McKinsey Telecoms. RECALL No. 13, 2010 - Leveraging IT

8/2/2019 McKinsey Telecoms. RECALL No. 13, 2010 - Leveraging IT

1/46

Title

RECALL Noxx

Telecommunications, Media, and Technology

Leveraging Technology

RECALL No13


2/46

3RECALL No 13 Leveraging Technology

Welcome ...... to RECALL No 13. For the first time, we are issuing an

electronic version of RECALL, our publication for lead-

ers in the telecommunications industry. Paper copies

are available on request. The individual articles can also

be found in McKinseys Telecommunications Extranet.

The current issue focuses on the huge potential that still

remains to be captured in the IT and technology arenas.

Our first ar ticle synthesizes the results of our interna-

tional Telecoms IT Benchmark surveys most recent

wave and dispels a number of myths about whether and

how IT and performance are correlated. We then show

the structured application of lean techniques that can

deliver significant performance improvements across

key business areas.

We start by illustrating how telcos can unlock signifi-

cant productivity gains in their field force by using

smart simulation across their entire operating model.

Next, we discuss how IT-enabled lean transformation

can boost performance in application development

and maintenance along all aspects of the organization.

In another dimension of lean, we look into the service

delivery chain for B2B information and communication

technologies, where lean can tap productivity improve-

ments of some 40 percent.

The fifth article describes a deeper, more collaborative

approach to outsourcing and offshoring that can achieve

radical transformation of an operators IT landscape.

Such an approach also makes it possible to realize high

incremental cost savings. We then move on to next-generation IT architecture management, revealing the

best practices of top performers. Our final article drills

down from this broad view to a specific, yet vital facet:

customer lifecycle management. Here, the right infra-

structure can greatly reduce churn and lift revenues.

In closing, we hear from Fernanda Torquati, Global CIO

of Telefnica. She shares with us the unique story of her

companys IT transformation journey in an interview.

She believes they will achieve a uniform global IT at the

end of this journey, while ensuring local demand man-

agement and an overarching country interface. But

such journeys dont happen overnight.

We hope this issue of RECALL sparks insights and dis-

cussion as you navigate your own technology journey.

As always, we look forward to your feedback on these

articles, as well as your thoughts on topics you would

like to see covered in the future.

Jrgen Meert

Leader o McKinseys

EMEA TMT Practice

Fabian Blank

Leader o McKinseys EMEA

Mobile Operations Service Line

and Editor o this RECALL issue

Klemens Hjartar

Co-leader o McKinseys

Operations and Technology

in TMT Practice

Tomas Calleja

Co-leader o McKinseys

Operations and Technology

in TMT Practice


3/46


Contents01 Money or management? The true driver of telco IT performance 7

02 Sweating your assets: Riding the next wave of savings in the field force 13

03 Lean on the line: Improving ADM in telecoms 19

04 Fixing break-fix: The power of lean ICT transformation 25

05 Outside in: Leveraging outsourcing and offshoring to transform IT 31

06 Fast forward to success: Managing next-generation IT architecture 37

07 Turning customer insights into income: The architecture is key 45

08 Transforming IT: An interview with Fernanda Torquati, Global CIO, Telefnica 53

Appendix


4/46


Money or management? The true driver of telco IT performance

01 Money or management? The true driverof telco IT performance

Conventional wisdom dictates that greater IT spend

leads to improved performance. Results of McKinseys

Telecoms IT Benchmark, however, show that the secret

to IT eff iciency and effectiveness lies in its management.

Since 2008, McKinsey & Company has been conduct-

ing an IT benchmarking effort in telecoms. The exercise

not only aims to measure and compare IT efficiency

(i.e., how much do I spend on IT?) and effectiveness

(i.e., how well does IT support my company?) but,

most importantly, to identify key performance dr ivers.

The survey has highlighted substantial differences

across participants in these efficiency and effective-

ness categories.

McKinseys IT effectiveness index defines performancealong three dimensions that are crucial for every tele-

coms operator:

Time to market for new products/services

Functionality coverage by business activity

Availability of business-critical IT services.

The higher the score, the better the telcos IT supports

the organization. Comparative analysis of results em-

phasizes time to market as the dimension that explains

most of the difference between best and poorest opera-

tors. This is highly significant, since top performers can

be up to five times faster in bringing new customer price

plans to the market.

IT efficiency is simply the ratio of IT spend (capex plus

opex) to company revenues. The two years of this study

have revealed that what typically differentiates more

efficient from less efficient operators is their spending

in application development.

With the IT benchmark, McKinsey has been able to

identify the areas that drive excellence in IT manage-

ment (i.e., the key management practices that dist in-

guish top performers) and to dispel some myths, while

highlighting several realities.

Drivers of excellence in IT management

In this study, McKinsey examined IT management

practices of operators and identified the factors that

differentiate the most efficient and effective operators

from the least. The best operators excel mainly in thefollowing three areas:

Demand management. Top telecoms performers strictly

adhere to demand management processes, and this

holds true both for application development and for

application maintenance. Some examples of best-in-

class demand management are (Exhibit 1):

Deploying and adhering to a stringent, gated pro-

cess to review the demand, facilitating focus and

accountability of stakeholders, and establishing a

more efficient and effective decision making process

Creating a yearly IT capacity plan by segmenting

the demand along two dimensions business lines

and demand type (i.e., projects, small demands, and

maintenance)


5/46

8

The best operators adhere strictly to ormal demand

management processes01

Appointing a set of sufficiently senior and knowl-

edgeable relationship managers from IT to the

business to help steer their business counterparts

toward the optimal functionality cost versus time-

to-market trade-off.

Top performers are also more advanced in having

defined an infrastructure serv ice catalog. This allows

them both to standardize the factory (in terms of pro-

cess, services, technologies, etc.) and to have the correct

demand management dialog with users. These activities

ensure that the service level provides adequate quality

at the right cost.

Vendor management. IT purchasing represents 60 to

70 percent of the total IT spend for telecoms operators.

This means that vendor management is a top priority.

The first lever for successful vendor management is ven-

dor consolidation. McKinseys Telecoms IT Benchmarkshows that top performers have far fewer overall IT ven-

dors than do the poorest performers. Top fixed-line per-

formers, for example, have 60 vendors, while operators

coming in at the bottom of this category have 133.

It is not unusual, in fact, to find the following situation

at a telco: a plethora of both large and small vendors

in application development and maintenance (ADM)

and infrastructure, multiple contract models, limited

service quality targets, no vendor risk of losing business

continuity, limited application of contract penalties,

lack of cost transparency mechanisms, and hundreds of

RFPs to purchase IT products and services.

IT vendor consolidation represents a formidable oppor-

tunity to achieve a substantial reduction in IT spend

and a significant improvement in service quality. Top

McKinseys Telecoms IT Benchmark

In 2008, McKinsey conducted its first IT bench-

marking study in telecoms with a sample of 19

European operators, including 6 integrated players,

3 fixed-only operators, and 10 mobile-only opera-

tors. The 2009 survey has seen participation grow

to a total of 27 participants in Europe and the first

set of benchmarks in North America. The study par-

ticipants are typically f ixed incumbents and large

mobile players (i.e., no mobile virtual network oper-

ators). The benchmark measures both IT spend as a

proportion of revenue as well as IT effect iveness to

put IT costs in the context of service levels, time to

market, and the functionality that IT systems offer

to the business.

MOBILE OPERATORSSOURCE: McKinsey 2009 European Telecoms IT Benchmark Survey

Applications going through formal demandmanagement processPercent

Development

Maintenance

100

100

87

76

Operatorslagging behind

Bestoperators

How is the chargebackmechanism used?

To what extent are accountmanagers vs. the business involved

in demand management?

What is the involvement of thebusiness in approval of IT projects?

Is there an infrastructure productcatalog (excluding storage)?

