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Long-term Profitability in the Communications Industry Transforming costs and driving growth
Long-term Profitability in the Communications IndustryTransforming costs and driving growth
Communications Operators face evolving customer demands, a converging industry and the growth of agile over-the-top competitors. This has led to revenue and margin erosion, with Operators looking for new strategies to restore growth. To finance those investments, Operators will need to transform their cost base and change how they allocate resources. This paper outlines our Fuel for Growth framework and offers examples of Operators that have already found, achieved and sustained their own fuel for growth.
3
For operators, disruption
continues to be the norm
4
The customer landscape is continuously evolving Consumer and Business customer relationships are no longer solely owned by Operators, but shared amongst several communication and digital service providers. Whilst this creates opportunities for Operators to innovate, it also creates challenges in terms of staying relevant, managing cost and churn, and delivering a differentiated experience.
Customer experience is a key battle front for Operators. Accenture research1 confirms that it is paramount for both consumer and business customers.2 Whilst 90% of consumers say they have higher expectations from their service providers, 64% of them switch between providers every year, due to poor service. Our research also highlights that B2B businesses which master customer experience also achieve higher revenue growth.
Returns are fallingOperators are struggling to deliver the same returns they saw six years ago. EBITDA, as a ratio of revenue, has dropped by two percentage points since 2009 and in the next three years industry analysts expect 19 of the 21 largest Operators to significantly improve their cost-to-revenue ratios.3
Industries are converging and consolidating The convergence of Communications and Media industries has resulted in the emergence of Triple and Quad Play, offering value added media, communications and digital services to their user base. Convergence epitomises the industry’s need to generate incremental growth, lower marginal cost and to stay relevant to their customers, amid growing competition from over-the-top (OTT) players.
M&A has been and will be instrumental in driving further convergence and consolidation. In 2015, there was a lull in M&A activity, with the total value of transactions at $94.8bn, 40% down from the previous year. By 2019, however, the value of these transactions will rise significantly, to $231.7bn.4 Operators are re-focussing their efforts on M&A as a way to drive economies of scale. In particular, there will be focus on finding synergies in network costs, which can be as high as 14.5%5 of the newly-merged company.
Competition is poised to intensify, as digital players such as Google, Microsoft, Apple, Amazon, Facebook and other more nimble innovators are developing services that directly challenge Operators’ traditional services.
1 Accenture 2015 Global Consumer Pulse Research.2 Accenture Research analysis and S&P Capital IQ. 3 Global Transactions Forecast – Oxford Economics and Baker & McKenzie (2015).4 Based on Accenture subject matter expert data and project experience.5 Accenture Analysis.
Figure 1: Operators EBITDA as a % of revenue 2009-2015 (Accenture Research Analysis and S&P Capital IQ)
34.2%
33.1%
31.8%
30.4%
32.2% 31.7%
32.1%
2009 2010 2011 2012 2013 2014 2015
% o
f rev
enue
5
WhatsApp’s total spend is
only 2% of a typical
operator
17
12
66
16
20
20
10
9
63
134
Typical Operator WhatsApp breakdownWhatsApp cost structure
2
Purchased Licenses
Infrastructure, R&D & Intangle
Other Opex
ITCustomer Service
Interconnect
Subscriber Acquisition/Retention Cost
Network
Infrastructure, R&D & Intangle
Other Opex
IT
Customer Service
Interconnect
90%Opex
80%Opex
Operators’ traditional business model—founded on revenue from voice and messaging—is under assault with industry analyst Ovum predicting more than $100 billion of Operators’ revenues at risk in 2016 alone.6 They offer a distinct threat for three reasons:
OTT ride for free Video is driving exponential growth in mobile data traffic; it’s expected to account for 69% of mobile data by 2019.7 OTT providers exploit increased data consumption through advertising or paid content, but Operators only feel extra cost burdens.
