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Ultralow-Cost Mobile A New Operating Model for Network Operators
Perspective Roman FriedrichGeorge ApplingAshish Sharma Hadi Raad
Booz & Company
Contact Information
Beirut Bahjat El-Darwiche Partner +961-1-985-655 [email protected]
Hadi [email protected]
Delhi Ashish [email protected]
Dubai Karim Sabbagh Partner +971-4-390-0260 [email protected]
Düsseldorf Roman Friedrich Partner +49-211-3890-165 [email protected]
Greater China Dr. Edward Tse Senior Partner +86-10-6563-8300 +852-3650-6100 +86-21-2327-9800 [email protected]
Houston George Appling Partner +1-713-650-4143 [email protected]
Kenny Kurtzman Partner +1-713-650-4175 [email protected] LondonMichael Knott Partner [email protected]
Madrid José Arias Partner +34-91-411-5121 [email protected]
Melbourne Simon Gillies Partner +61-3-9221-1903 [email protected]
Milan Luigi Pugliese Partner +39-02-72-50-93-03 [email protected]
MoscowSteffen Leistner Partner [email protected]
Mumbai Jai Sinha Partner +91-22-2287-2001 [email protected] New York Christopher Vollmer Partner +1-212-551-6794 [email protected]
Paris Pierre Péladeau Partner +33-1-44-34-3074 [email protected]
San Francisco David Standridge Partner +1-415-281-4995 [email protected]
São Paulo Ivan de Souza Senior Partner +55-11-5501-6368 [email protected]
Tokyo Paul Duerloo Partner +81-3-6757-8615 [email protected]
Ashish Bhatia, Neha Grover, Kabir Iqbal, Aditya Paranjpye, Pierre Péladeau, Karim Sabbagh, Aishwarya Sridhar, and Peter Weichsel contributed significantly to this Perspective.
1Booz & Company
EXECUTIVE SUMMARY
Faced with evolving technology, vast opportunity, and, it must be said, falling per-user revenue in most global markets, mobile network operators (MNOs) are considering ways to reduce their expenses to maximize profits and efficiency. But cutting costs cannot be—as it traditionally has been—a one-off, across-the-board exercise. An indiscriminate paring down of costs will leave the company worse off than when it started.
All MNOs must instead learn to nurture and bolster their most strategic strengths and capabilities, even when cutting costs. An ultralow-cost mobile (ULCM) operating model can enhance both efficiency and effectiveness. For some, it may even be at the heart of their strategy.
Using this holistic approach—which involves evaluating not just where to cut costs, but where to focus resources—enables telecom companies to better understand their markets and how their strategy fits. Whether your company operates primarily in rich markets or poor—or across both—ULCM offers you the opportunity to change the way your company operates, save money, and increase revenue.
This Perspective explains how mobile players can migrate to a ULCM model, taking into account every aspect of the mobile value chain—network operations; marketing, sales, and distribution; and outsourcing. It presents the holistic cost-cutting approach to operational efficiency and shows how to optimize infrastructure, delivery, and marketing expenses while strengthening your ability to compete.
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In the global telecommunications industry, cost leadership has emerged as one core strategy toward gain-ing competitive advantage. Mobile telephony, in particular, is a rapidly growing sector where average revenue per user (ARPU) is nevertheless dropping over time in most markets. Thus, mobile network operators have an opportunity to gain competitive advantage by using the appropri-ate method of cutting costs to grow stronger.
Traditional cost-cutting programs typically cut expenses across the board, trying to spread the pain more or less equally. This often results in indiscriminate cost reduction, based
on industry templates and market-place benchmarks, rather than a holis-tic approach that takes into account the company’s context in the market. If you are a leading mobile telecom executive approaching costs this way, you are, in effect, basing your company’s decisions on what your competitors and other companies are doing, not on your particular strategic direction. It may reduce expenses in the very short term, but it fuels inco-herence and loss of market advantage over the long term.
An effective cost-cutting exercise should recognize that many expenses are discretionary and should be treated as potentially expendable. Some costs will be necessary to “keep the lights on” (investing only to the minimum extent required) or as “table stakes” (investment that you and your competitors must all make to play in the market). But these expenses should be optimized to the maximum.
Other costs are pertinent to your strategy; these represent distinctive
market-winning capabilities that enable your company to stand out from competitors. Though it is helpful to review costs and bolster productiv-ity, you should continuously support and strengthen these capabilities, regardless of the current economic climate. In telecom companies, a stra-tegic focus on cost will generally lead to a new focus on maximizing yield management and utilization, because these factors have a significant impact in building a distinctive telecom service.
The result of this cost-cutting exercise should be an ultralow-cost mobile transformation program that can increase profitability in all markets, including the subscriber-dense cities of the developing world, and more developed markets with high ARPU such as the U.S. and western Europe. The transition to ULCM involves a conscious and comprehensive effort to improve cost efficiencies and yield by 15 to 20 percent in each cost category.