Question

Advanced/highBasic/low


6/46



1 Including internal onshore and offshore plus staff contractors

SOURCE: McKinsey 2009 European Telecoms IT Benchmark Survey

MobileFixed

APPLICATION DEVELOPMENT AND MAINTENANCE

FTEs1 per EUR billion in revenues

R2 = 0.21

Percent of outsourcing

0

100

200

300

400

500

600

700

800

900

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90

More outsourcing does not necessarily mean ewer in-house FTEs02

performers are able to reduce IT purchasing spend by

up to 25 percent (15 to 20 percent of total IT expendi-

ture) by transforming their vendor management model.

Operators should, however, be careful that they do not

become too dependent on one service provider, espe-

cially for ADM. With only one provider, what were once

benefits could turn into liabilities, since the operator

becomes locked in. This is why companies should pur-

sue vendor consolidation while maintaining a multi-

sourcing strategy.

The second lever of vendor management is a telcos

outsourcing strategy. Outsourcing application develop-

ment is often seen as an easy means of reducing ADM

costs, but operators that outsource more dont neces-

sarily have fewer non-outsourced staf f (Exhibit 2).

McKinseys Telecoms IT Benchmark has clearly high-

lighted that this is true only if the operator has mature

vendor management practices, such as using detailed

service definitions during negotiation, frequent con-

tract reviews, time-to-market KPIs, and active vendor

cost management.

IT architecture. The third area of IT management is

architecture, and McKinseys benchmarking study

shows that top performers have a much more consolidat-

ed application landscape. As an example, operators at the

top of the mobile list have an average of around 100 appli-

cations, while the poorest performers have about 170

(Exhibit 3). Even if application does not always mean

the same thing across companies, these figures clearly

indicate that a lower number of applications is a key per-

formance driver in IT both in cost and effectiveness.

Top performers also adhere much more to standard pack-

age functionality to avoid falling into the common trap of

adapting them too much, thus turning them into another

in-house development legacy. Fixed-line operators are

much less advanced in using standard packages, mainly

due to the large legacies in this particular business.

As another example of best-in-class architecture, a high

consolidation level of corporate databases (product

catalog, installed base, etc.) enables operators to reduce

ADM spend and improve time to market. Some opera-

tors, for example, have run projects to build an inte-

grated product catalog and to implement new product

development through simple parameterization. This

allows them to drive down the time to deploy new price

plans to as little as just a few days.

The truth about IT in telecoms

McKinseys Telecoms IT Benchmark also helped dispel

some myths and highlight several of the realities of how

IT supports telecoms operators. The key findings from

our survey are the following:


7/46

10

85

105

145

50

49

90

Mobile

Number of applicationsFixed

Number of applications

SOURCE: McKinsey 2009 European Telecoms IT Benchmark Survey

Poorestoperators

168103

Overall 14485

Bestoperators 9765 16

407172

320166

276141

Operations support systems

Business support systems

Enterprise resource planning

29

39

30

26

16

The best operators have simpler application landscapes03

Telecoms operators can deliver high IT effect iveness

with limited IT spend, i.e., 3 to 4 percent of their rev-

enues. The myth of needing to spend more to raise IT

effectiveness has been refuted. What really moves

the needle is management practices, and this holds

true for both mobile and fixed-line operators as well as

in other industries.

Size does not necessarily help. Small operators can be

efficient and the bigger ones too. But we believe that

large operators are not fully capturing the benefits of

being large, resulting in some missed opportunities.

This situation is often driven by the excessive complex-

ity of the IT landscape.

High levels of outsourcing do not necessarily imply

low IT spend. In fact, operators whose IT spend is a

large percentage of their revenues often outsource a

great deal of their IT functions without bringing theirIT spend to below-average levels at least in the short

term. As outlined before, to capture the potential of

outsourcing and offshoring, telcos must have mature

capabilities in these areas.

Standardization of technologies and interfaces

improves time to market. The focus of time-to-market

strategies tends to be on outsourcing, but poor out-

sourcing management can actual ly worsen the situ-

ation. Telcos who focus on IT standardization are the

ones who see positive results in their time-to-market

improvement efforts.

Top performers are characterized by fewer, more

productive human resources. This is not to say that a

reduction in headcount improves performance. It does

appear, however, that telcos that have been able to elimi-

A cross-industry perspective

While McKinseys Telecoms IT Benchmark offers

insights within the telecoms industry, our work

with other sectors confirms these learnings. In par-

ticular, top telco managers especially CIOs often

ask how their organizations compare with banks in

terms of IT spend and IT effectiveness. McKinseys

telecoms and banking benchmarks indicate that

contrary to popular belief banks are not much

more advanced than telcos, even though they spend

much more on IT (i.e., 7.5 percent of revenues versus

4 percent on average in telcos). Banks application

development practices are also no more advanced

than those of telcos, even though banks in general

do have better performance management systems

(e.g., using function points much more frequently).


8/46



nate unnecessary complexity have smaller but more

productive workforces.

An overview of telecoms operators across type and over

time confirms that outdated thinking regarding invest-

ment in and the handling of IT is not serving telcos well.

Among others, the myths of more money equals betterperformance and greater outsourcing means lower

costs have been dispel led. Operators who get the most

bang for their IT buck place strategic focus on manage-

ment, not money.

Duarte Begonha

is a Principal in McKinseys Lisbon oice.

[email protected]

Stphane Rey

is a Principal in McKinseys Zurich oice.

[email protected]

Javier Garabal

is a Principal in McKinseys

Barcelona oice.

[email protected]

Giuliano Caldo

is a Senior Expert in McKinseys

Rome oice.

[email protected]


9/46


Sweating your assets: Riding the next wave of savings in the eld force

02 Sweating your assets: Riding the nextwave of savings in the field force

Under pressure from ever fiercer competition and

greater product complexity, telcos are seeking further

technology potential to enable the next wave of field

force productivity improvement. Leaders are finding

that smart simulation across their entire operating

model can reap swift gains without new investment.

Many telecoms operators have implemented broad pro-

grams to enhance the end-to-end productivity of their

field forces in the recent past. However, the battle for the

wireline arena continues to rage, markets are matur-

ing, and customers are demanding ever more complex

products and networks. Telcos are faced with a dilem-

ma. They urgently need to unlock further productivity

to keep pace with customer and capital market expecta-

tions without increasing their budgets. A sophisticatedtechnique involving lab-based simulation can unleash

an additional 15 to 20 percentage points of further pro-

ductivity from telco f ield forces without the burden of

additional capex.

A new mode of technology-enabled operations

Over the last five years, many major telcos have turned

to technology enablement to improve the productiv-

ity of their network field force. In most cases, this has

involved expensive up-front investment in tools such as

automated dispatching systems, GPS, wireless hand-

helds and laptops, and other field tools. Such resource

intensity has frequently led telecoms operators to

neglect additional incremental investment in other

areas ones that are crucial in maximizing the return

on their technology investment.

What went wrong? Many telcos added this new layer of

technology without aligning the new systems to their

core processes. The high pressure to deliver meant they

often sacrificed functionality or focused on driving

value in only one dimension. Insufficient investment in

the alignment of systems and processes has left users

either unable or unmotivated to tap the systems full

savings impact. Some field organizations, frustrated by

the perceived lack of value their GPS implementation

offers, simply switch off their systems. Failure to pro-

vide targeted capability building and interlink the new

technology with performance improvement and incen-

tives has been an added stumbling block.

However, driven by the need to mine further potential

a few years on, telcos are now revisiting the sacrificesmade during implementation and searching for ways to

unleash additional value without significant additional

investment. To do this, telcos must focus on the entire

operating model (Exhibit 1), scrutinizing all their tools,

data inputs, and core business processes and particu-

larly the interactions between them.

Integrating operations around technology

McKinsey has tapped into a powerful technique for cap-

turing this next wave of savings with its OpsTechLab.

