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Rethinking operational processescan ofer telcos competitive savings

Abstract

The telecommunications industry is changing as

applications, networks, and end-user devices are moving

to modular architectures. This is resulting in a much wider

range of competing offerings than ever before. Consumersare shifting towards increasingly complex products like

IPTV, Internet, and mobile data services just when carrier

margins are falling. Add to this new reality the current

economic slowdown, which will limit revenue growth for

telcos in the near term, and telcos find themselves under

mounting pressure to reduce costs.

Indeed, we see telcos facing some difficult challenges:

Customer support costs are increasing because of the

higher call volumes and longer handle times that result

from the more complex services.

Network costs are also rising as carriers deploy and

maintain new infrastructure to support advanced

services. These services are usually more asset intensive

than the legacy telephone services squeezing cash

margins.

Customer acquisition and retention costs are also likely

to increase due to market saturation and competition.

Internal process costs are typically higher for the newer

IP and wireless data services than for legacy wireline

and mobile voice services.

If telcos are to maintain and improve their margins,

we believe they must find new ways to optimize their

operations and reduce costs. While there are several

levers managers can pull to optimize operations, including

service delivery model, organizational simplification,operational processes, and external spend, some of

the most effective strategies are in the area of improving

operational processes. Three key approaches to

consider are:

Standardizing and simplifying the processes for newer

IP services and mobile voice service in order to reduce

absolute costs and generate scale efficiencies as

demand for these new services grows. Based on our

observations, this can result in savings of up to 20-40%

for impacted functions.

Focusing on reducing dispatches and improving

the efficiency of install and repair technicians on

the network side, which together, based on our

observations, can result in savings of 18 to 29

percent of addressable costs.

Improving immediate-term efficiencies of non-network

areas such as call centers, field sales, retail stores,

and the order to cash process which, based on our

observations, can result in savings of 28 to 44 percent

(these short-term savings can be used to fund long-

term cost-reduction initiatives).

By streamlining these three operational areas, telcos

should be better positioned to handle the challenges they

are facing and find the capital necessary for the inevitable

transition to IP services. This article examines the changing

environment for telcos and presents a targeted approach

for telcos to consider in their efforts to achieve these cost

reductions.


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2

The shifting telco environment

Technology and regulatory changes have transformed the

communications landscape and created a difficult situation

for traditional telephone service providers. Emerging

technologies have placed telcos in significant intermodal

competition with both cellular service providers and cable

TV companies.

Additionally, the move to common high-level protocols

(e.g., IP) enables the separation of applications fromtransport services, with the result that much of the

increased customer utility is captured by third-party

application providers which, in turn, reduces product

margins.

Finally, increasingly sophisticated customer equipment

has resulted in the loss of traditional network control

points, resulting in rapid traffic growth that has been

difficult to monetize in the current competitive market and

application arbitrage of transport costs. Skypes model,

which converts high-revenue voice traffic into low-unit

revenue data traffic, is an example of this.

Then there is the regulatory environment. Very bluntly,

it has not been kind to incumbents and has been slow

to recognize industry changes. Asymmetrical regulation

of cable, wireline, and wireless carriers has resulted in

economic advantages for only some providers and they

do not include telcos. Carrier-of-last-resort obligations,

together with service standards and unbundling

requirements, have created a situation in which

incumbent telcos must deploy capital to economically

unfeasible areas, retain obsolete technology, and

maintain service standards that are not required by some

customer segments or are actually inappropriate for new

technologies.

Externally, customers are shifting towards increasingly

complex products like IPTV, Internet, and mobile data

services. The shift in consumer preference towards

video and peer-to-peer applications is driving consumer

demand for more bandwidth. To address this demand,

telcos have invested in fiber infrastructure and are

continually upgrading the bandwidth capabilities of access

infrastructure. Funding these infrastructure investments is

a challenge in todays environment given the additional

pressure of rising customer support costs.

The competitive environment is also getting more difficult

with open access platforms, newer devices, and smaller,

more nimble competitors.

And while these various trends require telcos to make

investments in network infrastructure and customer

support, there is limited opportunity to pass on these

additional costs to the customer.


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Chart A. Percent of phone hours by product queueNorth American wireline telco

Where are the anticipated IP benefits?