COST CUTTING AS A HOLISTIC ENDEAVOR
A strategic focus on cost will generally lead to a new focus on maximizing yield management and utilization.
3Booz & Company
Exhibit 1 ARPU Has Limited Correlation with EBITDA
Source: Merrill Lynch Matrix, 2009; company annual reports; Booz & Company analysis
OF THE PAST THREE YEARS WAS HELPFUL BUT NOT SUFFICIENT TO PUT THE U.S. AUTO INDUSTRY BACK ON TRACK.
60%
50%
40%
30%
20%
10%
Industry restructuring put the industry on a path to achieving
full return on invested capital
Industry restructuring helped to address fundamental weaknesses
but did not go far enough
Industry restructuring was a missed opportunity to address
fundamental structural weaknesses
37%35%
53% 52%
11%13%
OEMSupplier
Per
cent
age
of R
esp
ond
ents
Marketing
2,200
2,250
2,300
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2,500
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2,600
2,650
2,700
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2,900
2,950
3,000
3,050
8,000
8,200
8,400
8,600
8,800
9,000
9,200
9,400
9,600
9,800
10,000
10,200
10,400
10,600
10,800
5/225/155/85/14/24
Nikkei
Nikkei
Sony
Sony
4/174/104/33/273/203/133/62/27
-1%
-18%
-12%
-19%
5/29
SONY CORPORATION VS. NIKKEI 225 INDEX(TOKYO STOCK EXCHANGE CLOSING PRICES IN JAPANESE YEN)
Japanese Earthquake Sony PSN Data Breach
0 5 10 15 20 25 30 35 40 45 50 55 60 65
EBITDA Margin (%)
ARPU (US$)
VimpelCom
MTSGlobe
Kyivstar
UMC DiGi
Maxis
Smart
Vodafone Spain
Telefónica
MTN
VodacomO2 U.K.
Orange U.K.Vodafone U.K.T-Mobile
AT&TVerizon
TIM BrazilClaro Brazil
Vivo BrazilOptus
Telstra KDDI
NTT DoCoMoChina Mobile
Idea
Bharti Airtel
Reliance Communications
R2 = 0.012
MOBILE EBITDA (ACROSS DEVELOPED AND DEVELOPING MARKETS)
Mature Markets
Developing Markets
0
15
30
45
60
75
To successfully move toward ULCM, operators must first develop a basis for judging expenses: a metric that indicates the strategic value of investments. Though ARPU has traditionally been considered a key driver and indicator of profitability for MNOs, the link between ARPU and earnings (in the form of EBITDA) is tenuous at best. MNOs in emerging
markets, with ARPUs of less than US$5, often have higher EBITDA margins than their counterparts in higher ARPU markets (see Exhibit 1).
The cellphone tower, or base transceiver station (BTS), is a more precise indicator of profitability than ARPU or even subscriber base. By increasing efficiency
THE ULTRALOW-COST APPROACH
4 Booz & Company
and simultaneously enhancing effectiveness at every BTS, operators may achieve improved EBITDA and enhanced overall profitability.
With its focus on the BTS, ULCM has some similarities with what many MNOs call the “minutes factory” approach, which is commonly applied in India and is expanding into other
developing markets. This approach is characterized by a combination of low costs and extremely high network utilization, which results in relatively higher yield per BTS despite marginal ARPUs. ULCM goes a step further by aggressively working to optimize efficiency by lowering costs throughout the entire mobile value chain, not just at the BTS.
The ULCM approach increases efficiency by lowering costs. The total cost of ownership (TCO) per BTS varies widely from market to market (see Exhibit 2), but there is room for improvement in even the most efficient Indian markets. TCO per BTS generally correlates significantly higher with EBITDA than with ARPU. This suggests that EBITDA
Exhibit 2 There Is a Wide Variation in Costs per Base Transceiver Station Globally
Notes: TCO calculated on operating expenses plus 10% opportunity cost of capital (on net block); end-of-year subscriber numbers used in the metric; average exchange rate for the period: ¤1 = US$1.3. Operating expenses include network, customer servicing, IUC, license, personnel, and SG&A expense (excludes annual depreciation). Source: Annual reports; analyst reports; news articles; company websites; Merrill Lynch European Telecom Wireless and Broadband Matrix, Q1 2010; TeleGeography; Booz & Company analysis
OF THE PAST THREE YEARS WAS HELPFUL BUT NOT SUFFICIENT TO PUT THE U.S. AUTO INDUSTRY BACK ON TRACK.