OTT are in the operators backyard Google, Facebook, Microsoft, Apple and Amazon are adding the capabilities to become Operators in their own right, with innovating business models. Facebook, as part of internet.
org, will bring free access to selected internet services in less-developed countries. Innovations in network extension technology, caching and data compression will reduce delivery costs and data consumption by a factor of 10.. Google’s Project Loon will bring internet access to remote areas by using high-altitude balloons to create wireless networks with up to 4G-LTE speeds. They are also working on Skybender, which uses solar-powered drones to create networks that are 40 times faster than 4G.
OTT are more agile The typical OTT player operates with a lower, OPEX orientated cost base and one that is Opex orientated. In 2016, OTT players will spend 7% of their revenue on capital expenditure, while Operators will spend 18%.8 Less burdened with spend in infrastructure investment and management, OTT players are better placed to quickly invest in new opportunities.
6 Ovum (2015).7 Cisco VNI Mobile (2015).8 Communication Provider Revenue & Capex Forecast: 2015-20 – Ovum (2015).
Figure 2: Cost of WhatsApp Compared to a Typical Operator (Greenwich Consulting)
A new class of competitors
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9 AT&T reported this at Cowen Technology, Media & Telecom Conference.10 Survey questions from Increasing Agility to Fuel Growth
and Competitiveness – Accenture (2016).
Every operator competes in this environment, but not every operator is competitive. Why? Because the traditional rules of competitiveness no longer apply and Operators are struggling to keep up with the pace. It’s time to Redefine Competitiveness — three interdependent strategies are now critical for success.
Securing a License to GrowOperators must establish a level of trust with consumers and shareholders. This requires them to develop a business model that is continually in-tune with customer needs and to be able to scale at speed. For example, Software Defined Networking (SDN) allows 4-8 times the amount of traffic to be run on existing platforms and drastically reduce customer waiting times.9
Did you know: Less than ¼ of companies say they are positioned to optimise and deliver their growth objectives10
Becoming a Trusted OperatorOperators must build solid foundations for the company by creating more efficient operations and ensuring that they are trusted by society. This will allow them develop new services and market them with a trusted brand. For example, the success of operators in the Internet of Things (IoT) will depend on the appeal of their services and the level of digital trust consumers have in them.
Did you know: 83% strongly agree that trust is the cornerstone of the digital economy
Creating Fuel for GrowthOperators must ensure that savings are linked to a growth agenda. Too often, operators free up funds but fail to use them effectively elsewhere. By having funds at hand, operators will be strategically agile and invest quickly in new growth opportunities. In the next section, we will focus on how Operators can find their own fuel for growth.
Did you know: 82% say their business is now focused on cost reduction to free up funds to invest in growth initiatives
Figure 3: Model for Achieving Competitiveness with Emphasis on Fuel for Growth
Long-term competiveness is achievable
Fuel for Growth
ProfitabilityGrowth & Customers
License to Grow
Trusted Operator
Competiveness
Trust & Regulation
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Transformation comes in three steps: visioning your growth, delivering changes to liberate that fuel and sustaining the transformation.
Our Fuel for Growth framework is focused on delivering profitability. We begin by working with you to define your growth opportunities and understand what funds would be needed. Then we use a combination of three approaches to deliver savings: shrewd spending, smart investments and streamlined operations. Finally, we focus on sustaining savings by ensuring there is a dedicated, continuing effort to turn the changes into business as usual.
Your path to transformation
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Figure 4: Our Framework for Fuel for Growth
Establishing Growth Vision
Delivering Fuel for Growth
Sustaining Fuel for Growth
1
2
a b c
3
Shrewd Spending Smart Investing Streamlined Operations
SG&A Price
Working Capital
Head Count
SG&A Quantity
25-35%
Advertising, Travel Spend
How can we spend better?
Points of Presence, Data Centres
How effective are we at allocating our resources
to generate value?
Right First Time, Mean Time to Repair
How efficient are we at running our business?
