Ten ways for operators to cut costs update from July 2008

The pressure has long been on operators to squeeze cost out of their businesses, while at the same time broadening their service portfolios and growing their footprints to boost turnover.

There are numerous options open to operators that are facing requirements to streamline, ranging from a simple staff cull to offloading what have hitherto been core competencies to third parties. This month, we’ve selected ten of the most frequently debated and polled a range of experts on the benefits that are offered by each one. The ten we have selected are not ranked in terms of importance or value, simply because the impact they have will differ substantially from carrier to carrier.

But they are all in use throughout the operator community and, if one central message rings through loud and clear from the discussions that were had in preparation for this feature, it is that there is no such thing as a quick fix. None of these cost saving manoeuvres offers miracle returns or simple solutions; they all require that the hard work and planning is done in advance.
1. Network sharing

As carriers look at further network rollouts going forward, one option open to them is to deploy a single network in partnership with domestic competitors, retaining shared ownership. It is a strategy with visible benefits, according to Bharti Airtel CTO Don Price:

“If you and I are competing in the same market, it doesn’t make sense for both of us to do the build out. We have an expense that we can’t reduce, you’re left with an expense that you can’t reduce. You’re on the left side of the highway, and I’m on the right side of the highway. What did we do? We crossed the finish line six weeks apart. So as we go forward in the industry, as a network community, let’s build one highway, one common infrastructure and let the sales and marketing guys compete on the cars.”

Economically, it’s difficult to argue with the suggestion that a single network deployed by, say, three operators and then used as a platform for each of their service offerings makes more sense than making that spend in triplicate. But it is far from that simple. Most regulators believe that technology competition is just as important as service competition and a single network in any given market – particularly during a period where new technologies are being deployed – would likely be viewed by telecoms authorities and user groups alike as offering insufficient choice to the end user community.

Regulatory concerns aside, the logistics of such a relationship between competitors might prove too difficult to manage, as Robert Westwick, a consultant in PA’s Wireless Technology practice explains: “The thing about these deals is that you have two parties that have been lifelong enemies going into an arrangement where they have to trust each other and reveal a fair amount of information about themselves in order to get the greatest benefits from network sharing. And that’s very difficult coming from a position where they’ve viewed one another with suspicion and hostility. There’s a big worry that, if it goes wrong when you’ve got that close to the other party, the exit strategy is going to be very complicated.”
2. Cut handset subsidies

In markets where handset subsidies have always been in place – which covers much of the world (notable exceptions include Finland, Italy and South Korea) – the cost of providing mobile phones to users at a low, or even zero charge, has long proven a major expense for operators. For some models the subsidy cost can run to hundreds of dollars per unit and with new handsets routinely offered as an incentive to counter churn, the cost is not a one-off associated only with customer acquisition.

Handset subsidy is a difficult habit to break, as critics of the practice have long warned. Once a customer base is used to the handset being free with a contract, they become conditioned to accept no alternative. Even when service charges are reduced to compensate for a more realistic handset pricing strategy, customers in subsidy markets have been historically unwilling to accept a price hike.

The launch and subsequent popularity of Apple’s iPhone – and the IT vendor’s rumoured insistence that its brand not be devalued by large subsidy – has proven that consumers are willing to pay out for a handset if they desire it enough. But the iPhone is not a bellwether product for the handset market and – top end fashion-led handsets aside – customers generally expect to pay less than the actual value of the handset.

There is something of a Catch-22 for mobile operators when it comes to handset subsidies. In order to get feature-rich terminals into the hands of users who can then be persuaded to spend money on services, they have to absorb part of the cost themselves. There is then no guarantee of service revenue which, even if it were forthcoming, would be at risk of being cancelled out by the subsidy itself.

Carolina Milanesi, research director, mobile devices at Gartner, says that it is very difficult for operators to cut handset subsidies. “Operators tried that in 2000 in the prepay market and sales collapsed,” she says, before suggesting an alternative: “What we have seen operators do is making sure they have return on investment. So if you get a higher subsidy you end up with a longer contract and a higher monthly fee. Some operators have also tried offering cash instead of a phone upgrade,” she says.
3. Network outsourcing

Arguably the most significant operational trend in recent years, outsourcing various aspects of the network, back office functions and application platforms has become a crucial means of opex management for mobile operators.