The key to keeping investment costs down and speed-

ing time to impact by around 50 percent is to conduct

IT-enabled simulations of client tools and process-tool

interactions. One dimension is to constantly optimize

the tools underlying algorithms to ensure greater

input data quality. Another is fully aligning these tools


10/46

14

Coreoperatingprocesses

Data

Tools

Continuous improvement

Identifying/addressingsystematic hurdles to driveimproved performance

SOURCE: McKinsey

Performancemanagement

Measuring and man-aging performanceat an individual anda group level

Resource/capacitymanagement

Managing staffing anddemand levels toenable service deliveryat lowest cost

Service delivery andmanagement

Closely managing jobcompletion to ensureservice delivery

Workforce manage-ment

Work scheduling andtactical assignmentof engineers to jobs

Engineer data Job data Product data

Scheduling algorithm

Optimizing service andengineer utilization

Network dataCustomer data

GPS

Pinpointing real-timelocations

Forecasting model

Estimating futuredemand

Engineer/techniciantools

Issuing handhelddevices, laptops

Field orce perormance can be optimized via improved integration o core

operating model elements01

with core operating processes. Integrating continuous

improvement into these processes is also essential to

ensure sustainable change.

Priming system tools for new functionality. System

tools are only effective when data inputs are reliable and

relevant. Initial systems implementations often involve

a thorough review of key inputs. However unless

processes and resources are put in place to uphold data

accuracy over time system tools gradually lose eff ica-cy in line with the erosion of data reliability. Maximum

automation is required for timeliness and efficiency.

Two examples of high-impact improvement levers

include daily technician job scheduling or dispatching

algorithms and the automated infeed of updated techni-

cian skill profiles.

Complex scheduling tools require thoughtful initial

configuration and continuous attention to ensure their

optimal performance. In practice, however, awareness

of a scheduling tools true productivity drivers varies

greatly. Changes made to accommodate business needs

or specific regions also reduce a tools eff iciency over

time if its algorithms are not regularly re-optimized.

Simulation in McKinseys OpsTechLab serves to test a

scheduling engines performance, identifying areas for

improvement. Simulation tools use real data to create

optimized scenarios that can be compared to the histor-

ical baseline. This approach allows telco leaders to tune

up their dispatching tools by refining the algorithms

they run on. Algorithms in the scheduling engine must

be configured and weighted to reflect the true priority

of assignments. This optimizes job allocation to meet

service needs, reduces drive time, and maximizes tech-

nician utilization. Simulation bypasses the need to test

potential improvements live prior to implementation.This lowers the risk of service failures, while speeding

up implementation.

Ensuring that scheduling tools receive an automated

feed of skill profile updates is a second highly valu-

able but seldom used tweak to existing technology.

This boosts the f lexibility of resource deployment

and maximizes scheduling algorithm effect iveness.

It also increases the impact of training investments,

as it ensures the organization deploys technicians to

perform all the tasks for which they have been trained.

OpsTechLab simulations often demonstrate a potential

increase in jobs per FTE-day in the range of 8 to 10 per-

cent, with travel time reductions averaging 20 percent.

Integrating these smarter tools into core field force

operating processes. Ensuring that data and tool


11/46



reconciliation and updating are state of the art is only

one side of the equation. Aligning processes to capture

their full potential is the other. Again, up-front simula-

tion of the impact is faster and far more cost-effective

than field testing would be. Three examples of where

the greatest benefits can be uncovered lie in the areas

of workforce, service delivery, and technician perfor-

mance management.

Dynamic dispatch is the use of scheduling algorithms

and GPS to drive workforce management. This enables

dispatchers to assign field workers one job at a time

throughout the day in the most efficient possible

sequence, rather than the traditional method of load-

ing them with a full days work up front. GPS gives

the scheduling algorithm a more accurate picture of

technicians real time locations compared with the

jobs requiring completion. Scheduling algorithms then

conduct multivariate optimization to deliver maximum

technician utilization and lowest drive time, corre-

sponding to serv ice at the lowest cost a boon for both

the company and the customer.

Compared with conventional full-day scheduling,

using dynamic dispatch typically yields improvements

in field productivity of 10 to 15 percent. This corre-

sponds to the impact telecoms players are capturing as

they implement real-world dynamic dispatch. And

surprisingly most field technicians like it once they

get used to it. A major source of stress for field techni-

cians who are front-loaded or bulk-loaded is that

one unexpectedly long job can upset their whole daysschedule. Dynamic dispatch enables an organization

to manage variability in task time completion using the

entire field force, rather than asking a single technician

to do this every day.

Beyond providing a telecoms operator with cost sav-

ings opportunities, implementing dynamic dispatch

also makes it possible to generate incremental revenues

by enabling telcos to both offer and deliver differenti-

ated service levels to their customers based on varying

response times. This is one example of fully exploiting

business processes to realize the return on systems and

tools investment.

Unlocking impact: A case example

The experience of one North American telecoms

player exemplifies the importance of optimization

across the entire operating model, using an inte-

grated approach.

This operator already had a good workforce man-

agement process in place. They had deployeddynamic dispatch techniques and an automated

scheduling algorithm. However, OpsTechLab simu-

lations revealed that they were missing out on 5 to

10 percent in productivity savings by not regularly

analyzing the effectiveness of their scheduling

algorithm. By improving their algorithm configura-

tion and allowing their technicians to perform all

the jobs they were capable of, they could shorten

driving distances between jobs and increase tech-

nicians value-added call time. The telco had access

to all of this data from their tool, but did not have

the simulation capability to interlink it and gener-

ate such savings opportunities. McKinsey helped

update their algorithm using the findings from the

simulation and also build the capability to regularly

update and improve it.

On the GPS front, managers were required to log

into the graphical GPS system each day to ascertain

the positions of their technicians and then cross-

reference with pages of data to spot any discrepan-

cies. This system had two issues. First, it was hard

for managers to determine whether technicians

were really where they should be there were novisual displays to indicate irregular activity.

Second, it required managers to sit at a computer

tracking their staff in real t ime all day, which didnt

happen in practice, given the many competing

demands on managers time. A simple custom tool

was created by the McKinsey team to highlight

technician behavior inconsistencies for the man-

agers attention at the end of each day, allowing

managers to spend time where they should be

coaching technicians.

Optimizing the interlinks between tools and

processes helped this telecoms player drive a pro-

ductivity improvement of 10 percentage points

while enhancing the return on their previous tech-

nology investment.


12/46

16

Another area where few organizations are capturing the

full potential of tool/process alignment is the ability of

GPS to provide real-time visibility on service delivery

and service management. McKinsey has conducted

several recent systems implementations with clients

to define the requirements for installing real-time vis-

ibility of their serv ice delivery. Close cooperation with

vendors allows identification of the system require-ments for smart delivery of such visibility without over-

whelming managers and dispatchers. Real-time alerts,

for example, notify dispatchers when service delivery

is at risk, enabling them to contact technicians and

offer support, or escalate issues to field managers. This

gives dispatchers and the field a greater sense of shared

responsibility in service delivery.

Performance management is also greatly improved by

expanding GPS functionality. Coaching and perfor-

mance dialogs can be informed by richer data broken

down into time on site, driving, and unproductive time,

rather than by approximations and averages. Expected

job times can be refined based on actual rather than

estimated work times, providing standard task times or

norms for specific types of tasks. Above is an example

of a GPS-based scorecard that can be used by f irst-line

managers to identify drivers behind technician perfor-

mance. It serves as the starting point for performance

coaching with the technician and enables managers to

customize their approaches. A manager could, for exam-

ple, investigate high time away from task using retro-

spective location data. A manager might also recognize

the need for additional technical coaching for techni-

cians with high productive time but low task time.

