Johannesburg, 13 Jul 2010
The African market still offers a huge potential for telecommunication service providers. For instance, mobile penetration growth rates of about 40% CAGR1[1] (compound annual growth rate, 2003 until 2009) make the region highly attractive for carriers and ICT providers.
However, African urban markets turn towards saturation, and even in small markets, competition increases, leading to four or more players within a market.
Even with the dreamlike growth rates, getting and staying ahead of competition has become a major topic on African telecommunication service providers' agendas.
In order to increase market share and to stay ahead of competition, many telecommunication service providers turned to product pricing as the key instrument for beating their competitors. Indeed, this could help to gain market share, but solely following this strategy does not take into account the situation that is typical for emerging markets: on the one hand high subscriber growth rates, but on the other hand declining average revenue per user (ARPU). In the worst case, market success is finally achieved but the winner is broke.
A growing subscriber base does neither guarantee a growth in revenue nor in profit. Because of declining ARPU, professional cost monitoring and management become decisive: where are the main areas of spending? What potential do they offer for cost cutting initiatives? What tactics and strategies shall a provider deploy in the short-term as well as in the long-term?
Analysing a telco's cost structure should take two aspects into account. On one hand - of course - which are the major cost drivers within the organisation? On the other hand, it should be considered in which organisational unit cost cutting efforts will do the least harm, ie, how to avoid damaging the company's competitive advantage by implementing cost cutting initiatives.
Looking closer at carriers' overall operational expenditures, the network organisation's OPEX can be identified as a major cost driver (approximately 30% of the average carrier's OPEX). Therefore, restructuring efforts seem to offer huge potential if they are targeting the network organisation. What is even more important from a strategic point of view: the network organisation itself cannot help the company to differentiate it from its competitors. Of course, customers penalise bad network quality. However, they do not equally reward good quality, but take it for granted. For this reason the potential to establish unique selling points (USPs) via the network organisation is fairly limited. Keeping this in mind, the network organisation seems to be the ideal candidate for initiatives aiming at boosting efficiency, hence it is worthwhile to take a closer look at the network organisation's OPEX structure.
Research carried out by Detecon indicates that personnel expenses as well as site maintenance and rental are the major cost blocks.2[2] These costs make up about 66% on average of the overall network OPEX. With a transparent cost structure, ways for cost reduction can be identified more easily. Having created transparency in terms of cost formation, the Detecon approach aims to realise efficiency gains in the short as well as in the long run.
Short-term cost reductions should start by analysing current resource endowments, eg, in terms of FTEs. It is often the case that technical progress allows much leaner staffing and therefore smaller department sizes than in the past. Short-term efficiency measures aim to address these inefficiencies. Personnel identified as redundant could be shifted to other areas or could be reduced by natural fluctuation.
Short-term measures:
* Create transparency, ie, which units of the network organisation in particular are spending the most, which cost types are dominant (cost structure analysis).
* Analysis of operating procedures and resource endowments currently in place (identification of redundancies and slacks)
* Shifting of redundant personnel to other units (depending on fit of qualification).
* Renegotiation of supplier contracts (only applicable when they are not fixed in the long run).
* Implementing minor organisational changes, which help to smooth collaboration, reduce duplication of work etc.
Experience has taught that organisations' growth is often guided by other factors than organisational imperatives. Companies with fast and potent growth in the past often lack structural and procedural efficiency. In these cases, more fundamental and long-term efficiency initiatives should be considered that target the overall organisational structure and processes.
Long-term measures:
* Analysis of the company's strategic requirements (market situation in terms of competition, customers, market growth etc; regulatory environment; geographical situation; maturity of the organisation; available skilled staff within the labour market).
* Detailed analysis of the organisational structures and processes in place.
* Development of possible organisational scenarios (structures, processes, responsibilities/accountabilities) based on the strategic and organisational analysis and vote for the most adequate scenario.
* Step-by-step implementation of the favourite organisational option.
* Change and transformation management in order to ensure the overall success of the reorganisation.
In the long-term, there is room for strategic cost reduction initiatives such as the fundamental redesign of organisational structures and processes.
These kinds of changes have to be based on the design of consistent (target) organisations and process frameworks. Designing an optimal organisation structure requires a top down approach in which strategic requirements are identified, organisational requirements are determined and criteria and basic design options are considered.
Last, but not least, efficient (and efficiently implemented) process models make a significant contribution on the way to a lean organisation. Former processes that often lack strategic intentions can be merged, simplified and optimised according to situational aspects such as company size, customer structure, degree of competition, or the technologies involved. Major attention should be paid also to analysing the current responsibilities and accountabilities. If those are not clarified, fixed and documented, a state will endure that is often to be found in historically grown organisations: without clearly assigned responsibilities and accountabilities everyone is accountable for generated profits, but nobody for the costs and losses.
The Detecon approach to boost network organisations' efficiency is not about blind cost cutting; it pays attention to particular organisational specifics as well as to strategic requirements, and identifies areas for improvements within the current organisational structure and procedures. Past projects managed by Detecon have shown that by combing short and long-term measures, substantial cost reductions can be realised within the network organisation:
* Short-term measures: on average 18% cost reduction.
* Long-term measures: Additional 18% cost reduction.
* Combining short and long-term view: on average 38% cost reduction.
Freed resources must not necessarily be realised in terms of actual cost reduction, but could also be used to address new markets, implementing new products or business models or preparing and supporting growth in general.
From this perspective, efficiency appears as a strategic weapon in the battle for market share and even market survival. In the end, combining both short and long-term perspectives on efficiency as well as a portfolio of sound and field-tested methods is the key to boosting efficiency in a telco's network organisation.
1[1] 2010 Informa Telecoms & Media
2[2] Riadh Marrakchi / Youssef EL Ouariachi: Stop, Cost Control! Network Cost Optimization is more important than ever Published in DMR 02/2009
Share