Driven in equal measure by kit vendors’ search for a new revenue stream and the carrier community’s need to squeeze cost out of its operations, the sector is forecast to grow at 18 per cent over the next four years. Informa Telecoms&Media estimates that the managed network services market will be worth $18.5bn by 2012.

The three leading providers in this sphere – Ericsson, Nokia Siemens Networks and Alcatel Lucent – report contract portfolios between 70 and 165 in size, with contract values ranging between $100m and more than $3bn.

As they grow this area of their business – Ericsson’s managed services operations generate one third of the company’s turnover – the vendors are able to build scale that outstrips even that enjoyed by the largest international operators. This allows them to operate networks at a lower cost than their customers, hence the growing popularity of outsourcing among an operator community that, only a few years ago, was in large part opposed to the concept.

Such arrangements ought not to be rushed into, though, warns Tim Devine, a partner in the Communications Media&Entertainment practice at PA Consulting. It is essential that an operator considering a move into outsourcing has already achieved the smooth running of any element of their operation that they want to hand over to a managed services partner, he says, and PA has advised against its clients moving to outsource in the past because of concerns over a lack of preparation.

“The idea that you can outsource to get rid of a problem is naive,” he says. “If you do that you will give yourself the same problem, just being managed by somebody else.”

For some industry players, the logical extension of outsourcing is that operators need not actually own the network they use to sell airtime to customers. For many CTOs this is as unappealing a prospect as outsourcing was six or seven years ago. But if time has eaten away at those objections, it’s conceivable that carriers could grow to be more comfortable with the radical suggestion that they could actually sell their networks back to the same firms they bought them from.
4. Consolidation

The global expansion led principally by dominant Western European operators was originally motivated by a desire to grow the size of the business. But the economies of scale that large players have been able to build has been a significant upside, as infrastructure vendors have found to their cost.

Today, with hardly any greenfield opportunities remaining, and with an ever decreasing number of unaffiliated operators available to be picked off, larger scale consolidation – the merging or acquisition of entire groups – remains an option for carriers looking to further leverage size to manage cost.

While the emerging markets of the world may now be the major battle grounds for operators looking to secure global dominance, some observers feel there are significant opportunities for further consolidation within developed markets.

“My sense is that I still think there’s a little bit of room [for consolidation] in North America,” says Andy Zimmerman, head of Accenture’s Global Communications division. “In Europe there is definitely an opportunity. In the States, what we’ve seen with the mergers that have been done – excluding Sprint Nextel – is that there are tremendous opportunities. In Europe, where you have one standard, there’s a lot of opportunity to save money. There are obviously regulatory issues, but if they can be managed there is an economic argument for consolidation.”

This is one cost saving measure that favours only a select group of operators. With the emergence of a substantial number of multi-market carriers, any firms looking to play in prospective M&A activity will require a certain level of financial muscle just to get to the table. For smaller operators the only real option is to make themselves as attractive as possible to potential buyers.

But even the largest players in developed markets are not guaranteed success. Their opposite numbers in emerging territories are building huge scale and in many cases have expertise in managing low cost businesses that the Western players simply cannot match. It is only a matter of time before these players stake their claim on developed markets as well. So we can expect further consolidation to be motivated by defensive strategies as well as cost synergies.
5. Headcount reduction

Over the course of this decade, hundreds of thousands of jobs have been cut in the mobile industry as various players have sought to correct the fattening period of the late 1990s and early part of the millennium. While this has hit the supply side of the industry far harder than the carrier community, ‘headcount rationalisation’ – as it is sometimes known – has often proven popular with management keen to make a quick impact on the bottom line.

But Tim Devine warns against a rash approach to headcount reduction. “If you just want to reduce costs, it’s a pretty dumb thing to do,” he says. By his reckoning there is a prevalence of senior management within the industry simply mandating a (for example) ten per cent staff cull across the entire organisation, reasoning that this will be reflected in a comparable reduction in employment costs. But this, says Devine, rarely works well.