Example estimated savings:
Example areas in Communications
industry
Example Questions Answered
15-20% 15-20%5-7% 5-10%
COGS Productivity
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Operators must first revisit their ambitions for long-term competitiveness. They need to consider the best path for them to secure their license to grow and enhance their position as trusted operators. This produces the framework of a growth program and defines savings that are needed to finance it. It also allows the whole business to see that the savings are being made to fuel growth, not just for in-year belt tightening. Programs that fail to consider growth and cost in tandem, will be tactical, not transformational.
Establish growth visionSet your ambition
Case studyA cable telecom company provides video, data and voice service to residential and commercial customers over its broadband cable systems. We were asked by their board to partner to reduce operating expenses.
By understanding their key growth priorities, we showed how to improve results in care, sales and marketing, supply chain and distribution network.
The Result: Accenture conceived and then implemented a $200m profitability transformation programme.
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Figure 5: Growth strategies for Operators
$54m $19mStreamlining and outsourcing of processes in Forecasting, & Planning
Optimising warehouse spend
Drive operational excellence in Fulfilment Service
Command Centre across 6 Call Centres
Reducing commissions through improved incentive schemes
Deflecting non-value customer contacts to digital
service channels
Decreasing marketing spend through offshoring of content production
‘De-languaging’ and relocating sales back-office
activities
Consolidation of Enterprise IT platforms
Consolidation of IT vendors
Accelerate migration of TAL customers towards cable infrastructure
IP migration for core products
Automate and streamline Network Testing processes
Optimise 3rd party access spend
$31m $33m
$23m $19m
$19m $320m
$9m $8m
$57m $45m
$165m $41m
Network
IT
Customer Management
Support & Overhead
Sales & Marketing
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When setting budgets, Operators often struggle to isolate areas they could reduce or eliminate entirely. You need a granular lens to examine which spend is dedicated to activities that do not add value. This allows you to define clearly what your customers’ value. Crucially, it establishes a continuous process that allocates your efforts and resources where they will add the most value.
To begin, budget holders start from a zero base, justifying each item’s need and cost, while respecting strict policies and top-down targets set by the cost category owners. Such detail supports an open, transparent way of creating a budget, resulting in important insights into consumption. This helps procurement drive additional price savings. Accenture’s closed-loop cost
management approach provides deep visibility across all expenses to identify, eliminate and prevent unproductive expenses on an ongoing basis.
Our comprehensive toolset, analytics capabilities and teams with extensive experience allow us to develop insights on:
• Standardised cost definitions for more than 150 sub-categories.
• Analytical models to scrutinise the costs in each of these categories.
• Custom-built budgeting tools offering both short-term and long-term solutions to drive results.
Deliver shrewd spendingSpend wisely to add value and drive growth
Case studyAn Operator’s decentralised structure had hindered previous efforts to realise cost efficiencies. Potential synergies between business units were virtually unexplored.
Accenture successfully managed the cost reduction programme by applying a rigorous, fact-based sourcing approach and specific category expertise… as well as establishing tight collaboration between business, procurement and engineering/technology.
The Result: An average TCO cost reduction of 25% compared to the previous baseline.
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Figure 6: Spend Excellence using Closed Loop Procurement
2 3
5
4
6
1 Category Ownership Value Targeting
Closed-loop
Procurement
Zero-Based Budgeting
Control & Monitoring
Visibility
1 VisibilityProvide transparency to ‘who-spends-how-much-on-what’ through transactional data analysis
2 Category OwnershipCreate an accountability matrix to ensure dual-ownership of every expense
3 Value TargetingDefine expense policies and procurement initiatives to reduce both consumption and price
4 Zero-Based BudgetingBudget from zero annually to expose and remove unproductive expenses
5 VisibilityExecute strategic sourcing events and execute buying operations to realise price reductions with suppliers
6 Control & MonitoringMonthly review to identify budget variances, owners responsible, and action plans to resolve them
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When surveying network directors, we found that 25% of their total cost base supports products with declining revenues. Yet at the same time, more than half did not have deadlines set to migrate legacy products.11
Smart investing involves approaches specifically tailored to gain greater value out of network and IT investments. For Operators, those investments typically represent 25% of all costs.12 The biggest drivers of that spend are Operation Support Systems (OSS), Mobile Access and Fixed Core.