As IP has evolved and been widely deployed, there has

been an industry expectation that it would create a

number of infrastructure and operational benefits for

carriers, including:

Significant supply-side benefits from a converged

network

The operational benefits of separating service platforms

and transport

Reduced customer-service and care costs resulting from

replacing internal labor with customer labor (e.g., Web

self-service and care)

The ability to deploy and change products rapidly to

respond to market conditions.

However, with the exception of the last benefit, these

have yet to materialize. And that last benefit, in fact, is

currently one of the factors contributing to increased

costs as product change and variety confuses both staff

and customers and can offset any benefits provided bynew economies of scale. In the case of one provider, IP

service volumes increased about 50 percent over the last

five years while network operations staff had increased by

close to 80 percent. In addition, many of the old operating

models have been used as the basis of the new processes.

Metric

Trouble Calls Per Network Access Per Year

Trouble Call Handling Time (Average Duration In Minutes)

Inbound Call Center Calls Per Customer

Inbound Call Handling Time (Average Duration In Minutes)

Network Accesses Per Network Ops Headcount

Wireless

0.23

11.9

1.37

4.6

16,100

TMD

0.6

7.8

0.58

7.9

7,200

2005 Average

handling time

11.9

11.9

7.8

IP

3.05

15.1

2.64

7.5

1,700

2007 Average

handling time

15.1

13.8

7.8

Customer support costs are rising

As illustrated by the metrics from one provider who we

have worked with (see charts A-D), newer products and

services are driving significant increases in customer

support activity. IPTV, Internet, and mobile data services

are more complex than traditional voice services. These

products generate higher volumes of inbound calls with

longer average handle times, sometimes nearly double

the minutes required to handle a call for a wireline voice

service.

Wireline

IPTV

Internet

0% 10% 20%

Percent of phone hours

30% 40%

2007

2006

2005

74% growth from20052007

69% phonehours in2007

Product

Internet

IPTV

Wireline

Chart C. Operational metrics by technology type(illustrative only)

Chart B. Average handling time for product queue


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Chart D. Customer care call volumes (2007)North American wireless telco

Chart E. Internet ticket reasons

Average callhandle time

Jump coincides withpromotion of smart phones

Call persubscriber

12

10

8

6

4

2

0

0.020

0.018

0.016

0.014

0.012

0.010

0.008

0.006

0.004

0.002

0.000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Other14%Account

administration4%

Homenetwork

6%

Email24%

Connection52%

Customer configuration

Corrupt softwareNo synch

Third-party

Authentication

Other

Customer configuration

Third party software

Corrupt software

Other

42%

86%

21%

5%

11%

4%

11%

6%

4%

10%

Chart F. Connection tickets

Chart G. Email (e.g., Outlook) tickets

Further compounding the problem is that a significant

percentage of inbound support calls are not even

related to products that telcos provide. As illustrated

by the metrics from one of our clients (see charts E-G),

connection and email issues can typically make up

more than 75 percent of all Internet tickets, and the

root cause of a consumers connectivity issue may be

computer hardware or software (operating system, email

programs, anti-virus or anti-spam software, etc.) or user

configuration errors.

Consumers often call the telcos first when these issues

appear especially as many of the companies that sell

these products do not offer free support (and in many

cases offer no support at all!). This combination of higher

volumes and longer handle times means that these

services now account for the majority of customer

service phone hours and care costs about 70 percent

as of 2007 based on our research.

For wireless providers, customer acquisition and retention

costs are also likely to rise given the maturity of the

market in the United States. For example, in work withone of our clients, we found that wireless devices with

data plans take approximately 45 minutes to sell in-store

versus 28 minutes for those devices with a voice plan only.

Since market penetration is already very high, growth will

have to come through taking customers from competitors

and from the sale of wireless data devices and services.

Cost per Gross Addition (CPGA) costs may climb as carriers

offer richer incentives to new customers in the form of

Customer Premises Equipment (CPE) subsidies or service

discounts.


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Chart H. Typical telco opex breakdown Chart I. Breakdown of operationalprocess opex

Where can telcos look for savings?