60%
50%
40%
30%
20%
10%
Industry restructuring put the industry on a path to achieving
full return on invested capital
Industry restructuring helped to address fundamental weaknesses
but did not go far enough
Industry restructuring was a missed opportunity to address
fundamental structural weaknesses
37%35%
53% 52%
11%13%
OEMSupplier
Per
cent
age
of R
esp
ond
ents
Marketing
2,200
2,250
2,300
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2,950
3,000
3,050
8,000
8,200
8,400
8,600
8,800
9,000
9,200
9,400
9,600
9,800
10,000
10,200
10,400
10,600
10,800
5/225/155/85/14/24
Nikkei
Nikkei
Sony
Sony
4/174/104/33/273/203/133/62/27
-1%
-18%
-12%
-19%
5/29
SONY CORPORATION VS. NIKKEI 225 INDEX(TOKYO STOCK EXCHANGE CLOSING PRICES IN JAPANESE YEN)
Japanese Earthquake Sony PSN Data Breach
15,374.7
TCO/BTS (US$ per month)
Western Europe 2Developed Asia 1Western Europe 1
Africa 1MENA 2
ASEAN 5ASEAN 4
Eastern EuropeMENA 3
ASEAN 2ASEAN 1Filipino 1
ChinaIndia 3India 2India 1 3,076
3,398
5,1535,7615,969
8,7309,0479,119
12,52013,556
14,77917,230
18,373
23,745
33,25662,503
COST BENCHMARKING: TCO PER BTS, 2009
5Booz & Company
is related not to the cost of capacity that is actually used in service, but to the total cost of capacity, whether it is used or not.
It also increases effectiveness by improving the yield (revenue) per BTS, which is also much more strongly correlated to EBITDA than is ARPU.
Maximizing minutes of use per customer will produce better
distribution of your installed fixed cost base. Given that the fixed cost incurred in creating and operating a network typically accounts for 65 to 70 percent of the total cost, high usage per customer is critical to the overall profitability of telecom companies. There is significant room for improvement on this front—for instance, India, which has among the highest minutes of use per customer globally, clocks only about 13
minutes per customer per day, or 394 minutes per month. And only seven countries have such high levels of utilization. This suggests significant room to increase usage per customer in both developed and developing markets. Meanwhile, operators in developing economies—notably China and India—have a simultaneous opportunity to substantially increase average revenue per minute (ARPM) per BTS (see Exhibit 3).
Exhibit 3 Depending on Market Maturity, MNOs Can Create Additional Value by Either Stimulating Usage or Enhancing Yield per BTS
Note: Figures for all western European nations and Korea are for 2008. Source: Merrill Lynch Wireless Matrix, Q3 2009; Global Insight; Informa; Booz & Company analysis
OF THE PAST THREE YEARS WAS HELPFUL BUT NOT SUFFICIENT TO PUT THE U.S. AUTO INDUSTRY BACK ON TRACK.
60%
50%
40%
30%
20%
10%
Industry restructuring put the industry on a path to achieving
full return on invested capital
Industry restructuring helped to address fundamental weaknesses
but did not go far enough
Industry restructuring was a missed opportunity to address
fundamental structural weaknesses
37%35%
53% 52%
11%13%
OEMSupplier
Per
cent
age
of R
esp
ond
ents
Marketing
2,200
2,250
2,300
2,350
2,400
2,450
2,500
2,550
2,600
2,650
2,700
2,750
2,800
2,850
2,900
2,950
3,000
3,050
8,000
8,200
8,400
8,600
8,800
9,000
9,200
9,400
9,600
9,800
10,000
10,200
10,400
10,600
10,800
5/225/155/85/14/24
Nikkei
Nikkei
Sony
Sony
4/174/104/33/273/203/133/62/27
-1%
-18%
-12%
-19%
5/29
SONY CORPORATION VS. NIKKEI 225 INDEX(TOKYO STOCK EXCHANGE CLOSING PRICES IN JAPANESE YEN)
Japanese Earthquake Sony PSN Data Breach
Stimulate usage
0
0.04
0.08
0.12
0.16
0.20
0.24
5004504003503002502001501000
Venezuela
Ukraine
Turkey
Spain
Sweden
Russia
Poland
Peru
Portugal
ARPM (US$)
Average Minutes of Use Per Customer Per Month
Pakistan
New Zealand
Netherlands
Morocco
Mexico
Korea
Japan
Italy
IsraelHungary
Germany
France
Egypt
Denmark
ColombiaChina
Brazil
Belgium
AustriaUkraine
Australia
ArgentinaSingapore
Laos
Sri Lanka
Malaysia
ThailandVietnam
Philippines
Bangladesh
Indonesia
India
Maintain Enhance yield
6 Booz & Company
From a network perspective, higher usage per BTS is a direct result of a higher customer usage market strategy in general. It also encompasses non-voice usage such as short message service (SMS), an offering that MNOs in the Philippines have used to their advantage. Further, it incorporates higher spectral efficiency. MNOs in the 900 MHz band typically need fewer base stations to cover the same area, all other factors being equal, and thus enjoy higher utilization than those operating in, say, the 1800 MHz band in voice (data networks may have additional considerations).
