Telecoms can thrive with astute choices

Telecoms operators around the world are facing increasing difficulties. Their traditional sources of revenue and profit are drying up. The markets for voice, messaging, and fixed broadband are almost saturated. In the UAE, for example, the regulators say there are nearly twice as many mobile subscribers as people, the highest such rate globally.

To make matters worse, margins are narrowing. Operators' high-value customers can easily find better deals and faster data speeds. Customers want more data. In the United States last year consumers for the first time spent more money on buying data than on traditonal voice services - forcing companies to invest heavily in extra capacity and new technology. Operators are also investing to fend off competition from internet players such as Google, Skype and Facebook.

Many operators have responded with cost reductions. Some are across-the-board. Others involve deep cuts in customer service centres and field operations. The danger is that firms may thwart any chance of sustainable growth by cutting costs that are worth having along with spending that isn't.

A better approach is for operators to define their priorities then take three broader reinforcing measures. These are to cultivate and invest in the requisite capabilities to implement the priorities, divest other capabilities and reorganise within this new capability set. These steps can shrink the cost base by 25 per cent and prepare the operator for growth. Defining priorities means choosing a "way to play". This leverages the capabilities that make the operator different and matches the operator's internal strengths to attainable market opportunities. These capabilities should be distinct to make it difficult for any competitor to copy them. One "way to play" is to be an experience player offering a wide range of innovative products and services that provide a top-class customer experience.

Deciding what type of operator to be determines the next three measures. First, it identifies which capabilities need investment, and which need slimming down or cutting. Experienced players have to put resources into superlative customer service that keeps customers and sells them more products and services.

Customers' every contact with experienced players has to be professional, high quality, but not necessarily costly. Customised apps can be as significant in providing such quality service as highly trained and easily contactable customer service staff. Second, operators have to transform their cost structure, which involves understanding the connection between costs and growth. As costs are related to capabilities, operators can categorise them as essential, competitive necessities, routine business capabilities, or not required.

Operators can eliminate or spend very little on capabilities they do not need. For example, connectivity players need to be leaders in network technology and coverage, while being competitive on costs. Connectivity players do not require the capability to customise handsets, which they can divest entirely. They can also increase their efficiency in customer experience, which is a competitive necessity. For example, connectivity players can sell online and have a few high-profile outlets instead of building an expensive chain of shops.

By contrast, network technology is less important for experience players, not ranking as an essential capability. Experience players can reduce network investment costs, which tend to be substantial. They can move to best-in-class cost levels by sharing their networks with other operators, thereby freeing up resources for innovation.

The third element is reorganisation. Unlike previous organisational changes, which disrupt and create little value, this form of reorganisation sustains the cost reductions needed for growth. This is achieved through less management overhead and having business functions pool resources.

Operators' organisation charts can be rearranged to manage work more effectively and efficiently. For example, experience players can move all innovation-related functions under a single overarching unit. Reorganisation can also stimulate growth by empowering managers to act like owners of the business.

Getting rid of certain capabilities is not a one-off dumping of ballast. Nor is reducing resources for non-differentiating capabilities just another cost-cutting technique, of which operators already have plenty.

Rather the point is to make spending deliberate, linked to capabilities, and continually in search of the lowest cost operations. By doing this routinely, as part of the daily way they do business, telecoms operators can position themselves for growth.

Karim Sabbagh is a senior partner and Chady Smayra a principal at Booz & Company