OTT providers are shaped differently, with no significant costs dedicated to their networks and more agile IT systems. In response to these slim line competitors, Operators are looking to IP and the next generation of network services. We can help Operators to:
• Develop analytics platforms: Predict events to improve service and identify under-utilised infrastructure.
• Replace legacy networks: Migrate to a single, unified IP network and to develop SDN services to increase efficiency in field force.
• Outsource services: Partnerships to manage back-office and infrastructure functions.
Smart investing also offers Operators the opportunity to re-invent their operations - new and agile infrastructure should be enabled by streamlined operations.
Figure 8: Breakdown of total spend on operational technology – Forecast: Communications Service Provider Operational Technology, Gartner (2016)
Deliver smart investingMaximise the value delivered by your infrastructure
Case study
An operator wanted to increase the quality of experience for their customers and maximise return on investment in their network. To help, we developed an advanced application and algorithm that planned network investments based on
capacity diagnostics, demand forecasts and node clusters.
The Result: Saving 25% of planned network investment and increasing quality of experience for customers.
11 Network Transformation Survey – Accenture (2015).12 Based on Accenture experience.
OSS
Mobile Access
Mobile Core
Fixed Access
Fixed Core
BSS
22%
6%
3%
18%11%
40%
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Deliver streamlined operationsAchieve value by automating operations
77 percent of executives say they have not optimised their processes for identifying and removing business activities that do not add value.13 Streamlined operations focusses on whether business re-organisation and simplification could deliver the same or better value at a reduced cost.
Achieving a streamlined operation calls for starting at the end result, and working back from there. This means beginning with the final customer or consumer, understanding their needs, and then working backward to ensure you set up each process to meet these needs.
We have seen Operators use three core levers to gain value from their operations: centralise, relocate and standardise.
In the next few years, one of the key focus areas for Operators will be automation of back-office functions. Robotics Process Automation (RPA) emulates human execution of repetitive processes. It requires no complex system integration as RPA platforms are specifically designed to work with legacy platforms. We will also see operators streamline further by investing in cognitive automation solutions like computer-generated virtual assistance and even systems that gain knowledge from data as “experience”.
Case study
We recently helped a global telecommunications company to automate nearly 60 business processes in areas such as marketing and sales, billing, service fulfilment and service
assurance. This increased productivity and freed up more than 72,000 man hours per year to improve customer experience.
The Result: More than $1M saved in annual operating costs.
Figure 9: Key transformation leavers and estimated benefits
Key Levers Examples Efficiency
Centralise • Create centres of Excellence (CoEs) and centralise common processes
Relocate • Move from high-cost base to low-cost base and labour arbitrage
Standardise • Identify global process commonalities and embed procedures
Optimise • Define and simplify processes to remove wasted effort
Automate • Implement Robotic Process Automation and Cognitive Computing
5-10%
10-15%
35-50%
Digitise • Deliver instant analytics, always connected workers and resilient platforms
13 Increasing Agility to Fuel Growth and Competitiveness – Accenture (2016).
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In our experience, too many Operators are unable to sustain savings after the first year or two. That’s usually because they haven’t changed the environment and corporate culture. That’s hard to do, particularly when cost-cutting is on the agenda. There are five key factors to ensuring savings stick:
1. Start at the top: Get leadership to set the agenda and stay involved.
2. Always think growth: Growth and costs must be considered in tandem.
3. Act fast, and maintain momentum: Create a mindset of shifting from unproductive to productive spend.
4. What gets measured gets done: Establish governance and financial control mechanisms to sustain changes.
5. Focus on culture: The whole business should live and breathe cost transformation. You can only create that culture if timelines and benefits of the savings are clear for all to see.