Enabling sustainable change with continuous improve-

ment. Top telcos know that, with technology, stand-

ing still can mean falling behind. All elements of the

operating model require continuous improvement to

ensure maximum return on technology investments.

Historically, improvements have been made reactively

in isolation based on technical user group observations.

The imperative now is to drive continuous improvement

in an integrated way, using strong cross-functional

teams, regular review and maintenance cycles, and an

effective feedback loop from all stakeholders.

Most telecoms players have technical specialists

focused on a single aspect of the operating model: pro-

cesses, tools, or data inputs. Telcos need to augment this

domain-specific expertise with a small cross-functional

GPS-based scorecard

Scorecard with GPS data

Daily

productivity

Percent

Task time

attainment

Percent

Productive

time

Percent

Total worked

time

Minutes/day

Late start

Minutes/day

Early fnish

Minutes/day

Time away

rom task

Minutes/day

Tech 1 57 85 67 540 12 45 120

Tech 2 64 75 86 565 -10 32 59

Manager1 61 80 76 553 1 40 90

Defnitions

Productivity Task time attainment x productive time, as a percentage

Task time attainment (actual time to execute assigned tasks) / (standard task time or assigned tasks), as a percentage

Productive time (Total worked time (late start + early fnish + idle time)) / total worked time, as a percentage

Total worked time Average time worked during the given period, in minutes per day

Late start Average delay in departure time vs. expected start time, in minutes per day

Early fnish Average early return to overnight location vs. expected completion time, in minutes per day

Time away rom task Average stationary time away rom expected job location, in minutes per day

1 Managers metrics are the average o all assigned technicians


13/46



Brant Carson

is an Associate in McKinseys

Toronto oice.

[email protected]

Todd Scheidt

is an Associate Principal in McKinseys

Toronto oice.

[email protected]

Kelli Fairbrother


London oice.

[email protected]

leadership team that has a mandate of year-on-year

improvement in overall systems performance. These

systems optimization leaders must bring a specific set of

capabilities to the organization. First, they need to have

a leaders understanding of the business and its perfor-

mance aspirations. They must have the problem solving

capability to optimize both within and across domains

using simulation tools, user group feedback, and regu-

lar system diagnostics. Finally, they need the programmanagement skills to steer maintenance cycles and con-

struct and orchestrate feedback loops.

To start, these leaders need to develop regular mainte-

nance and review cycles for their information systems

algorithms, data input quality, and process-tool interac-

tions with clear expectations for target system per-

formance and the associated field productivity levels.

Weekly, monthly, and quarterly maintenance sched-

ules can be defined in detai l, with clear responsibility

assigned. Reviews can be incorporated into software

release cycles to ensure quick responsiveness when

additional development is required. In addition, vendor

reviews and technology forums can be incorporated

into an annual cycle to ensure the organization keeps

abreast of external technology tips and trends.

Such leaders also need to build effective feedback loops

from a broad cross-section of the user population. Real-

time issue reporting from technicians, dispatchers,

and management should accompany more formal user

panels and lead user feedback. User feedback can serve

as a source of ideas to be tried and tested using simula-

tion. Regular feedback also ensures the organization is

always learning ways to improve the effectiveness of its

people through the intelligent adaptation of technologytools to better suit their needs.

The leaders driving this next wave of field force cost

savings are doing this by squeezing the maximum out of

assets they already have. Telcos are repeatedly finding

they can quickly unlock 15 to 20 percentage points of

additional productivity improvement from their exist-

ing technology investments. Simulation across multiple

dimensions in a risk-free environment with a focus on

better integrating data, tools, and processes is the fast-

est and most reliable way to deliver on the full promise

of technology enablement.


14/46


Lean on the line: Improving ADM in telecoms

03 Lean on the line: Improving ADMin telecoms

Once the domain of automotive manufacturing, lean

is now transforming telecoms. Fine-tuning a telcos

innovation engine can lead to big competitive gains in

productiv ity, time to market, and quality.

Given the current challenges of the telecoms industry

(e.g., creating new services, improving quality of exist-

ing services), IT-enabled business innovation is becom-

ing more and more important. However, the speed,

cost eff iciency, and quality of the innovation channel

at many telcos leave significant room for improvement.

Boosting performance in application development and

maintenance (ADM) now tops the management agenda.

McKinsey experience indicates that ADM performance

improvements can have a significant impact. First,productivity gains in ADM of more than 30 percent are

possible (equal to 1- to 3-percentage-point increases

in company profit margins), leading to lower costs or

greater capacity to deliver on business requirements.

The impact of performance improvement, however,

reaches beyond the ADM activity itself into the entire

organization. As a result of their ef forts, telcos have

enjoyed time-to-market improvements of 10 to 25 per-

cent for changes in price plans, bundles, and new de-

velopment projects, and have seen reductions in defects

in delivered software of 20 to 45 percent.

These benefits apply to both IT departments as well as

to separate business-to-business ICT services units that

provide ADM services directly to customers. In the lat-

ter case, we have observed EBIT increases of around 5 to

7 percentage points for the ICT services unit.

A lean overview

While the manufacturing industry originally pioneered

lean management concepts, other industries have fol-

lowed and implemented these principles in their own

business contexts. Lean management transformation

is very practical as it invests 25 percent of the time on

analysis and 75 percent of the time on implementation.

The transformation is based on an iterative learning

process where new ideas are tested, feedback is gath-

ered, and improvements are implemented immediately.

Over the past several years, application of lean manage-

ment concepts to ADM has gained momentum. More

and more companies are implementing lean manage-

ment concepts in their ADM departments. Lean man-agement focuses on five interlinked elements to improve

overall performance, and these elements can be applied

to ADM in much the same way as their traditional indus-

trial application.

The first two principles of lean management as they

relate to ADM speak to the organizations systems.

First, process eff iciency is the way processes and re-

sources are used and configured to create value while

minimizing the cost to serve. Second, performance

management comprises the processes, systems, and

infrastructure needed to manage performance across

ADM activities.

The next principles relate directly to the human element

of the organization. Mindsets and behavior describe the

way the staff of the organization think, feel, and act both


15/46

20

individually and collectively. Organization and skills

are about the extent to which processes are managed

and supported by a skilled base of workers.

At the heart of lean management the element that

links all of its principles is the voice of the customer.

This means the services that come from ADM activities

are aligned to real customer desires.

A lean management journey typically consists of

three phases:

Diagnostic phase (two to three weeks). This phase

begins by generating an initial hypothesis regarding

the main improvement levers. A fast scan of current

working practices on the work floor (called a walk-

through) combined with high-level benchmarking

serves as the basis. After that, a deep dive with lean

management techniques to better understand root

causes and solution directions begins.

Future state design phase (two to three weeks). Here,

several lean management solution archetypes (e.g.,

business requirements, iterative development, per-

formance management, and testing efficiency) lead

the organization toward a new way of working. The

advantage of having lean management archetype

solutions is a steep acceleration of implementation

and impact.

Implementation phase (around eight weeks).The new

way of working is established and then refined over

the given time period. The first v isible elements that

teams will encounter are whiteboards and daily briefingmeetings. The daily briefing is a 15-minute, stand-up

meeting that takes place in the morning, in which the

team discusses the previous day, plans the coming day,

and raises challenges/problems. During this phase, tac-

tical implementation plans are also further developed.

In general, about 10 percent of the expected benef its

can be captured by the end of the f irst eight weeks of the

implementation phase, which will continue for another

nine to twelve months.

Lean ADM in telecoms: A case study

One telco with whom McKinsey has worked has an ADM

department with more than 1,500 FTEs. The organi-

zation is now well on track to reaching (and even exceed-

ing) its improvement targets. The following recounts

their lean ADM journey.

Diagnostic.The diagnostic began with a top-down

performance review (benchmarking and walk-through

technique) to generate an initial hypothesis on pro-

ductivity, throughput time, and quality improvement.

