As the scope of competition for telcos goes beyond other telcos, the strategies need a complete makeover. Erik Almqvist, managing director goetzpartners Middle East on how regional telcos can thrive and develop into digital powerhouses with strong cost efficiencies.
As intensifying competition leads to stagnating ARPUs and declining EBITDAs, it is increasingly important for operators to be in the top tier of their market. Erik Almqvist, managing director, goetzpartners Middle East believes that with a clever combination of increased cost-efficiencies, effective and selective digitalisation, balanced regulation, and investment in connectivity focused adjacencies, operators can stand out as the new age powerhouses.
Almqvist says: “In the past twelve months we have assisted telcos on digital transformation, cost efficiency, e-government, technology and customer migration strategies, regulatory advice and post-merger integration. These cases are all about shaping the future, not fine tuning the past!”
“On the mobile side there is a race to become number one or two as most number three operators struggle and eventually may not survive,” Almqvist says. “This is the reason we see intensifying steps of consolidation, both among operators and on the network asset side.”
OTT players were recently painted as the bogey man of the industry but most operators today realise that although they gradually destroy the voice business they are also perhaps the most important drivers of data demand. Data demand is of course a mixed blessing as it tends to drive capex faster than revenues which accentuates the need for efficiency but also the need for the right pricing models.
On the regulatory side we see a divergent region where some nations seem to have struck the right balance between regulation and incentives to invest, but there is still a long way to go to get this mix right in many regional economies. For example, there has been an over-tendency in the past for early taxation. Almqvist says this can prove to be detrimental for the economic growth, as evidenced in the past, by the European economies which took more than a decade to recover from the effects of exorbitant licence fees following the introduction of 3G.
He explains how high charges in the initial stages of telecom infrastructure investments dissuades operators from high quality investments or ends up transferring the burden to consumers who are forced to pay higher amounts to use the services. In both the ways, consumption is affected, and as a result, there’s hardly any scope for the economy to grow.
Almqvist suggests the best way through is to adopt late-stage taxation, for example, VAT, wherein taxes are imposed only at the point of consumption of a particular product or service, and not before or during their production.
Erik Almqvist has to his credit, the world’s first scientific calculation to ascertain the effect of broadband speed upgrades on GDP. He explains how building telecom infrastructure creates economic benefits on multiple levels, starting from creating jobs, wealth and a knowledge economy. And the effect can be maximised by avoiding early taxation, Almqvist says. “During the early 1990s, Europe used to be ahead of most other regions in terms of technology. However, two mistakes by European politicians, namely over-taxation and heavy regulation led to the region losing its competitive advantage.”
Telcos worldwide have been undergoing massive diversification projects to position themselves as new-age digital players. However, one tends to wonder, if they might be spreading themselves too thin in the process and should just limit themselves to being bit pipes. “Being a bit pipe is not a bad thing as there is still and in the foreseeable future a need for connectivity,” Almqvist says.
Nevertheless, he sees a great potential for telcos to be more than bit pipes. He argues that the main reasons operators struggle to make much progress on other fronts are legacy issues, lack of direction and weakness in implementation. Most operators still cling to legacy systems in spite of the market brimming with technologies like cloud, which make bypassing legacy a possibility. Giving an example, Almqvist says how Matrixx provides advanced solutions to digitalise the customer interface without relying on the legacy systems.
Another issue is the weakness in implementation. Almqvist says telcos frequently tend to over-rely on big brands in consulting, but fancy brands alone seldom deliver results.
A blurred vision of what telcos should become and where they actually excel is yet another stumbling block on their way. “If you are a bit pipe, massive ubiquitous connectivity is the differentiator, but moving beyond that you need to take a stand and become something differentiated and innovative. Operators are afraid to take this plunge” Almqvist says. “O2 is a good example of a mainstream operator who dared to be different and won.”
As telcos embark on digital transformation journeys, it’s very essential for them to streamline their operations, in order to maximise the returns on their investments in digital. This is an area often neglected by companies, Almqvist says. He explains how goetzpartners leverages its deep expertise in digital and cost metrics to help companies improve their cost efficiencies with streamlined operations.
Citing examples of the projects goetzpartners has been involved with over the past year, Almqvist says that for one of the of the world’s largest operator groups with a global footprint, goetzpartners decreased cost with over 30% across all addressable costs, with a resulting highly significant return on investment. goetzpartners carried out an intensive programme for the operator across multiple geographies, to enable cost savings and digital transformation.
In another project, goetzpartners is helping a telco, in collaboration with a government, to enable the launch of e-government services in an African country. The firm is also involved in institution building with one of the most forward-looking governments not only in the Middle East but in the world, and together, they are trying to put in place a proper mechanism to troubleshoot investments. Well-known for its expertise in corporate finance, goetzpartners started operations 26 years ago, by advising the so called Mittelstand companies and cable operators in Germany on issues like succession, acquisitions and mergers.