In addition, while encouraging usage, it is critical to combine it with better
ARPM to maximize overall yield. An indiscriminate offering of “all you can eat” plans is perhaps not the best way to embark on this strategy; ideally, such plans should be offered only after an appropriate analysis of the calling patterns of various customer segments.
Contrary to the conventional wisdom in the industry, operators in low ARPU markets such as India do not have a cost structure that is very different from those in more industrialized parts of the world. A quick scan of the cost baskets in any given TCO model reveals that all elements contribute more or less uniformly to the overall
cost base irrespective of geography, although the absolute cost base differs significantly. From largest to smallest with respect to both their contribution to the cost base and the size of the difference across geographies, these cost components include the following:
Technology (network and IT)•
Marketing (sales, distribution, • subscriber acquisition, and customer service)
General and administrative (G&A; • includes regulation-related costs)
While encouraging usage, it is critical to combine it with better ARPM to maximize overall yield.
7Booz & Company
Technology expenses are common to all geographies, and they can be broken down generally into four categories: passive network infrastructure, active network infrastructure, data delivery, and maintenance.
For the purposes of cutting costs meaningfully, it is important to consider passive and active infrastructure separately.
Network costs typically account for the single largest component of TCO, irrespective of geography. That is why the network is an obvious first choice for any cost-cutting exercise, and why periodic network evaluations are one key to containing expenses. Moreover, during the next few years, the network cost component is likely to increase further because of projected growth in demand for mobile broadband.
Passive Network InfrastructureIn the passive network, towers, leases, and rentals contribute the bulk of expenses, followed by energy costs.
MNOs employ several measures to contain these costs. Sharing passive facilities is the most widely known tactic; it has been standard practice in western European countries and India, and is fast finding acceptance among MNOs in Africa as well. Two recent examples, both announced in December 2010, are the Millicom deal with Helios Towers in the Democratic Republic of Congo, and MTN and American Tower’s joint venture in Ghana.
Divestiture is another option. An increasing number of operators
have begun to spin off their tower businesses as separate entities or sell passive assets to specialist tower companies. Enhanced tenancy, arising from such tower sharing deals, can result in 5 to 7 percent lower network operating expenses.
After tower costs, the second most significant cost savings often comes from reducing the energy costs of a tower setup. The current energy system in most developing nations in Asia and Africa presents a double whammy for telecom players. First, inadequate grid power results in ballooning energy costs; second, the typically unpredictable power supply requires backup generators. Battery backup is sufficient for most power outages, but generators are needed to run the air-conditioning that keeps the batteries cool. In developing nations with poor socioeconomic conditions, fuel theft may add to the cost. Thus, something that is not actually required to run the network ends up adding significant cost.
There are several ways of reducing expenses related to passive infrastructure. Start with a thorough root cause analysis of the energy setup as well as the overall tower design. This should ideally be done before a service is built and rolled out. For example, negotiate tower tenancy deals so that energy expenses are paid by the tower company rather than passed through to the operator; otherwise, you will bear the cost but have a limited operational role for making improvements. Next, look for energy-efficient shelter equipment; recent advances in materials technology help eliminate the need for local generators, reducing both capital
OPTIMIZING TECHNOLOGY INVESTMENT
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costs in generator purchase and operational expenditure. Also explore green sourcing of electricity, shifting consumption to renewable energy and reducing your company’s carbon footprint; this can allow you to take advantage of government incentives and subsidies, while fulfilling social objectives. If you are already in business, these measures are still appropriate, but redeployment costs may diminish or even entirely erode your gains.
Active Network InfrastructureThese network costs are driven by the geographic dispersion of customers
and their usage patterns for voice versus data. These factors determine the number of BTS sites needed, the required capacity per BTS, and the attendant backhaul costs.
To optimize all these factors, look at your active infrastructure expenses from several angles: technology used, backhaul costs, and maintenance costs. One mobile telecom provider mapped its current usage levels across an entire BTS network to optimally allocate planned investments (see Exhibit 4). Network planners found that highly utilized sites, and those with increased traffic, are prime
candidates for additional BTSs and/or for the rollout of enhanced 3G or 4G technologies. This can ensure a continued high-quality consumer experience and proactively protect the flow of revenue. To manage high growth on moderately utilized sites, MNOs can design targeted offerings to customers to evenly spread usage throughout the day and balance traffic growth. MNOs in Africa and India are, with varying degrees of success, experimenting with BTS-level dynamic tariff plans. Such initiatives should be carefully introduced to temper the excitement around the offers, with adequate transparency
Exhibit 4 Base Transceiver Station Assessment for Cost Optimization
Source: Booz & Company analysis
A
C
B
OF THE PAST THREE YEARS WAS HELPFUL BUT NOT SUFFICIENT TO PUT THE U.S. AUTO INDUSTRY BACK ON TRACK.
