to overcome these obstacles.
Opportunity abounds for GCC operators to prepare for future challenges by adopting a comprehensive cost management plan, addressing incremental efficiencies, process reengineering, and value chain restructuring. Operators that do not implement wide-ranging plans to manage their costs run the risk of steep declines in profitability.
According to Booz & Company, these new trends – hindering the telecom operators – are starting to emerge in the Gulf Cooperation Council (GCC) region, with revenue growth in the telecom sector slowing, competition rising, and consumers increasingly demanding more services and better performance at reduced prices. “The global operators hit hardest by these trends have undertaken substantial measures to adapt structurally to face these challenges. GCC operators are also starting to respond to the trends now emerging in the region through tactical, short-term cost reductions. These moves will prove to be insufficient to mitigate the full impact of the trends affecting the sector,” says Chady Smayra, Principal, Booz & Company.
By rigorously identifying and applying relevant cost measures, telecom operators can position themselves to weather the on-going industry challenges and extract benefits from leaner operations. There are three waves of cost optimisation that operators need to consider: incremental efficiency, process re-engineering, and value chain restructuring. “Deploying the right mix of these initiatives will enable operators to create – or sustain – value, outperform their competitors, and secure their sustainability in chosen markets,” Smayra adds.
Telecom operators worldwide are emerging from the global recession. At the same time, they are facing increasing pressures on both their top and bottom lines. “Although revenue growth is still positive in the GCC region, it has begun to slow recently. Average returns on assets have dropped by nearly half over the past five years to about 8% per year, and appear headed toward 5%, the level commonly seen in saturated markets,” says Hilal Halaoui, Partner, Booz&Co.
Three key trends are converging to pressure the profitability of the telecommunications market worldwide:
Stagnating Growth: The global telecommunications market has been stagnating as many markets approach their saturation point, a trend underscored by high penetration rates. In these markets, operators are experiencing slowing or decreasing average revenues per user (ARPU) and face the need to prepare for limited growth from traditional services.
Increasing competition and market fragmentation: Globally, the increase in the number of operators has steadily outpaced that of market revenues. The number of telecom operators has increased by 70% since 2005, whereas industry revenues increased by only 45% over the same period. Facility-based operators have grown by 6% per year, while MVNOs and internet service providers have grown at over 15% a year.
Sophistication of customer tastes: Changing consumer trends is another area in which GCC operators can see the shape of what’s to come. In mature markets, the increasing sophistication of customers coupled with new competition from non-telecom players is shooting up costs, as operators spend more to attract, acquire, serve, and retain customers.
Some markets, such as Europe and the US, are prone to all of these pressures. “The GCC region recently has seen increases in competition and market fragmentation, as well as a slowdown in growth. Based on experiences in from other more mature markets, ithe telecom sector too will soon face added pressure from consumers. In response, operators will need to prepare for constrained growth and compensate by creating leaner organisations. Essentially, regional incumbents will have to increase their marketing expenditures, and in turn, try to reduce many other costs,” Halaoui adds.
Fortunately, GCC telecom operators have a lot of room for improvement in cost optimisation. Regional telecom operators can formulate a response to these challenges by looking to global telcos that have taken several steps to rein in costs. Regional telcos can benefit by grouping cost optimisation initiatives into three waves.
Three key waves
Incremental efficiency: Involves making informed decisions to reduce costs by shedding excessive expenditures through better budget allocation and use of resources in ongoing activities (this usually yields rapid cost reduction and helps maintain a healthy cost structure).
Process reengineering: This considers systemic costs – i.e., costs that are incurred by the company’s processes and policies. Through reengineering of policies, processes, and procedures, Wave 2 initiatives typically generate savings within a year to 18 months through the implementation of lean operations.
Restructuring the value chain: Beyond the short- and medium-term initiatives, operators can benefit from restructuring their value chain. Whereas the previous waves change how operators go about their business, this wave fundamentally changes what it is that they do by reconsidering structural and inherent costs.
