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 substantive measures to adapt structurally to face these challenges. GCC operators also are 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,” said Chady Smayra, Principal,Booz & Company.
Extracting benefits by cost optimisation
By rigorously identifying and applying relevant cost measures, telecom operators can position themselves to weather the ongoing industry challenges and extract benefits from leaner operations.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
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 six percent per year, while mobile virtual network operators (MVNOs) and Internet service providers have grown at over 15 % a year.
Sophistication of Customer Tastes and Expectations: 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 adding up costs, as operators spend more to attract, acquire, serve, and retain customers.
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 operators that have taken several steps to rein in costs. Regional telecom operators 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.
Process re-engineering: This considers systemic costs such as costs that are incurred by the company’s processes and policies. Through re-engineering of policies, processes, and procedures, wave two 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.
- Capabilities-driven outsourcing
In this regard, telecom operators can a 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 the activities that support its “right to win” or its ability to compete with confidence and create value.
- Fixed–mobile integration
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.
- network sharing
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.
- 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).
All of the structural initiatives inevitably will create headcount redundancies. 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.
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.
Handling demanding consumers
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 further remarked.