60%
50%
40%
30%
20%
10%
Industry restructuring put the industry on a path to achieving
full return on invested capital
Industry restructuring helped to address fundamental weaknesses
but did not go far enough
Industry restructuring was a missed opportunity to address
fundamental structural weaknesses
37%35%
53% 52%
11%13%
OEMSupplier
Per
cent
age
of R
esp
ond
ents
Marketing
2,200
2,250
2,300
2,350
2,400
2,450
2,500
2,550
2,600
2,650
2,700
2,750
2,800
2,850
2,900
2,950
3,000
3,050
8,000
8,200
8,400
8,600
8,800
9,000
9,200
9,400
9,600
9,800
10,000
10,200
10,400
10,600
10,800
5/225/155/85/14/24
Nikkei
Nikkei
Sony
Sony
4/174/104/33/273/203/133/62/27
-1%
-18%
-12%
-19%
5/29
SONY CORPORATION VS. NIKKEI 225 INDEX(TOKYO STOCK EXCHANGE CLOSING PRICES IN JAPANESE YEN)
Japanese Earthquake Sony PSN Data Breach
Medium (30%-60%)Low (<30%) High (>60%)
BTS Utilization (%)
Medium (0%-10%)
MonthlyTraffic Growth
Low (<0%)
High (>10%)
BTS UTILIZATION GRID (% OF TOTAL BTSs)
Targeted 3G rollout
Backhaul optimization
Dynamic pricing
Relocation/active sharing
9Booz & Company
to neutralize any negative consumer experience related to either congestion (arising from higher-than-expected usage) or disappointment with price (typically related to actual-versus-perceived discounts).
Sharing active infrastructure may be appropriate only for markets where network coverage is stable and offers no competitive advantage. Other markets, where coverage and quality offer scope for differentiation, should be considered for active sharing at a later stage, when additional investments no longer lead to a disproportionate market advantage (see “The Outsourcing Dilemma,” page 10).
Data Delivery A disproportionate increase in data network traffic compared with voice is the direct fallout of increased mobile broadband usage.
Some customer-oriented features of mobile data traffic also affect costs differently. Data cards, which often complement (or substitute for) fixed broadband, disproportionately increase the backhaul cost. To increase battery life, smartphones terminate the connection after content is cached and reestablish the link when the user refreshes. This frequent signaling causes excess loading at the gateways, and hence adds to the cost base.
In general, MNOs should enhance their most important capabilities
by redeploying resources from less essential activities. Understanding the nature of data delivery costs is critical. For example, 3G and 4G technologies dramatically enhance customer experience and build loyalty. But to offer these services, significant investments are necessary and need to be sharply targeted.
While 3G and 4G technologies deliver data significantly more efficiently than 2G service, the cost benefit of deploying the newer technology may kick in only when the number of users per BTS—each enjoying an average throughput of, say, 100 Kbps—crosses a specific threshold. The breakeven point varies, depending on network configuration and usage patterns; but when the number of users per BTS remains below the threshold or the throughput required remains low, the delivery cost per user is actually much higher for 3G or 4G compared to 2G technologies. Therefore, it is sometimes pragmatic to consider phased deployment of these technologies, initially targeting areas that offer optimal customer usage, demand, and competitive advantage.
Backhaul costs are slated to make up an increasingly large portion of the overall cost base, with the increase in data usage. A Booz & Company analysis of MNOs in four diverse geographies—the U.S., the U.K., Indonesia, and Malaysia—reveals across-the-board increases in backhaul costs during the next
five years. For example, at one U.S. operator, backhaul costs are expected to jump from 12 percent of network costs in 2011 to 29 percent by 2016. In Malaysia, backhaul costs will more than triple during the same time period, from 11 percent to 34 percent.
Maintenance Maintenance costs may be pruned on at least two fronts. The first is multi-vendor managed services. Many MNOs have operations and maintenance contracts bundled into active infrastructure and annual maintenance contracts for field maintenance. By separating out maintenance in equipment provider contracts, standardizing service-level agreements (SLAs), and using key performance indicators (KPIs) along with consolidated bidding to enhance volume discounts, MNOs can potentially reduce these costs by 10 to 15 percent. Operators can also negotiate contracts with more sophistication to avoid horizontal (across geographies) as well as vertical (across platforms such as GSM, VAS, 3G, etc.) proliferation of maintenance costs.
The second front is tiered site maintenance. Instead of standardizing SLAs across many BTS sites, an MNO can treat each BTS differently, with SLAs designed to match the revenue yield and potential of each site. This type of differentiated negotiation can yield further savings on maintenance costs.
10 Booz & Company
The Outsourcing Dilemma
ULCM is usually equated with an outsourcing model. Indeed, many MNOs in India, where low cost is always a prevalent concern, do rely heavily on outsourcing; yet some of the lowest-cost operators do not.
With respect to specific areas of network operations, the outsourcing of passive components (towers, energy, leases, and rentals), field staff, and outside plant maintenance—which together constitute about half of the total network spend—normally offers clear benefits.
