Telecom operators worldwide face numerous obstacles to continued success: stagnating growth; heightened competition; and growing consumer sophistication. As these trends are still nascent in the region, GCC telecom operators have thus far implemented tactical, short-term initiatives to overcome these obstacles.Opportunity abounds for GCC operators to prepare for future challenges by adopting a comprehensive cost management plan, addressing incremental efficiencies, process reengineering, and value chain restructuring. Operators that do not implement wide-ranging plans to manage their costs run the risk of steep declines in profitability.
According to Booz & Company, these new trends – hindering the telecom operators – are starting to emerge in the Gulf Cooperation Council (GCC) region, with revenue growth in the telecom sector slowing, competition rising, and consumers increasingly demanding more services and better performance at reduced prices. “The global operators hit hardest by these trends have undertaken substantive measures to adapt structurally to face these challenges. GCC operators also are starting to respond to the trends now emerging in the region through tactical, short-term cost reductions. These moves will prove to be insufficient to mitigate the full impact of the trends affecting the sector,” said Chady Smayra, Principal, Booz & Company.
By rigorously identifying and applying relevant cost measures, telecom operators can position themselves to weather the on-going industry challenges and extract benefits from leaner operations. There are three waves of cost optimisation that operators need to consider: incremental efficiency, process re-engineering, and value chain restructuring. “Deploying the right mix of these initiatives will enable operators to create – or sustain – value, outperform their competitors, and secure their sustainability in chosen markets,” added Smayra.
Telecom operators worldwide are emerging from the global recession. At the same time, they are facing increasing pressures on both their top and bottom lines. “Although revenue growth is still positive in the GCC region, it has begun to slow recently. Average returns on assets have dropped by nearly half over the past five years – to approximately eight percent per year, and appear headed toward five percent – the level commonly seen in saturated markets,” stated Hilal Halaoui, Partner, Booz & Company.
Three key trends are converging to pressure the profitability of the telecommunications market worldwide:
Stagnating growth. The global telecommunications market has been stagnating as many markets approach their saturation point, a trend underscored by high penetration rates. In these markets, operators are experiencing slowing or decreasing average revenues per user (ARPU) and face the need to prepare for limited growth from traditional services.
Increasing competition and market fragmentation. Globally, the increase in the number of operators has steadily outpaced that of market revenues. The number of telecom operators has increased by 70 percent since 2005, whereas industry revenues increased by only 45 percent over the same period. Facility-based operators have grown by 6 percent per year, while mobile virtual network operators (MVNOs) and Internet service providers have grown at over 15 percent a year.
Sophistication of customer tastes and expectations
Changing consumer trends is another area in which GCC operators can see the shape of what’s to come. In mature markets, the increasing sophistication of customers coupled with new competition from non-telecom players is ratcheting up costs, as operators spend more to attract, acquire, serve, and retain customers.
Some markets, such as Europe and the U.S., are prone to all of these pressures. “The GCC region recently has seen increases in competition and market fragmentation, as well as a slowdown in growth. Based on the experiences in the other more mature markets, it, too, will soon face added pressure from consumers. In response, operators will need to prepare for constrained growth and compensate by creating leaner organisations. Essentially, regional incumbents will have to increase their marketing expenditures, and in turn, try to reduce many other costs,” added Halaoui.
Fortunately, GCC telecom operators have a lot of room for improvement in cost optimisation. Regional telecom operators can formulate a response to these challenges by looking to global operators that have taken several steps to rein in costs. Regional telecom operators can benefit by grouping cost optimisation initiatives into three waves.
Three key waves:
Incremental efficiency. Involves making informed decisions to reduce costs by shedding excessive expenditures through better budget allocation and use of resources in ongoing activities (this usually yields rapid cost reduction and helps maintain a healthy cost structure).
Process reengineering. This considers systemic costs – i.e., costs that are incurred by the company’s processes and policies. Through reengineering of policies, processes, and procedures, Wave 2 initiatives typically generate savings within a year to 18 months through the implementation of lean operations.
Restructuring the value chain. Beyond the short- and medium-term initiatives, operators can benefit from restructuring their value chain. Whereas the previous waves change how operators go about their business, this wave fundamentally changes what it is that they do by reconsidering structural and inherent costs.
These three waves are run concurrently and iteratively, to strike the needed balance among the choice of activities along the value chain, the processes in place, and the operational efficiency and capital expenditure allocation. The application of the three waves is a virtuous circle that allows operators to innovate continuously and expand their offerings while avoiding a build-up of layers of inefficient spending.
“GCC telecom operators have only scratched the surface in terms of capturing incremental efficiencies and have not ventured materially further. This means efforts to improve cost optimisation can generate significant potential upside, and regional operators can use network sharing to enhance their mobile infrastructure and monetise their asset base,” stated Smayra.
Handling demanding consumers
With sky-high penetration rates, the advent of increased competition, and the growing sophistication of consumers who are demanding more, GCC operators are beginning to feel the strains that have slowed to a crawl the industry’s growth in other regions of the world. “So far, regional operators have focused on only short-term and limited cost optimisation efforts in order to rein in costs. The benefit of implementing all-encompassing cost optimisation initiatives is promising. Employee reduction measures such as targeted early retirement programs would also help operators improve their results,” Smayra further remarked.
“Long-term structural initiatives likewise can help boost profitability and enable operators to focus on their core capabilities, helping them to differentiate their business model and succeed. The initiatives with the highest potential include fixed–mobile integration on the technology side, outsourcing of both non-core and non-differentiating core services, and redundancy management measures. GCC telecom operators should act now, before markets fully saturate and further fragment, to implement the optimisation initiatives that will allow them both to streamline their operations and position themselves for future growth,” concluded Halaoui.