OUTSOURCING TELECOM OPERATOR'S SHOPS - CAN THE OPPORTUNITY BECOME A THREAT?
October 2010
Josep Que, Partner
jq@deltapartnersgroup.com
Miguel Moreira da Cruz, Manager
mmc@deltapartnersgroup.com
The opportunity
Telecom operators around the world are striving to reach market share, revenue and EBITDA targets in an increasingly competitive environment. This impels companies to cut costs while differentiating in key areas and to move away from non-core activities that allow little or no differentiation and do not impact bottom-line KPIs in a direct and tangible way.
This strategy has supported the outsourcing option in most levels of the telecom value chain such as network infrastructure, customer service and management of own or branded shops. In this way, operators are focused on the core drivers of the business while leveraging on external specialists to deliver in non-core areas.
The branded channel is critical for any operator as it is the main point of contact with the customer and has significant weight on opex (1-3% of an operator’s revenues) and capex (a shop can cost around USD 100k). Outsourcing of the branded channel gained momentum with the realization from operators that the required know-how to manage shops successfully around HR, stock optimization and trade promotions, was not present in their organizations.
For example, annual staff turnover levels in telecom operators are around 10-15% while in technology retailers these figures can go up to 50-60%, which poses a completely different challenge on staff selection and recruiting. At the same time, salary schemes in operators usually account for 10-20% of variable compensation while best practices in the retail industry suggest levels of 70-80% to ensure proper motivation of the front-end personnel. Although the two businesses – telecom service provider and telecom retail – are linked on the product side, they differ in the key drivers.
As soon as telecom operators realized this, new players emerged as “sales partners” in the branded channel. In an outsourced model, sales partners are responsible for managing and operating the branded channel (commonly known as operators’ stores or “own” stores) on behalf of the operator.
Capturing the benefits of outsourcing own shops
In addition to allowing operators to focus on key areas of the business, outsourcing the management of the shops often facilitates roll-out of the branded channel since part of the responsibilities in the roll-out program are transferred to external partners. On top of that, the roll-out can be achieved at relatively low expense when some of the roll-out costs are also transferred to the partners (e.g. through franchise fees or by charging civil works costs), which reduces investment in new outlets often by more than 50%.
As a result, telecom operators manage to finance expansions of the branded channel and even reduce roll-out timelines quite significantly and thus outsourced models become very popular. For instance, Orange and O2 in developed markets or MTN and Etisalat in emerging markets have all added stores managed by external partners to their established network of company-owned outlets in a way to support expansion.
External partners also typically have know-how related to the local market which not only streamlines the process of identifying and securing a new location but also allows managing shop operations in alignment with local dynamics. In many diverse countries like South Africa, Jordan, Spain or Belgium, operators have even opted for regionally focused partners to manage branded shops due to the different characteristics of each region.
The benefits of the outsource option are evident and tangible but there is no such thing as free lunches and one has to bear in mind the threats that lie behind.
Threat 1: Potential hostage situation with strong sales partner
With such clear advantages why would operators still opt to control the branded channel directly?
MTN South Africa is one of the operators that can probably illustrate this well. When, in January 2009, MTN made the decision to acquire the remaining 59% of iTalk, a distributor that managed more than 100 of MTN exclusive stores, it knew the importance of gaining control and security over such a critical channel. Among other reasons, MTN wanted to avoid decisions regarding its premium channel that were not aligned with the company’s best interests.
The early stages of the various outsourced models have often disguised its potential risks. South Africa is one of the countries where outsourcing models in branded channel are more mature and so also the early benefits were already captured and the effective risks are now taking place.
Any external partner is profit-driven and can easily deviate from the initial strategy and engage in actions that go against the operators’ goals and therefore compromise the branded shops, which represents the premium channel of any company and where one wrong action can have the most negative impact. For example, if a certain shop is not performing well the company (or partner) managing it might prefer to shift its traffic to another shop and therefore push the operator to close it, while the latter is concerned about customer service, positioning and brand visibility. Often the operator will even agree on closing it in order to prevent disruptive actions that might harm the channel deeper.