Telco-operating costs can be classified into three

categories (percentages are based on our research

and are illustrative only):

1. Non-process costs account for 25 to 30 percent of

the cost base (35 to 40 percent for wireless carriers)

and include interconnection fees, taxes, CPE, and

uncollectible items. These cost areas are more difficult

to influence and typically do not provide a significant

savings opportunity.

2. Support processes typically account for 20 to 25

percent of the cost base (15 to 25 percent for wireless

carriers), and include marketing, HR, IT, finance, and

other administrative costs. While savings opportunities

may exist in support process areas, most telcos have

done a better job of controlling these costs as demand

mix has changed.

3. Operational processes typically represent about 50

to 55 percent of the cost base (40 to 45 percent for

wireless carriers); the process costs include customer

service, sales, billing, and network-related processes. Itis these costs that carriers are challenged to control as

the market changes, and this is where carriers should

first focus on finding efficiencies and savings.

100%

75%

50%

25%

0%

Non-processopex (25-30%)*

Billing(7-12%)

Network I&R(40-45%)

Network Ops and Design(18-23%)

Operational processes

Support processes

Sales(20-25%)

Customerservice

(10-15%)

Support processopex (20-25%)

Operational processopex (50-55%)

*Non-process costs include interconnection, taxes, CPE, and uncollectible.

Operational processes

The major operational process costs are network

installation and repair (I&R), network operations and

design, sales, customer service, and billing. Savings exist

across these functions, although savings in network

processes are typically more challenging to realize.

Network-related operational process areas

As shown in the charts H and I, network-related process

costs (I&R, operations, and design) can typically accountfor 60 to 75 percent of operating expenses. We have seen

improvements in these network-related areas that have

yielded 18 to 29 percent in savings by focusing on two

main areas:

1. Reducing dispatches: We have seen savings of 5

to 8 percent of total network operating expense

achieved through better screening of tickets to reduce

no-trouble-found dispatches, improved scheduling

to reduce no-access dispatches, better management

policies to reduce non-demand dispatches, and an

increase in first-pass resolution of tickets.

2. Improving the efficiency of I&R technicians: We haveseen savings of 12 to 18 percent of total network

operating expense achieved by increasing the use

of Good Jobs in Eight (a metric that measures the

number of good jobs in eight hours per technician), and

moving to a pay-for-performance model.

It is important to note that achieving savings in network-

related processes is challenging and typically takes a long

time to implement (usually greater than 18 months) due

to several factors:

There are inflationary pressures on infrastructure.

The workforce required to maintain and build the

network will, at best, remain the same or likely grow.

The workforce is typically organized labor, so any wage

changes, job description streamlining, or adjustments in

the part-time/full-time/contract labor mix are long-term

initiatives subject to contract negotiation cycles.


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Non-network operational process areasAs illustrated in charts H and I, non-network operations

can account for 35 to 45 percent of operating expense,

and we have seen them yield 28 to 44 percent in cost

improvements. Telcos should focus on non-network

operational process areas, such as call centers, field sales,

retail stores, and the order to cash processes for a faster

path to savings. The savings can be significant and the

implementation period can be less than 12 to 18 months.

Key productivity levers for each functional area should

be evaluated to determine potential improvement

opportunities. Chart J shows the typical levers for cost

centers and profit centers.

To find savings in non-network operational process areas,

we suggest a three-step approach:

1. Analyze activities and business processes to highlight

opportunities for reduction of out-of-scope work, cycle

time improvement, and quality improvement.

2. Use benchmarks to further identify or confirm

improvement opportunities.

3. Identify ways to simplify and standardize processes,

eliminate duplication of effort, and improve the

utilization of people and technology.

We have seen that the simplification and standardization

of processes, elimination of duplicated effort, and

improved utilization of people and technology result in a

savings of 15 to 30 percent. Savings typically result from

reduction in total work volume and/or shorter cycle times

required to complete the work.