Outsourcing active components—whereby the network vendor maintains the active parts and bills on the capacity delivered—may not by itself guarantee such benefits. When evaluating active component outsourcing, look for the following characteristics:
The outsourced task is neither a core competence of your MNO nor a • critical success factor for your service.
The contractor can and will bring scale that you cannot achieve without • outsourcing.
The contractor has unmatched operational competence.•
Compared to you, the contractor has better ways to rationalize • operational efficiencies through lower head count and other factors.
The outsourcing of active network components may also be appropriate if you wish to focus on more significant investments in other parts of your value delivery network.
Finally, savings from outsourcing G&A may amount to 7 to 10 percent of the company’s total manpower and G&A budget. But outsourcing will not always be the most desirable step for cost reduction, especially when it offers only short-term benefits.
Before any action is taken, each function that is considered for outsourcing should be consolidated and then evaluated. Even then, an MNO should think twice before outsourcing service components that are critical to its competitive advantage. For example, an operator that excels on the basis of its market-facing capabilities may opt to retain full control of country-level network planning and monitoring—two strategically significant activities, given the crucial nature of the staggered rollout of data delivery services.
MNOs can consider outsourcing decisions on a continuum, with this range of possibilities:
Ship It, Then Fix It: Outsource functions and then leave it to the outsourcing vendor to make whatever changes are optimal to improve performance. This approach is best used when the MNO needs to make bold moves fast and has relatively simple business models that are not interconnected.
Diagnose It, Then Ship It: Determine what improvements are necessary to improve performance and then instruct the outsourcing vendor on how to implement them. This method is best used when business processes and models are tightly intertwined, and when organizational buy-in is required on what and how to improve.
Fix It, Then Ship It: Undergo all design and implementation of improvements first, and then hand off to the outsourced vendor to execute on an ongoing basis. This approach is best used in MNOs that rely heavily on consensus-based management and are largely process-driven, and where the corporate culture is very strong.
11Booz & Company
MNOs in the Philippines have the lowest marketing costs in the world—both in absolute terms (per subscriber) and as a percentage of revenues. That’s because the Filipino market is primarily characterized by prepaid, standardized SMS product offerings. Every market is different, of course, but MNOs may identify relevant approaches to enhancing efficiency by studying the successes of operators in other regions. The possibilities include the following:
Improved Sales and Distribution Telecom markets making the transition to 3G or 4G, especially those in emerging countries, tend to have sharply diverse markets
coexisting. Low-income and high-income consumers sign up for different types of services. In these markets, there is steady pressure to introduce lower-denomination vouchers, to fit the budgets of progressively lower-income consumers. For example, Indian operators now offer top-up vouchers—additional credit purchases on existing prepaid accounts—in denominations as low as 5 rupees (11 cents U.S.). At the same time, often within the same BTS geography, tech-savvy customers are purchasing interactive “learn–experience–transact” (LET) data-driven products and solutions.
OPTIMIZING MARKETING
MNOs may identify relevant approaches to enhancing efficiency by studying the successes of operators in other regions.
12 Booz & Company
In such complex markets, a comprehensive strategy, which has been known to reduce overall sales and distribution spends by 4 to 5 percent, may be required to keep costs down while maximizing revenue through efficiency.
First, telecom companies may benefit from targeting specific product ranges to specific consumer groups: bottom-of-the-pyramid customers, existing customers, and the new, more technologically sophisticated LET segments.
Establishing relationships with capable partners—in logistics, BTS utilization, and the monitoring and servicing of distributors of low-end products and LET outlets—is also essential to managing costs.
Finally, firms should use new technology to better oversee the entire process to minimize distributor fraud, habitual churn, customer acquisition fraud, and more.
Better Customer Service and AcquisitionCosts for both customer service and acquisition tend to increase with a large, transaction-oriented prepaid customer base. Prepaid customers often remain on the lookout for the most attractive offers; as a result, telecom players are faced with high turnover and excessive inquiries to call centers about potentially cheaper plans. Operators might, therefore, consider becoming more efficient by deploying new cost approaches in a few key, customer-oriented subfunctions.
In particular, activation commissions for gross additions tend to add to costs without guaranteeing future customer spending. Odds are that no operator will ever completely eliminate such commissions—at least not in the near future. However, some MNOs are gradually converting them to deferred payouts linked to ongoing customer spending. While this has not led to any immediate cost reduction, it has certainly resulted in a higher-
quality customer base. Operators can also achieve a higher-quality base, especially in the prepaid market, by using new technology to track customers who engage in habitual churn (e.g., tracking the handset through its IMEI).
The term “high-quality customer base” should not be interpreted to mean “high-spending customer base.” One operator’s analysis of its call records in a particular market revealed that nearly 6 percent of the customers were returning an overall loss to the MNO, regardless of gross billing, and that these users were evenly spread across all ARPU categories. The situation was largely driven by user–product mismatch—which can be fixed by analyzing recent call data records to redesign usage and retention promotions— and the high cost of customer service. Customer service costs can be minimized by using interactive voice recording, charging for certain types of customer service calls, or consolidating and/or outsourcing
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customer service. However, caution must be exercised to minimize any possible negative impact on customer experience.