While trying to help one global vendor generate substantial cost savings without affecting the top-line, goetzpartners realised that the existing methodologies helped to bring in a maximum reduction of 10-15%. Beyond that, a reduction was difficult without affecting revenues. This was when the firm pioneered the ‘Color Books methodology’. This is a technique to create transparency of cost levers and link value enhancing initiatives directly to the P&L. “This proprietary methodology is extremely forceful in bringing highly significant EBITDA and EBIT improvements to telecom operators,” Almqvist says. Basically, this involves detailed analysis of all the cost levers across the organisation and co-relate with the impact contributed by those to the top line revenues. On close observation, wastefulness is seen on many different levels in an organisation, ranging from the use of external contractors to use of physical assets, both technological assets and real-estate, to turf wars between rival management teams and internal bureaucracies.
Color Books methodology enables companies to see cost levers on the P&L on a monthly basis unlike any other methodology in the market. Almqvist adds: “Using this, we have created huge value for our clients, by saving costs in the areas that did nothing to improve the revenue generated, competitive position or customer experience. They can then re-invest these massive cost savings for digitalisation and competitive differentiation.”
Explaining the usual market progression in any economy, Almqvist says: “The first operator invests in network, the second one says it is innovative and faster, and the third one says it is cheaper. That’s been the game from the 1990s to the 2010s.” The scary thing is that beyond that, operators are tending to get little bit too similar.
A common fallacy of operators when they embark on digitalisation is that they try to conform to some kind of norm that everybody else is following. Almqvist says that this is definitely not the right way to do it. “Dare to take a stance. Digitalisation is not about becoming like everybody else; it’s about raising yourself to a certain standard and then on top of, it’s about using digitalisation to achieve a unique position in the market.”
5G, IoT and smart cities bring in huge opportunities for telcos but most operators realise these developments are unlikely to create the massive revenue growth the industry would need which is why many seem to be looking at ‘adjacencies’. Adjacencies can clearly grow top line but generally diminishes operator margins, which adds to the industry’s woes and does usually not solve the growth/margin conundrum.
He believes operators should make use of the new technologies to differentiate in terms of the experience they provide to consumers. In terms of adjacencies, he says that there is a risk of operators becoming a victim of their own success. Often, several operators will enter new areas of business in order to grow, however, they are easily dissuaded the moment these new businesses lead to a decline in the EBITDA levels. The best way to counter this, according to Almqvist, is for operators to invest in businesses where connectivity is a natural advantage. He cites the story of how Safaricom invested in mobile banking, as a successful example.
While TMT companies in the rest of world seem to be undergoing massive consolidation, it is interesting to note how the Middle East telco market has never been fragmented enough to warrant major consolidation. Almqvist believes that to be an advantage. “The Middle East has understood the danger of fragmentation. Europe went a little bit overboard in the attempt to bring in competition inside national economies.”
He adds that the telecommunications market overall is mostly a natural semi-monopoly and trying to break it up too many times tends to increase the costs more than the benefits generated. Striking the right balance between fragmentation and competition can be quite tricky though. Almqvist says: “Depending on size of an economy, a third player may be viable but will struggle. Very few national economies in the world can bear more than three players. The consumer benefits from fourth players are totally negated by the increased system costs that consumers are forced to bear either in form of increased prices or inferior infrastructure.”
Though in such scenarios, regional telecom groups have an advantage compared to standalone operators, the benefits haven’t been realised much in the region owing to the lack of regional synergies, Almqvist says.
He adds that another hindrance is the heavy regulations telcos are subjected to. “On one hand you have companies like Google and Facebook, that are not regulated locally, and on the other hand you have telecom operators that are very heavily regulated in the national economy. That also inhibits these operators to reap scale-up benefits.” In terms of regulation, less is more. Almqvist says less regulation is part of the solution for creating environments where a third choice for consumer makes economic sense. “The more the pressure you place on operators, the less sustainable a third player in the market will be.”
Going forward, goetzpartners plans to expand into new industry verticals beyond telecommunications and governments. The firm is looking at verticals like oil and gas and renewable energies, where it believes its expertise in helping European and global players will prove to be a unique selling point.
Almqvist says: “In the old world management consulting firms got away with stating the ‘what’ on 300 pages in eight centimetres thick power point slide decks and expected the clients to implement it. We are a 26 year ‘young’ global firm and believe the ‘how’ is where the real value lies in today’s world as the ‘what’ is mostly old hat, common knowledge or easily obtainable in open sources. Everything we do is focused on achieving lasting results and continuous sustainable value. Our track record of results is second to none in the industry, this is why we are growing much faster than the competition.”
After setting up the Middle East operations last year, the firm is currently in a rapid growth phase and in the process of building a team of 30+ experts locally here in the region. Globally, the firm employs 350+ experts.
Erik can be contacted at email@example.com or on +971 566031884 .