Case studyA European telecommunications company launched a comprehensive business transformation program aimed at improving service and efficiencies. Early on, the client recognised that they were not sustaining the expected benefits. An Accenture team analysed data from 550 client employees
and compared those results against a database of 750,000 individual experiences of change programs. With insights into the employees’ understanding of the transformation goals, the client was able to identify the most important actions needed to keep the transformation on track.
Sustaining fuel for growth
Focus on culture
Always think growth
Start at the top
Act Fast
Measuresuccess
Sustaining fuel for growthMaking the savings stick
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A large cable and broadband company served more than 6 million customers. Growth had been minimal over the last five years, and costs were rising faster than revenue. The company had few standard processes in critical functions across the enterprise, as well as a lack of empowered, centralised governance to drive a comprehensive, cross-enterprise transformation.
The company created a holistic transformation programme, with Accenture’s help, to: The company’s programme had workstreams across Shrewd Spending, Smart Investing, Streamlined Operations and Sustaining Fuel for Growth. With Accenture’s help, they were able to:
− Create a new financial model that dynamically supports visibility into IT costs, resulting in improved budgeting, reduced duplicative allocation of funds, increased leadership transparency and reporting enablement.
− Drive improvements in sourcing organisation with projects in strategic sourcing, asset utilisation and inventory optimisation.
− Enhance the network by deploying a new demand forecasting tool, service call reduction platform and optimising auto-routing throughout the enterprise.
− Launch a workforce management platform across nearly 1,000 network technicians to improve hand-offs between various network, engineering, field services and tech ops organisations.
− Design a new operating model crafted to drive performance efficiencies and to create a better cross-channel customer experience through aligned and integrated capabilities … traditional & digital.
− Improve standardisation across the business by increasing functional specialisation enterprise-wide. Achieved by moving to a centre-led and region-staffed model for residential business operations functions.
Throughout this transformation, we worked with our client to create change management programmes that embedded a culture of cost management into their organisation… ensuring that they can sustain the savings made.
In all, this transformation will lead to US$1.3 billion of savings over five years.
$1.3bn of savings to fuel growth
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Start hereSuccessful transformational programmes incorporate shrewd spending, smart investments and efficient operations. We structure our tools and services in line with this approach. Some are exclusive to individual steps, others cover multiple stages to find savings. The chart below shows a selection of these:
A partner to fuel your growthAccenture can be your partner for every step of your fuel for growth journey. We can recognise the opportunities and then implement and sustain a profitability transformation. Our deep experience and breadth of resources supports you every step of the way.
Figure 10: Sample of our tools and services we use for Fuel for Growth
Shrewd spending
Smart investing
Streamlined operations
Embedding a Culture of Cost Management
Ensuring Cost control
Continuous Improvement
App for Profitability
App for Prime Value Chain
Sustain FuelDeliver FuelGrowth VisionInitiate & Manage
Tranbsformation
Closed Loop
Next generation
Automation
Process DesignLean Six Sigma
Understand Client Growth
Strategy
Spend Analytics
Network & IT Analytics
Operations Analytics
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About AccentureAccenture is a leading global professional services company, providing a broad range of services and solutions in strategy, consulting, digital, technology and operations. Combining unmatched experience and specialized skills across more than 40 industries and all business functions – underpinned by the world’s largest delivery network – Accenture works at the intersection of business and technology to help clients improve their performance and create sustainable value for their stakeholders. With approximately 373,000 people serving clients in more than 120 countries, Accenture drives innovation to improve the way the world works and lives. Visit us at www.accenture.com.
For more information contactMaddie [email protected]
Jürgen Morath [email protected]
Quentin [email protected]
Key contributorsWe gratefully acknowledge the contributions of many of our colleagues and team members who helped make this paper possible:
Chloe BarzyBill Theofilou Daniel HornbargerChristian HoffmanJames HebblethwaiteSimon PetersAlastair Livingston
Copyright © 2016 Accenture All rights reserved.
Accenture, its logo, and High Performance Delivered are trademarks of Accenture.