“If that’s what you do, then you’re just putting the problem somewhere else,” he says. “We were involved with an operator recently that was doing this. We were talking in particular to the products and services group and they said they’d solved the problem of how to keep output up with less staff by asking the marketing department to shoulder some of their burden. They had their ten per cent savings but they hadn’t optimised the cost base or changed the process, the way the company worked,” he says.

Much as with network outsourcing, headcount reduction requires scrupulous planning and preparation – any organisation embarking on such a programme needs to have a clear sense of what it is trying to achieve other than a simple slashing of numbers. And, like outsourcing, done properly it can be an effective cost management tool.
6. MVNOs and customer selection

Customers who don’t spend a great deal can be expensive to keep. In the past some operators have turned up the heat on certain customers – typically low spend prepaid users who might keep a handset for emergencies or particular, specific use cases – by hiking prices to the point where they exceed the reach of these customers. This kind of enforced churn has generally proven to be lousy PR, however, especially given that a good portion of this customer segment is made up of the elderly.

There will always be a portion of any given market that is marked by a relatively lower spend than other segments and carriers do have to find a way to address these users. A more effective strategy in some markets has proven to be partnering with ‘no-frills’ MVNO operations, building on the philosophy that ‘wholesale is better than no sale’. While not all low cost MVNO plays have proven successful – easyMobile has been one of the highest profile disappointments – there have been some high impact examples, particularly in Denmark.

The danger of such undertakings is that they can contribute to price wars that destabilise entire markets. But the concept can be applied in other directions. Indeed, while it was at one time thought that the MVNO model would be applied to a variety of consumer brands with broadly similar offerings, it has in fact proven to be a far more useful tool for reaching into the nooks and crannies of individual markets in a far more cost effective manner than a network operator would be able to manage alone.

Ethnic-specific MVNO operations are one such example, where the virtual player is able to devote its marketing and subscriber acquisition spend and focus entirely to a particular niche segment that simply would not offer sufficient rewards to a total-market carrier. But as a host, a network operator can share in the gains, without shouldering all of the risk or – more importantly – doing any of the work.
7. Marketing and sponsorship

For something so expensive, the benefits of sponsorship spend are notoriously difficult to measure. When Vodafone was sponsoring the Ferrari Formula One motor racing team some years back, the clearest evidence that the public had made any association between the operator and the team came in the form of a wave of complaints to Vodafone’s various customer service units.

During the Austrian leg of the 2002 F1 season, Ferrari driver Rubens Barrichello was ordered by his bosses to cede the lead he’d held all race to his team mate Michael Schumacher, to strengthen the German’s chances for the championship. After the race, so the story goes, Vodafone’s various customer service units were swamped with complaints from angry motor racing fans, upset at the carrier’s association with such unsporting conduct.

With this kind of spend, it’s often easier to prove a negative than a positive. And the precise size of the deals struck, even those that have been consigned to history, are details that carriers are loath to reveal. Marketing spend is often the first casualty of a financial downturn and there are always question marks over the validity of large headline branding like this.

According to brand analysis firm Marguax Matrix, Vodafone now occupies the top position in the Formula One brand exposure league (with McLaren now, rather than Ferrari) and is unlikely to withdraw from the world of sponsorship. The strategy may not suit all operators but, says Philomena Skeffington, principal consultant in the Information, Communications&Media (ICM) division at management consultancy Mott MacDonald Schema, but it makes no sense to curtail this spend once you have embarked upon it.

“It depends on your strategy,” she says. “If you want to stay up there at the retail end and have a high street presence, then you’d need to think very hard before cutting back on something like this because it keeps your name and your brand out there. But if you want to move further back into the value chain and you want to concentrate on providing the infrastructure to enable customers to connect to mobile networks then you could reduce your spend.”
8. Revenue assurance and fraud

It is a fact of life that mobile operators leak money every month through bad debt, inaccurate rating or billing, and fraud perpetrated from without and within. These are subjects that operators are often reluctant to discuss, maybe for fear of appearing to lack full control over crucial business processes.