Addressing Handset Subsidies For telecom players in more developed markets like western Europe and the U.S., the highest burden on opera-tional expenditure remains mobile device subsidization. This is a critical area, as the advent of smartphones may further exacerbate this situa-tion. There are no easy fixes to this problem, but some considerations may offer a chance to potentially cap the burden, or perhaps even reduce it in percentage terms.
First, with the emergence of prepaid services in developed markets, as well as session-based pricing, there may be an opportunity to finally decrease overall handset subsidies. Moreover, there is evidence that consumers want to have a single contract for all of their devices even though only the first on the plan is subsidized.
Second, carrier supply chain opti-mization has significant potential to reduce costs. For example, for one operator selling 5 million phones per year with an average price per phone of $100 and an ARPU of $20, moving to global best-in-class performance across select supply chain KPIs—such
as order fulfillment lead time, point-of-sale availability, and inventory turns—would result in an EBITDA boost of $50 million.
Most MNOs in emerging economies have either given up retailing handsets altogether or entered into franchise agreements with independent third-party distributors (including their air-time distributors). Such agreements, if permissible, may offer the option of allowing cross-subsidization between the airtime business and the not-so-lucrative handset business by third-party distributors, and may provide a last-ditch option for European and U.S. MNOs.
In developed markets, the greatest burden on telecom operational expenditure is handset subsidization.
14 Booz & Company
Typically, telecom operators have expanded their businesses through new products and new markets. As a result, MNOs have also grown vertically, and these silos may need to be broken down through consolidation and outsourcing in order to make the organizational structure tighter, nimbler, and more responsive.
As you undertake a review of your overall organization, G&A, and manpower structure, keep four objectives in mind: drive growth by enhancing your most important capabilities, achieve cost efficiencies, enhance market focus, and minimize disruption.
These objectives are best achieved by both organizational restructuring and process reengineering.
Organizational Restructuring This usually entails a series of moves designed to enhance local presence and accountability while simultaneously consolidating select back-end functions. A typical restructuring initiative should include a few crucial steps: create responsibilities and departments, consolidate certain functions, and outsource others.
First, operators can carve out separate profit and loss responsibility for zone managers within a country, while establishing a better sales and distribution system. This may lead to greater market oversight. Along with such new responsibilities, the MNO can also create a new department of localized content and online applications—games, or guides to tourist attractions or neighborhood services—to create and deliver content specific to each zone.
To further streamline operations, MNOs can consolidate the regulatory, finance, and customer care departments at the country/regional level, taking into account local language services, cultural sensibilities, legal requirements, and the maintenance of established service levels.
Process ReengineeringMNOs can also consider redesigning back-end processes, particularly those open to consolidation and outsourcing. This will enable an MNO to outsource units with clear mandates, performance indicators, and service levels, thus fostering greater efficiency.
Reengineering is even more beneficial if the scope of consolidation is large and the unit has unwieldy processes, operations in multiple locations, limited internal oversight, and a culture where every regional group operates as if it were unique and separate.
Circle/zonal-level consolidation is the ideal first step in such a case, enabling not only a deeper understanding of processes, but also a de-layering of the organization. These are likely to facilitate the standardization of technology, better bundling of service, and improved formulation and standardization of the SLA.
Whether—and what—to outsource is an important decision that should be considered only after an MNO has undergone organizational restructuring and process reengineering. Any outsourcing decision needs to take into account criteria that are central to the company’s overall strategy.
RESTRUCTURING THE ORGANIZATION
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A cost program, if carelessly executed, can turn into a one-off exercise, with either old costs creeping back over a period of time or new undesirable costs emerging—thus offsetting any intended gains.
Truly sustainable cost programs require, first of all, culture change, in which cost consciousness is institutionalized and embedded in everyday practice. This type of overall cultural transformation is best driven by frequent and visible involvement of the organization’s leadership, senior management, and CEO, acting through a wide spectrum of change agents spread across the organization.1 Ongoing research into and practice of the “smart program office” suggests that culture change is a critical first step to building effectiveness and efficiency.
Part of that involvement must include proactive communication and shared “moments of truth” to maintain momentum and demonstrate commitment to the program.
Second, and perhaps equally important, only those elements that are measured can be embedded into the organization’s DNA and acted on. Thus, the myriad changes involved with this program must be quantified, embedded into the operating metrics, and tracked on an ongoing basis, with a direct link to individual performance and rewards. Cost-cutting exercises are worthwhile only if they are engaged in holistically, impacting the entire organization from the top down. Focusing on your organization’s capabilities will help you understand where you can
MAKING IT SUSTAINABLE
Cost consciousness must be institutionalized and embedded in everyday practice.