Subsequently, the diagnostic deep dives focused on

validation of the initial top-down view, better under-

standing of root causes, solution directions, and achiev-

able impact in the short to medium term.

McKinsey used many different lean management diag-

nostic tools. A subset of the main ones used is included

here. For the process area, the focus lay on time spent on

value-added versus non-core activ ities (overall process

efficiency analysis), reduction of work inflow (value-

added work analysis), and process mapping to discover

rework loops and waiting time (value stream mapping

analysis). For the performance management area,

emphasis was placed on assessing KPIs, visual aids

(within lean management also referred to as Kanban),

and review cycles. The organization angle looked at gaps

between employee skills required and those available.

To diagnose mindsets and behavior and the voice of

the customer, employee surveys helped evaluate how

staff acts and feels, whereas a process maturity assess-

ment focused on the quality of the customer interactions

and on talent management.

The diagnostic revealed that project and support eff i-

ciency could be increased by 22 to 45 percent based

on the actions listed in Exhibit 1. The diagnostic also

indicated potential to lower the share of projects with

budget overruns from 45 percent to between 20 and

35 percent, while cutting the cost price of resources by

around 15 percent to bring it in line with market levels.Finally, the diagnostic identified potential to double

the current ratio of people working offshore versus

onshore and cut throughput time by about 15 percent.

As a realistic goal, the organization committed itself to

reduce costs by 25 percent over 18 months.

Future-state design. Based on the diagnostic, this

phase focused on four large design archetypes: business

requirements, testing, management and support, and

performance management.

The business requirements archetype was employed to

reduce rework, prevent budget overruns due to incor-

rect scoping, and drive down non-productive develop-

ment hours of analysts, while enhancing the quality of

handover when work moves offshore. This design arche-

type focused on the full process chain from customer


16/46


Lean on the line: Improving ADM in telecoms

SOURCE: McKinsey

Efficiency improvement initiatives for average and top performers Waste as a percentage of total time

Reduce time focused on non-core production activities

Prevent rework resulting from unclear and changingbusiness requirements

Lower support staff efforts like administration, finance, and HR

Increase testing efficiency

Ensure sufficient scope of control for project management

Raise utilization by ensuring staff is working on projects

Total efficiency improvement

5

22 - 45

0 - 7

2 - 6

3 - 6

3 - 6

9 -15

Eiciency improvement potential ranges rom 22% or average to 45% or

top perormers01

insight research and collection to change management

in requirements after initial sign-off. Here, use cases

were selected as the method for business requirement

design. The main rationale for choosing use cases was

that, when applied correctly, this forces completeness

and a proper level of detail and it is easily understand-

able for business. It also immediately feeds into the

performance management initiative through use case

points a metric to measure productivity output.

Testing to reduce non-productive hours and enhance

overall efficiency was the second archetype that the

telco used. This design phase focused on improving the

interaction between development and testing activities

through tighter quality control of unit testing output.

It also concentrated on shift ing large portions of sys-

tem testing to earlier points in the development cycle

(instead of a big-bang testing approach at the end of the

development cycle) to enhance feedback to the develop-

ers. Another important focus of this phase emphasized

improvements to the testing activity itself based on

automation of integration/regression testing for parts

of the system code that remained relatively untouched

over the different releases. In further improving risk-

based testing, the telco ultimately will decide on the

amount of testing effort to invest based on the codes

functional and technical risk profile.

The management and support archetype was employed

in order to achieve a reduction in the number of support

staff and project managers. The main reason for the large

numbers of support staff was the abundance of manual

finance and administration tasks. To drive efficiency, one

objective of the design was to implement a project man-

agement automation tool and consolidate the remaining

support work. For project managers, the design focused

on increasing efficiency in communication interfaces

with other parties within the organization (primarilyparticipating in meetings and preparing reports).

Finally, the performance management archetype was

used to buttress the lasting impact of all initiatives. On a

project management level, the design consisted of a large

whiteboard that showed planned versus realized work

on a person-by-person basis (visual work flow board) as

well as a burn-down chart that visually tracked overall

team progress over time. Each morning, team members

would discuss outcomes of the prior day and plan for the

day ahead. On a weekly and monthly basis, a richer set of

KPIs showed progress on other dimensions such as uti-

lization, fully-loaded cost per FTE, defect density, effort

overruns, and span of control. On a management level, a

series of review meetings across the organization was set

up to discuss the KPI reports and served as a forum for

management to decide on actions based on facts.


17/46

22

A very conscious decision was reached to make the

detail design of these archetypes line-led, meaning that

line management drives the design choices described

above supported by lean management experts. This

ensures better organizational acceptance for the solu-

tion and a smoother subsequent implementation.

Implementation. The telco implemented its lean pro-

cess in three distinct stages. The first implementationstage was to test the design. To ensure the perfect fit,

McKinsey worked with the organization to implement

the full future-state design in a project launched recent-

ly. After some marginal f ine-tuning to accommodate

organization-specific requirements, the solution was

ready for full rollout.

The second stage of implementation was to develop the

organizations capabilities. The telco started its capa-

bility-building effort based on adult learning doctrines

under the guiding principle that it is important for

people to first understand the reason for change before

training them in new skills. The business requirements

and performance management initiatives required the

greatest training effort given the use of new tools like

use cases, use case points, burn-down rates, and visual

work flow boards. To develop the necessary capabilities,

the telco conducted workshops for analysts and project

managers to build awareness of the gap in the quality of

current versus best practices this, for them to inter-

nalize the importance of change. The telco also offered

e-learning and selected expert classroom sessions to

educate employees on the new way of working as well

as to develop internal coaches who could continue the

training efforts beyond the individual sessions.

The third and final implementation stage was to rapidly

scale up the solution. After testing the design, McKinsey

worked with the telco to finalize the blueprint design

material. It is important that this blueprint consists of

practical material that people will use daily (like stan-

dard operating procedures and quick reference guides)

rather than lengthy manuals that are hardly ever used.

In only a couple of waves, the capability-building pro-

gram covered the entire organization. At the end of eachwave, everybody immediately adopted the new way of

working. Rolling out the new approach rapidly ensured

that the full organization works uniformly.

The results generated so far have boosted confidence

throughout the organization that the lean ADM journey

is indeed a very rewarding one. It also remains very high

on the top management agenda and visibly so. All of

these elements are important in ensuring that impact is

sustainable and the organization steadily moves toward

continuous improvement, even after the initia l effort.

For this telco, the lean ADM journey has just begun.

Telcos can obtain faster and cheaper innovation capa-

bilities with better output, leading to a competitive

edge. Applying lean management principles to their

ADM activities is a tried and true means to this end.

Lean management focuses on process and the associ-

ated performance management optimization, but goes

even further to develop capabilities, alter mindsets, and

ensure continuous improvement.

Joris Hppener


Tokyo o ice.

[email protected]

Kevin Wei Wang

is a Principal in McKinseys Shanghai oice.

[email protected]

Stphane Rey

is a Principal in McKinseys Zurich oice.

[email protected]


18/46


Fixing break-x: The power of lean ICT transformation

04 Fixing break-fix: The power of leanICT transformation

Operators focused on the business-to-business ICT

space can benefit significantly from lean transforma-

tion of their field force operations.

In recent years, the field force has become a critical

competitive element in telecoms players high-volume,

standardized customer service operations. Operators

have learned to leverage this element to also drive value

based on cost efficiency and quality. But a very dif fer-

ent situation persists today for most players serving the

large B2B information and communication technolo-

gies (ICT) customer segment.

The service delivery chain in B2B ICT differs from B2C

telco service operations in several respects. First, ser-

vice level agreements (SLAs) for large accounts usuallyencourage customization. This means that attempts to

standardize the process are often thwarted from the

outset. Another factor is that service delivery windows

are much shorter: most repair tickets involve turn-

around within 8 or 24 hours. Beyond this, the work

requires a higher share of specialized skills. The B2B

ICT segments broad hardware portfolio also leads to

greater logistics complexity, which the field force has

to support alongside same-day service provision. For

all these reasons, lean transformation has traditionally

been considered less applicable.