Case study: Sales and customer service (North American telco)

(illustrative only)

Some key areas of improvement in cost center functions, such as trouble/repair call

centers included:

Suboptimal demand management

Lack of adequate policies and procedures to control call handling times and non-

productive idle times

High overhead costs

In profit center functions, such as d irect sales call centers or retail stores, some key

areas of improvement included:

Diminishing returns on sales efforts

Inadequate incentives to drive appropriate up-sell or cross-sell activity

Insufficient customer targeting

Addressing these improvement areas led to an accumulated savings of 26 to

41 percent

OrganizationCost centers

Inbound repair center

Credit services (excl. collections)

Operator services

Hybrid sales/service center

Inbound call center

Profit centers

Direct sales (internal)

Retail stores

Total

Percentage of Savings

38 - 46%

25%

15 - 50%

25 - 43%

15 - 40%

8 - 15%

26 - 41%


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Direct sales Order preparation Order entry Customer service Management Administration

Case study: Field sales (North American telco)

(illustrative only)

In one North American telco, business sales reps were

spending 45 to 75 percent of their time in non-sales

activities. The causes of this were complex product

sets and orders, and inefficient systems. Product

Cost

*Diminishing returns

Revenue

Cost ofservices

Cost of sales PriceUnits sold/retained

WorkloadNon-productive

timeTime spenton sales*

RetentionCost per

hourConversion

rateCredit

adjustments

Internalsupport

Skill/effectiveness

SalesServices

Shrinkage Attempt rate*Unit time TargetingVolume

Cost centers: Operator services, cred it services, and repair centers Profit centers: Direct sales, and retail stores

Hybrid sales/service center: Inbound sales

portfolio simplification, order process improvements,

and system changes enabled field sales reps to

increase time spent on customer-facing sales activities,

resulting in higher sales.

ServiceRepresentative

SalesAssociate

Account

Representative

AccountExecutive

0% 25%

Direct sales: 28% of time spent

Other support and office activities: 72% of time spent

50% 75% 100%

Currently little focuson direct sales

25%

27%

34%

55%

9%

26%

15%

16%

36%

21%

12%

4%

22%

9%

13%

5%

3%

10%

12%

9%

6%

8%

14%

11%

Chart J. Typical cost reduction levers cost centers and profit centers


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Conclusion: Achieving sustainable cost reduction

If telcos are to maintain their margins and their

competitive position, they must seriously evaluate cost

reduction opportunities and find new ways to optimize

their operations. To identify cost-reduction opportunities

that are sustainable in the long term, telcos should look at

the productivity levers that are specific to each functional

area and then determine how to improve them. A one-

size-fits-all analysis approach will not be effective in

finding the real sources of inefficiency.

We believe that several supporting elements are necessary

to realizing and sustaining efficiencies:

Process changes must be supported by updated policies

to realize the full benefits (e.g., call center hours of

operation, call handle time targets, handling of out-

of-scope calls, and vacation and sick policies that align

with staff utilization targets).

Implementation and tracking of the right metrics

(such as utilization of non-phone time in a call center

environment or sales coverage in a sales organization)

are crucial to encourage the right behaviors and identifyfurther improvement opportunities.

Visible and active support of senior leadership along

with fast, decisive action to set the tone and direction

for the rest of the organization. In addition, a change

in culture may be required so that staff understand

that admitting there is room for improvement is not

considered to be a failure, but instead is encouraged.

Feedback and pilot mechanisms should be established

to help ensure that a problem is addressed with a

viable solution instead of one that creates additional,

unexpected problems. For example, one companylaunched and promoted a call blocking feature for all

calls without a Caller ID. While the intentions were

good, this had the unfortunate result of blocking

many calls from wireless devices, leading to a very

high volume of trouble calls and a lot of service

cancellations.

To keep the organization motivated, savings targets have

to be credible and defensible, and all parts of the business

should contribute. Finally, telcos should consider other

strategic objectives such as desired customer experience

and competitive positioning to help ensure that they are

not undermined by the imperative for cost reduction.

Contacts

Mic Locker

Director

Deloitte Consulting LLP

Tel.: +1 212 618 4973

Email: [email protected]

Lisa Glover

Senior Manager

Deloitte Consulting LLP

Tel.: +1 212 618 4505


Phil Asmundson

Philip L. Asmundson

Vice Chairman and U.S. Technology, Media &

Telecommunications Leader

Deloitte LLP

Tel.: +1 203 708 4860


Marketing Contact

Kathy Dorr

Marketing Manager

Technology, Media, & Telecommunications

Deloitte Services LP

Tel.: +1 615 313 4341


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