Pedro Teixeira, account manager for the Middle East and Africa at Portuguese revenue assurance (RA) specialist WeDo Technologies, cites that revenue leakage for mobile operators can range from two per cent for a mature operator with RA solutions in place, through to six or seven per cent for a large player that has yet to establish an RA strategy. He suggests an overall industry average of between three and four per cent.

According to Kurt Ruecke, who works for Deutsche Telekom’s IT services company T-Systems, revenue leakage runs a lot higher – an average of 13.6 per cent across the telecoms operator community worldwide – with fraud representing the greatest problem, at 4.5 per cent of revenues.

It is sometimes suggested that the only organisations that really draw attention to these kinds of problems are the ones that sell solutions to combat them – scaremongering as a sales pitch, if you like. But, says Teixeira, there is no real call for such tactics, as most operators have embraced RA strategies already.

“If you were to ask me a year or two ago I would have said that many operators were failing to address this,” he says. “But in the last year or so even the operators that are slowly reacting to market changes and needs have realised it is a key area that needs to be addressed.”

But the fact that, as Teixeira says, operators are increasingly driven to meet these issues head on raises questions as to what level of incremental savings can be made. Mott MacDonald Schema’s Philomena Skeffington argues that, by and large, most of the savings that could be made are already being made; at least in the more mature markets.

“It is something that operators take into account,” she says, “so I wouldn’t think there’s a lot of money to be saved there on top of what they are already saving.”
9. Off-shore call centres

A recent trend across a number of vertical sectors, including finance and IT, has been to shift labour intensive customer care functions to locations where workers are far cheaper to employ – and the mobile sector is no exception. Such a move is often part of a wider strategy to introduce tiered levels of service, where premium, high-spending customers benefit from locally sourced customer care, while lower-revenue subscribers are serviced with a second-division offering.

Philomena Skeffington says that there are savings to be made, but argues that painstaking planning is essential if the implementation of such a strategy is to be successful. “You need a detailed plan before you offshore something this complex. When it comes to training you need to get your cultural values across and all of the details about products and handsets,” she says. “These things aren’t trivial and you need to make sure they can all be effectively supported by the off-shore organisation.”

There are numerous anecdotal reports of shortcomings from off-shore customer service organisations, centred not least on serious problems in the communication between a customer and a service agent who is required to speak in a second or third language. And while the headline savings – particularly in wage costs – made off-shoring a popular strategy some years back, practical evidence suggests that it is far from easy to make it work. And operators run the risk of losing subscribers because of poor customer service, which could wipe out the savings made by moving the division overseas in the first place.

“Yes you can reduce cost,” says PA Consulting’s Tim Devine, “but the flip side is that people don’t always get the service that they’re expecting. It’s difficult to do; the banks haven’t really cracked it yet and I don’t think the mobile operators have, either.”
10. Distribution and e-tailing

The costs of maintaining a physical distribution network run high and the popularity of online purchasing among consumers is growing all the time. It is common practice for carriers to offer customers preferential deals – cheaper handsets or more valuable service bundles – if the customer buys online. The cost of provisioning such purchases across the internet is obviously much lower in terms of wages, overheads and inventory.

But there will always be a significant portion of consumers who prefer face-to-face interaction with an operator’s sales force when selecting a handset or a service plan. And when new handsets debut – particularly in the high end – carriers themselves benefit from the ability to offer physical demonstrations. So, while ‘e-tailing’ can offer useful savings, it is not suitable as a standalone distribution strategy, unless perhaps for a particular type of niche player.

“I think e-tailing has a part to play, and I think more people are now buying things online,” says Philomena Skeffinton. “But creativity in distribution outlets is vital as well.”

Distribution models vary market by market, especially with regard to the layer of independent retailers and service providers that are in place. But carriers have learned the value of leveraging retail partnerships and the range of outlets in which handsets and services can be purchased is on the increase. For low end, prepaid service, it is now common practice for supermarkets or petrol stations to stock phones, enabling the carriers to service the market at a much reduced operational cost, freeing up their own properties to focus on high-end, high-spend users.

And, says Skeffington, “If the model changes so you get more of a wholesale retail model in that space, I think you’ll get more different types of organisation at the retail end.”

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