This belief, however, is a fallacy. To demonstrate the

power such a transformation can have, this article

presents a sanitized case study. It involves a leading

integrated EU telecoms/ICT player with an enterprise

business unit that also installs and maintains the ICT

systems of large B2B customers. The company aimed

to improve profitability and customer satisfaction in

its ICT hardware repair operations by boosting the

productivity and quality of its service operations. To

accomplish this, company managers decided to adopt an

end-to-end (E2E) focus on the delivery chain for repair

activities conducted at the customer site. The results

demonstrate that lean transformation in this area can

raise productivity by some 40 percent and at the same

time realize quality improvements of around 10 percent.

Working end-to-end to maximizeimprovement potential

The lean field force transformation focused on five areas

(Exhibit 1): contact center, service qualification, plan-ning, field engineers, and logistics. These areas consti-

tute the core E2E process for on-site ICT repairs (mainly

hardware). The company exhibited all the typical differ-

entiating characteristics outlined earlier. About 40 per-

cent of the tickets were for same-day repair (a maximum

service window of 8 hours); another 40 percent were for

resolution within 24 hours.

Despite the challenges, the company achieved sig-

nificant impact during an eight-week pilot phase. The

results were measured using a detailed dashboard,

which also showed that these results were being sus-

tained over the long term as well. Field engineer pro-

ductivity, for example, increased by nearly 40 percent

and quality measured in terms of the share of repair

tickets fixed right the f irst time rose by over 11 percent.

Planning effectiveness the number of tickets per


19/46

26

SOURCE: McKinsey

Internal process(~ 75 FTEs)

Customerinteraction

E2E hardware ICT repair service process

Open ticket

Complete customerserial number, etc.

1

Contactcenter

6 FTEs

SLA check

Matching ticket withtechnician and parts

Delivery speed mgmt.

3

Planning 6 FTEs

Completeness check

Technical diagnostic

Contract check

Vendor warranty

2

Servicequalification

6 FTEs

Travel

Parts pickup

On-site execution

Return of parts

4

Fieldengineers

37 FTEs

Procurement

Stock management

Transport coordination

Warranty claims

5

Logistics 18 FTEs

Parts advice Parts confirmation Depot/courier (handshake)

Activity

Function

Customer reportsincidentTelephone, e-mail, EDI,portal)

Diagnostic contactcustomer or sendtechnician

Contact customer tomake appointmentif requested

Execute repair atcustomer site

The end-to-end (E2E) on-site repair process addresses ive key areas01

engineer per week climbed by nearly 35 percent and

overall productivity went up by roughly 36 percent (sug-

gesting very similar latitude for FTE reduction).

Getting started: A two-week lean diagnostic

Field force transformation begins with a diagnostic

phase. An effective diagnostic surfaces a wide variety

of issues that the transformation teams need to work

through in all these areas. Key diagnostic tools used

include value stream mapping, field observation, andvariability and disruptions assessment (also across

peers). The main findings in each area were revealing.

Contact center/service qualification. The company

discovered that the customer information collected

was often either incorrect or incomplete (e.g., end-user

workstation identification and customer serial num-

bers) and that agents were not always making direct

contact with end users. More effective remote diagnos-

tic scripts and tools were needed. The contact center

and qualification also lacked a clear process for perfor-

mance reporting, such as the number of clean tickets

passed on to planning and field engineers.

Planning. Direct observation showed: engineers spent

less than 20 percent of a typical day on value-added

ticket time (Exhibit 2). Around one-fourth of their time

was dedicated to administrative tasks. The main down-

time in the process was for travel, administrative activi-

ties, waiting, and searching for the client manager or

exact workstation location on the customers premises.

Field engineers. The diagnostic spotlighted issues in

both field engineer support and peer performance.

Field engineers faced irregularities in over 80 percent

of total tickets received. These mainly related to logis-

tics (over 60 percent) and planning (around 10 per-

cent). On average, this already represented 35 minutesof waste per ticket, equal to around 15 percent of the

organizations total daily field engineer capacity. The

quality of this support definitely required significant

improvement effort.

Where productivity was concerned, a peer comparison

diagnostic revealed a large spread. The top 25 percent

were completing roughly twice as many tickets per day

as the lowest quartile. One of the drivers was admittedly

the geographic concentration of tickets within a region.

Many low performers were in more sparsely populated

regions, resulting in increased travel downtime. But

even within the top quartile, the spread between the top

and bottom 25 percent amounted to 2.4 successful tick-

ets per day. High variability in ticket completion times,

even when the incidents reported were very similar,

suggested significant optimization potential.


20/46



Logistics. Logistics encompasses procurement, stock

management, transport coordination, and warranty

claims. Around 60 percent of correct ive actions in logis-

tics were courier-related (such as the courier arriving

too late), with couriers accounting for about 25 percent

of total logistics costs. Waste from frequent logistics

disruptions included parts not delivered to the right

local inventory locations or not assigned to a ticket

(PDA synchronization problems, etc.). Some 5 to 8 per-

cent of parts were defective on arrival. Around 50 per-

cent of parts shipped to engineers on site are returneduntouched, a sure sign of overqualification. Another

area requiring optimization was stock turn: analysis

showed that over 90 percent of stock-keeping units were

only used twice a year at the most.

Powering up for higher performance

The company used the detailed insights of the diag-

nostic phase to develop improvement initiatives based

on the lean philosophy along four productivity levers:

capacity management, planning management, coach-

ing for results and performance, and reducing disrup-

tions within the E2E service delivery chain (Exhibit 3).

Ultimately, the team identified more than 40 initia-

tives during the two-week diagnostic, spread across all

five areas (contact center, qualification, planning, field

engineers, and logistics), as well as ideas to streamline

the E2E nature of the work f low.

Boosting contact center/qualification quality.At the

contact center, one initiative was to review and optimize

the scripts used for capturing critical customer data,

such as the end users mobile number, customer serial

number, location, and the key contact. In the qualif ica-

tion phase, initiatives included reducing follow-up tick-

ets by enhancing attention to detail and keeping staff up

to date on newly introduced contracts and models.

Optimizing planning and capacity management.

Numerous proposals were generated to improve field

force planning and capacity management. Every detail

of next-day tickets was set up the day before. The plan-

ning team mapped all tickets and to dos on a planning

board that they checked regularly at noon and at the end

of the workday. Unproductive time was balanced out

with much more precision: engineers not fully sched-

uled for the following day were assigned to a f lexi-

pool for either part of the morning or afternoon. One

productive use of their time is to inspect repair parts

at the warehouse to check quality and to give suppliers

feedback. Initiatives for field engineers included intro-

ducing a normed ticket time based on performance

management to reduce variability in ticket completion

times. This encouraged an effective decrease in average

1 Assigning ticket and allocating tasks to specific minutes

1.0

Work-hometravel

1.0

1.5

8.0

Value-addedticket time

Waste inprocess

0.5

Lunch

0.5

Admin

1.0

Travel time

1.0

Gross timefor tickets

4.5

Non-flexibleplanning

1.5

Warehouseadmin

-81%

Fromhome toware-house

Find andcheckparts forthe day

Checkand cor-rect ticketfor theroute day

Ticketsfinishedat2:00 p.m.,but noadditionalworkpossible

Fromlocalware-house tocustomerlocation

Betweencustomerlocations

Closingcalls

Loggingdata1

Search-ing for/callingcustomer

Phonecalls dur-ing ticketexecution

Lunch atnon-clientlocation

Diagnos-tic

Repair

Testing

Descrip-tion

Non-value-added activitiesbefore/after tickets

Non-value-added activitiesduring ticket execution

SOURCE: McKinsey

Time spent on 1 day, based on observations during go and see field visitNumber of hours (rounded)

Value-added time accounted or less than 20% o an engineers day02


21/46

28

ticket time. With 50 minutes estimated as the weighted

average time achievable, the team determined it could

generate a 25 percent reduction in average ticket time.