16 Booz & Company
consolidate or outsource, and where you must channel your resources, thereby enhancing your competitive advantage without compromising quality or functionality. A ULCM program is likely to result in increased returns, regardless of the market.
Properly executed and sustained, ULCM has the potential to produce dramatic improvements in your overall competitiveness. Even best-in-class low-cost operators in India and the Middle East and North Africa (MENA), for example, can realize substantial savings (see Exhibit 5). A
MENA operator was able to reduce its TCO/BTS costs by 65 to 70 percent, down to the baseline of a low-cost operator in India, which, in turn, reduced its own TCO/BTS costs by more than 25 percent, to ULCM levels.
Exhibit 5 Operators Have Significant Potential to Substantially Reduce Costs Using a ULCM Approach
Notes: Incremental revenues from higher utilization arising from increased minutes of use have been translated to proportional cost savings. Network and IT, marketing, and G&A are calculated from operator balance sheets. The impact of ULCM has been calculated on the overall 100% TCO/BTS for MENA operator. Other factors like active infrastructure, data delivery, and general expenses also offer potential savings via ULCM but are difficult to estimate without a detailed understanding of operator cost structure. Source: Booz & Company analysis
60%
50%
40%
30%
20%
10%
Industry restructuring put the industry on a path to achieving
full return on invested capital
Industry restructuring helped to address fundamental weaknesses
but did not go far enough
Industry restructuring was a missed opportunity to address
fundamental structural weaknesses
37%35%
53% 52%
11%13%
OEMSupplier
Per
cent
age
of R
esp
ond
ents
Marketing
2,200
2,250
2,300
2,350
2,400
2,450
2,500
2,550
2,600
2,650
2,700
2,750
2,800
2,850
2,900
2,950
3,000
3,050
8,000
8,200
8,400
8,600
8,800
9,000
9,200
9,400
9,600
9,800
10,000
10,200
10,400
10,600
10,800
5/225/155/85/14/24
Nikkei
Nikkei
Sony
Sony
4/174/104/33/273/203/133/62/27
-1%
-18%
-12%
-19%
5/29
SONY CORPORATION VS. NIKKEI 225 INDEX(TOKYO STOCK EXCHANGE CLOSING PRICES IN JAPANESE YEN)
Japanese Earthquake Sony PSN Data Breach
Medium (30%-60%)Low (<30%) High (>60%)
BTS Utilization (%)
Medium (0%-10%)
MonthlyTraffic Growth
Low (<0%)
High (>10%)
BTS UTILIZATION GRID (% OF TOTAL BTSs)
A
C
B
Targeted 3G rollout
Backhaul optimization
Dynamic pricing
Relocation/active sharing
Achieved TCO/BTS
(ULCM)
G&AMarketing &
Contracts
Passive Infrastructure
Active Infrastructure
Existing TCO/BTS
(India)
Procure-ment
G&AMarketingNetwork& IT
UtilizationTCO/BTS(MENA)
100%
FACTORS CONTRIBUTING TO REDUCED TCO/BTS
~20%-22%
~15%-17%~12%-15%
~-5%-7%
~10%-12% ~4% ~2% ~2%~4%
~30%-35%
~22%
Efficiency measures
Effectiveness measures
Impact of ULCM
Booz & Company 17
Endnote
1 For more details, please visit the Katzenbach Center at www.booz.com/global/home/what_we_think/katzenbach_center.
Cost cutting is a necessity in today’s telecom industry, and global averages vary significantly. However, a strategy that evaluates which areas to pare and where to invest will result in a com-pany actually growing stronger and being able to better compete in the market. This requires enhancing both effectiveness and efficiency across the entire organization ecosystem—increased utilization resulting from a customer and BTS perspective, a judicious investment plan that strengthens the customer experience, and a rationalization of the organiza-tion and market functions to match your company’s strategy and customer behaviors.
Most important, embedding a culture of continuous cost improvement requires consistency of perspective, metrics, and culture, driven top-down. The choices are many; some of them have been illustrated above. The filter is equally critical.
CONCLUSION
About the Authors
George Appling is a partner with Booz & Company based in Houston. He primarily advises telecom operators, device manufacturers, and retailers. His focus areas include marketing and branding, sourcing and supply chain transformation, organizational improvement and change management, and retail strategy.
Roman Friedrich is a partner with Booz & Company based in Düsseldorf and Stockholm. He leads the firm’s communi-cations, media, and technology practice in Europe, and specializes in the strategic transformation of these industries in the context of digitization.
Ashish Sharma is a principal with Booz & Company based in Delhi. He leads the firm’s communications, media, and technology practice in India, and has most recently advised telecom operators on new revenue models arising out of the digitiza-tion of industries.
Hadi Raad is a principal with Booz & Company based in the Middle East. He focuses on entrepreneurship and innovation, over-the-top broadband appli-cations, cross-industry digitization, new business models, and convergence in com-munications, digital media, and technology.
©2011 Booz & Company Inc.
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