Telecom operators typically have outsourced non-core activities – support functions such as information technology, human resource management, payroll, collection, and logistics. As industries mature, such functions become commodities that are difficult to differentiate from the offerings of competitors. In this regard, telecom operators can also benefit from outsourcing core telecom activities that are not part of their differentiated set of capabilities – the key strengths that set the company apart from its rivals. This would enable the business to focus on activities that support its “right to win” or its ability to compete with confidence and create value. Every telco must define its strategy and align its products and services with that strategy in order to outperform competition.
Incumbent operators typically integrate fixed and mobile technology when they migrate to next-generation networks, which afford opportunities to identify and capture synergies. Integrating technology on fixed and mobile systems typically generates the most savings.
Operators can also realise synergies in their fixed and mobile platforms in areas such as customer care, sales outlet rationalisation through a shift to one-stop-shopping stores, and marketing and product development.
These savings could lead to EBITDA improvement in the percent range over the long run. Finally, product development and marketing integration with loyalty programs can yield cost and revenue synergies through converged offerings, which can enable telcos to reduce customer churn and help them gain market share.
Regional operators can use network sharing to enhance their mobile infrastructure and monetise their asset base. Potential network-sharing models include spinning off entities and transferring ownership of passive or active infrastructure investments. Such moves would enable operators to benefit directly from the economies of scale generated from pooling infrastructure. It also would enable them to concentrate and invest in other areas, such as new technologies or services. Several GCC countries have begun implementing models that would encourage operators to engage in wide-scale network infrastructure sharing.
Virtual network enabling partnerships
Regional facility-based operators can enhance their assets and capture economies of scale by setting up virtual networks. Some regional operators are establishing virtual networks for mobile, and more recently, fixed voice and data, to target customer segments outside of their focus. Partnership models can address infrastructure, innovation, and marketing and sales. For example, operators can forge partnerships with retailers that have proven abilities to serve specific customer segments such as small and medium-sized enterprises (SMEs). There are two key benefits of virtual networks. Firstly, they capture additional business opportunities through the value they add to operations. These network partnerships maximise the utilisation of fixed assets, providing operator the opportunity to leverage or derive scale from its existing investments.
All of the structural initiatives inevitably will create head-count redundancies. Operators rely on to deal with this issue (early retirement, outplacement, and layoffs) may prove difficult regionally for a variety of reasons, ranging from labour laws to the need to preserve public image and create jobs, especially for young nationals. One possible solution to cope effectively with redundancies is to make use of a special employment entity (SEE), a separate unit created for excess staff for a given period of time. SEEs carry out operational activities and support the transition of redundant employees into productive sectors. SEEs provide employees with opportunities to develop their skills through a wide variety of academic and vocational training initiatives.
These three waves are run concurrently and iteratively, to strike the needed balance among the choice of activities along the value chain, the processes in place, and the operational efficiency and capital expenditure allocation. The application of the three waves is a virtuous circle that allows operators to innovate continuously and expand their offerings while avoiding a build-up of layers of inefficient spending.
“GCC telecom operators have only scratched the surface in terms of capturing incremental efficiencies and have not ventured materially further. This means efforts to improve cost optimisation can generate significant potential upside, and regional operators can use network sharing to enhance their mobile infrastructure and monetise their asset base,” stated Smayra.
With sky-high penetration rates, the advent of increased competition, and the growing sophistication of consumers who are demanding more, GCC operators are beginning to feel the strains that have slowed to a crawl the industry’s growth in other regions of the world. “So far, regional operators have focused on only short-term and limited cost optimisation efforts in order to rein in costs. The benefit of implementing all-encompassing cost optimisation initiatives is promising. Employee reduction measures such as targeted early retirement programs would also help operators improve their results,” Smayra remarked.
“Long-term structural initiatives can help boost profitability and enable telcos to focus on their core capabilities, helping them to differentiate their business model and succeed. The initiatives with the highest potential include fixed–mobile integration on the technology side, outsourcing of both non-core and non-differentiating core services, and redundancy management measures. GCC telcos should act now, before markets fully saturate and fragment more, to implement optimisation initiatives that will allow them to both streamline operations and position themselves for future growth,” he says.