An alternative planning and dispatching method is

based on a dynamic approach. Here, field engineers are

assigned one job at a time throughout the course of the

day. This method makes it possible to manage variabil-

ity in ticket completion time across the entire f ield force.

However, when highly specialized hardware is involved

that has to be taken to the site by the field engineers,planning a day ahead is required to distribute the appro-

priate parts to the field engineers.

Streamlining logistics. Logistics initiatives focused on

aspects such as improving the coordination of parts

sourcing and transportation by courier, in alignment

with field engineer planning. The parts drop was orga-

nized at a single location and bundled into a single

role. Previously, this had been organized across differ-

ent teams at separate physical locations. Other ideas

generated were to invest engineer time into ensuring

that parts receiving at local warehouses was optimally

orchestrated. A 6:00 a.m. check was conducted on parts

that had been delivered overnight and central pickup

was organized. Prior to this streamlining, field engi-

neers would pick up parts individually at non-assigned

warehouse locations.

SOURCE: McKinsey

Increasefield forceeffectiveness

4 productivity levers Examples of initiatives

Capacitymanagement

Balance number of available field engineerswith expected ticket volume

Minimum number of FTEs in fixed pool of engineers

Flexi-pool to buffer peak load

Engineers shifted from FTE pool to flexi-pool

Planningmanagement

Fill each engineers free time with produc-tive tasks

Reduce travel time

Next-day tickets planned at end of day

Planning team checks scheduling board every dayat noon and end of day

Coaching forresults

Reduce variability in engineer performancevia coaching and performance management

Norm time reduction

Weekly performance review between field managerand team

Field manager coaches worst performer individuallyat least once per week

Reducedisruptionswithin chain

Reduce disruptions in ticket execution

Reduce follow-up tickets

At least 1 contact with end user during E2Eticket delivery

Planning and logistics team sit together in open-space setup

ILLUSTRATIVE

Several speciic initiatives resulted in signiicant impact03

Nurturing lean thinking for sustainable change

Beyond optimizing processes, aligning staff mindsets

and behavior is just as important, anchoring the con-

cepts and philosophy of lean continuous improvement

from an E2E angle. Opportunities for manager role

modeling were set up alongside a constructive coach-

ing environment in which staff could refine their skills

and capabilities. This skill building dovetailed with

performance management, helping drive long-term

sustainability. One initiative was to introduce an inte-grated E2E dashboard that tracked progress on a weekly

basis together with weekly meetings that addressed any

E2E issues. Other actions focused on improving team

interaction. A 15-minute get-together at the beginning

of each shift provided a daily update on team productiv-

ity, quality, and morale, while offering a forum to handle

any outstanding issues and gather new team ideas on

performance improvement. At the end of each week,

half-hour team discussions were held to maintain the

momentum, while benchmarking quality and produc-

tivity performance against past results.

The companys successful lean field force transforma-

tion taught a number of important lessons on how to

best tap into the innate but often latent power of the


22/46



field force organization. Where scope and setup are

concerned, it is essential to work end-to-end to avoid

misalignment on KPIs and SLAs at the subunit level. In

execution, identifying the right drivers and breakpoints

is crucial. Linking thresholds and targets to real finan-

cial impact as well as customer excellence is also a

strong enabler. And ultimately, imprinting lean princi-

ples on the companys DNA by refining employees soft

skills is perhaps the greatest differentiator: this is thekey to a continuous improvement culture.

Bart Delmulle


Brussels oice.

[email protected]

Matthias Winter

is a Director in McKinseys Zurich oice.

[email protected]

Peter Verboven


Brussels oice.

[email protected]

Leon de Loo

is a Principal in McKinseys

Amsterdam oice.

[email protected]


23/46


Outside in: Leveraging outsourcing and offshoring to transform IT

05 Outside in: Leveraging outsourcing andoffshoring to transform IT

Many operators outsource and offshore their IT, but few

capture the value that a full-scale transformation can

unleash. How to become one of the few.

Conventional IT outsourcing and offshoring (O&O)

can deliver significant medium-term improvements,

but benefits ultimately flatten out because companies

retain the same legacy IT platforms. Implications are

severe, including longer time to market and growing

operational risk. Industry players have begun to address

this issue using innovative O&O models where vendors

drive, co-invest in, and accelerate modernization in

the process realizing incremental cost savings of around

20 percent. These models require a different O&O

mindset that builds on shared objectives, employs joint

telco/vendor implementation roadmaps, and engages incommon value tracking. First, however, it is important

to see where conventional O&O setups often go awry.

The downside of conventional O&O

Well-structured and well-negotiated arrangements can

yield cost savings of some 20 to 30 percent over three to

five years. Primarily, transferring activities offshore,

capitalizing on vendor process improvements, access-

ing larger resource pools, and upping infrastructure

asset utilization serve to achieve this. Generally, con-

tracts also include well-designed demand management

mechanisms for telcos to capitalize on stricter, more

professional project and service level prioritization.

However, when one examines these deals two to three

years after the ink on the contract has dried, quite often

little in the way of real IT transformation has tran-

spired. While these players may enjoy highly competi-

tive unit prices and good utilization levels, they continue

to operate in their accustomed environment: their deliv-

ery models, their systems, their data models, and their

technical architectures remain pretty much unchanged.

Companies at this stage of O&O maturity often find that

burdensome legacy has begun to consume the benefits

of their O&O arrangements. Expenditure on their IT

operations keeps rising because each dollar of new

functionality adds roughly 10 to 15 cents in additional

annual maintenance costs. This means they have less in

their wallets to develop innovative, business-enabling

IT solutions given the resulting cash f low constraints.

They also have to contend with an increasingly complex

time- and money-consuming design and testing pro-cess which typically leads to slower time to market and

less project delivery predictability.

These serious repercussions can ultimately jeopardize

an operators competitive posit ion. However, while the

need for additional investment in IT transformation is

clear, circumstances can make it impossible for CIOs to

release the cash needed. First, the business case even

for evolutionary IT transformation is relatively chal-

lenging since the payback horizon may extend beyond

the CEOs mandate period. Second, funds for capex

are still scarce in the current business environment,

and customer-facing projects wil l inevitably receive the

capex green light first anyway. And third, vendors in

most existing O&O contracts often f ind it advantageous

to maintain the status quo rather than contributing to

removing complexity.


24/46

32

Applicationdevelopment

Applicationmaintenance

Applicationoperations

Infrastructureoperations

Businessprocessing

Valuechain

Business domains (examples)

Enterprise resourceplanning

Group functionsBilling

1 2

3

45 5

6

7

Service architecture Sourcing strategies (examples)

1 Preferred offshore vendors

2 Two prequalified niche providers

3 Software as a service

4 Business process outsourcing

5 Single-vendor co-financedmodernization

6 Single-vendor data center/servers

7 Single-vendor end-usercomputing services

SOURCE: McKinsey

A service architecture view helps translate objectives into the right

transormation path01

The power of O&O to drive and accelerateIT transformation

A multi-lever transformation is required to crack the

curve described above and move to the next level of

IT performance. Telecoms players need to move from

ad hoc processes with vague contours to well-defined

services, using configurable standard packages rather

than customized (largely unsupported) software. This

will result in a gradual shift f rom fragmented data mod-

els, tailor-made application programming interfaces,and logic-heavy middleware to modular, services-

based architecture. The landscape morphs from dozens

of legacy technology platforms to a handful of standard

technology stacks.

To achieve this type of true IT transformation without

significantly increasing their IT spending, operators

have to take a much deeper and more collaborative

approach to O&O. Instead of merely pursuing tacti-

cal business objectives like cost, f lexibility, or quality,

participants need to share and agree on business priori-

ties regarding the future evolution of each IT domain.

To capture the maximum amount of value, manag-

ers should step beyond attempts to squeeze margins.

Instead, they should ensure common understanding

of the detail the new platform will entail, with exact

itemization of the implementation plan, KPIs, and

resources, for example. This allows them to fully gauge

the impact of individual transformation initiatives.

Conventional O&O tactics regarding the deal itself tend

to be static, such as one five-year deal for all application

maintenance: they do not reflect the varying priorities

required in specif ic IT domains. Instead, telcos need to

tailor their sourcing strategy to fit domain-specific pri-

orities (multi- versus single-sourcing, for instance, and

transformation versus pure offshoring), creating the

right incentives both internally and externally.

How to set up a joint operator/vendor model

The first step is to develop an internal perspective,

identifying where pursuit of IT transformation via O&O

would make sense. Telcos need to recognize that objec-

tives such as cost efficiency, competitive price develop-

ment, or fast time-to-market performance will translate

into different transformation paths depending on which

part of their IT landscape is in focus. Taking a service

architecture perspective will help teams analyze this

issue in a highly structured manner (Exhibit 1 ).

A comprehensive sourcing strategy then needs to be

developed that aligns with these objectives. The founda-

tion should be a credible economic model that assesses

modernization priorities per domain, establishes a

baseline, estimates the financial impact, and designs


25/46

33

Radically reducing complexity withoutincreasing spend: An O&O case example

One operator collaborated with preselected ven-

dors to rst create domain-specic evolutionary ar-

chitecture roadmaps. Then, they asked the vendors

to design a model that maximized their ability to

execute their roadmaps at minimum cost. Vendors

competed on multiple dimensions: price, quali-

ty, credibility, and timing. The winning plan wascontracted together with a long-term application

maintenance agreement so that a signicant share

of the transformation was funded by the vendor.

This operator is on track to see signicant IT

savings of well over 20 percent by fully leveraging

offshoring and lean savings that go beyond the

30 percent already achieved from the previous O&O

setup. Since the transformation modernizes the ap-

plication architecture, the company can shut down

several expensive legacies, beginning its move from

proprietary vendor stacks to open platforms. The

knowledge offshore vendors gain from maintenance

and transformation work will also ultimately lead to

a far better offshore application development ratio,

cutting time spent on design and testing.

RECALL No 13 Leveraging Technology

Outside in: Leveraging outsourcing and offshoring to transform IT

KPIs to quantify the effects. A telco will aim to concen-

trate volume with fewer providers, with niche vendors

managed by the prime vendor in the domain.

The heart of the strategy needs to be maintenance con-

tracts with shared transformation: long-term mainte-

nance is tendered to vendors, with the vendor co-invest-

ing in a shared modernization plan that locks in the

transformation objectives. This will involve negotiating

a joint roadmap with vendors that maximizes offshor-

ing, operational excellence, and scale levers. It is vitalto provide incentives for vendors to remove complexity.

The provider may, for example, take over legacy systems

from the clients technology platform. In this situation,

the client should in addition to negotiating prices for

specific services also create incentives for reducing

the cost base. Awarding a long-term commitment that

involves the maintenance of systems, once installed

(rather than just a delineated project), is often a major

incentive in itself. The clear scope and in-depth involve-

ment of participating in an operational transformation

in a strong relationship also gives the vendor greater

assurance of capturing profitability over time.

A further crucial negotiating point is the deal duration

and financing to trade off up-front capex against long-

term opex, making use of all value drivers (Exhibit 2 ).

The running costs of a simpler, harmonized system are

100

Years0 1 2 3 4 65 7

Cost/price developmentPercent of baseline

Build your internal view of the transformationroadmap and economics

1

Negotiate joint roadmap with vendors,maximizing offshoring, operationalexcellence, and scale levers

2

Agree on deal duration and financing to tradeoff up-front capex against long-term opex

3

1

2

3

SOURCE: McKinsey

Cost/price development should decrease to below the baseline within a

relatively brie period i careully architectured02


26/46

34

of course far lower than those of a legacy platform later

down the line, which benefits a provider in a long-term

contract just as much as the operator.

Signing the contract with the vendor is just the begin-

ning of the journey: the deal structure and governance

of this type of multi-vendor landscape need careful

planning to lock value into the application maintenance

setup. The roles assigned to prime vendors, niche ven-dors, and operations require overall supervision by a

coordinator acting as a single point of contact, with a

clearly defined role. The added challenge is that this is

not one overall transformation so much as the execution

of many intricate mini-transformations, and requires

leading-edge implementation. It is important, however,

that the operator always retains the strategic and archi-

tectural prerogative, setting and monitoring the direc-

tion of the transformation.

Pursuing a deeper, more collaborative approach to O&O

can give operators the opportunity to achieve a funda-

mental transformation of their IT environment. Their

O&O involvement should always be seen as part of anoverall business transformation, led ideally by their

business rather than their IT community. Operators are

outsourcing ever more of their operations as they prog-

ress up the value chain. Transformational O&O enables

and accelerates this process, but it also moves providers

work up the value chain, creating a win-win situation for

both operator and vendor.

Andr Christensen

is a Principal in McKinseys Toronto oice.

[email protected]

Tor Jakob Ramsy

is a Director in McKinseys Oslo oice.

[email protected]

Martin Lundqvist


Stockholm oice.

[email protected]


27/46


Fast forward to success: Managing next-generation IT architecture

06 Fast forward to success: Managingnext-generation IT architecture

Common pitfalls in telcos IT architecture management

are all too often a serious roadblock to superior business

performance. Operators can bypass these by applying

learnings from their most successful peers.

Telecoms operators are among the highest IT spend-

ers across all industries, relying heavily on IT to enable

their existing business as well as to open up new revenue

streams. However, the impact of IT-related factors on a

telcos business performance often remains unquanti-

fied in the breakneck race to stay ahead.

McKinseys annual telecoms IT benchmarking survey

provides strong empirical evidence of how dramatically

telcos IT architecture impacts their business perfor-

mance (Exhibit 1). Significant performance gaps areapparent between operators with lean IT architecture

and those with a highly complex and fragmented land-

scape. The difference in t ime to market, for example, is

striking: two weeks versus 32 weeks for a similar prod-

uct bundle. IT spend, too, is around 70 percent higher

for laggards than for best-practice mobile operators.

The survey revealed three key differentiators in top per-

former approaches to their IT architecture:

A consolidated application landscape per domain. The

number of applications per domain clearly appears to

influence an operators ability to drive the efficiency and

effectiveness of their operations. The survey showed

that operators with fewer applications perform substan-

tially better than comparable competitors with a large

number of applications. Best-performing mobile telcos

have 97 applications per domain on average, while lag-

gards have 168.

Use of standard software packages.Standard pack-

age functionality enhances business agility and drives

down operational cost. The IT architecture of best per-

formers is predominantly based on standard software

packages in key domains, whether billing, CRM, or ERP.

Mobile best performers spend 45 percent of their total

software budget on software packages, while the figure

for laggards is only 20 percent. These players rely on

proprietary solutions for the rest.

High level of data integration. Highly integrated archi-

tecture greatly enhances a telcos capability to drive

product innovation and successfully commercializetheir new products. The higher the degree of data inte-

gration (fewer customer databases, for instance), the

shorter the operators time to market. This translates

into a greater ability to push market innovation and gain

competitive advantage.

The large gap i

Date post:	06-Apr-2018
Category:	Documents
Upload:	kentselve
View:	215 times
Download:	0 times

McKinsey Telecoms. RECALL No. 13, 2010 - Leveraging IT

Documents