In some situations operators see themselves in the hands of their “partners”, completely vulnerable to “their” will due to their weight and dominance of the sales channel. This type of risk is highly correlated with the concentration of the channel in a few partners. That is why many operators, especially in emerging markets where recent start-up operations are more frequent, limit the share that a single partner can have and impose effective covenants to prevent “super-dealers” in the branded channel.
On top of that, monitoring is always part of the operator’s role in any outsource model to ensure all guidelines are complied and nothing happens in the branded shops that can harm its image and brand equity.
Threat 2: Outsourcing does not imply cost savings
Another aspect that frequently backfires in outsourcing models is related to the financial drivers of the business. Telecom operators look at outsourcing as a perfect way to increase coverage of branded shops with minimum capex/cash requirements.
However when part of the roll-out costs are supported by external partners, the commissions and subsidies demanded will also be higher. At the end, potential partners will factor all estimated revenues, cost and investments into a business plan that will have to generate positive NPV. Operators are therefore reducing short-term capex by adding long-term opex, and even covering high rates of return demanded by shareholders in the retail business.
It seems a great option when next year’s budget is being done but creates a challenge for profitability in the years to come.
Threat 3: What about customer service & retention?
Outsourcing models are intrinsically linked to periods when telecom operators are concerned about fast roll-outs and focusing on the key areas of the business, very common in stages of growth and subscriber acquisition. In this situation there are two key questions that arise: What happens when the focus of the operator moves from acquisition to retention? Will the partners be able and willing to provide quality customer service when this becomes “the rule of the game”?
This is always a challenge in mature operations as acquisition levels drop and most of the revenue streams for external partners are linked to sales of SIM cards, with the exception of revenue sharing and few other service commissions or subsidies. Despite many efforts to change this, it seems that partners always see more value out of acquisition rather than retention. We must not forget that the retail industry is mostly about selling and this is what partners are experts on doing.
To cover the lack of service-oriented operations in shops managed by sales partners, operators try to include commission elements linked to quality of operations and apply service commissions, in a similar model to outsourced call centers. However, this is “easier said than done” and implementation of such models has so far been a challenge that not many have succeeded to overcome.
Threat 4: Back-end support and choosing the wrong sales partner
Finally a common question that comes after the decision to follow the outsourcing route is “which partner to bring in?”. Most of the times this is the cornerstone for success of the model. Any outsourcing model will inevitably fail if an operator cannot attract the right partner. Telecom know-how, retail expertise and the ability to put a dedicated structure in place are some of the fundamentals that partners who will manage and operate branded shops should have. At the same time, even the most professional and capable partner will perform below standard if it does not have the right support from the operator. When McDonald’s Corporation decided to expand its retail footprint through an outsource model and implement a franchise concept it invested heavily in designing all the processes and creating the full back-office support that would ensure success for its franchisees. Today, any new McDonald’s franchisee acquires a complete turnkey solution and is ensured total support during the length of the contract. This is where telecom operators many times fail to deliver and partners are left totally accountable for most operations in the channel. On the other hand, even if a perfect model is achieved it might still not work out as wrong partners can always be selected and operators need to account for this. For those situations, as in many others, the only protection is an effective exit clause that allows operators to break the marriage without being dragged into a painful litigious divorce.
Conclusion
Relevant benefits have been captured by operators that have outsourced their own shops in terms of efficiencies, rollouts and costs, and although challenges exist, identifying and realizing them is the first step to reap the benefits of the model.
Ensuring the success of outsourcing an operator’s own shops requires being aware of the several threats that may arise and implement effective mitigation actions e.g. setting metrics for customer service, creating the support structure for the external partners while following a thorough process for selection of new partners.
The current level of competitiveness in telecom markets is making this an increasingly attractive option for operators to consider, thereby following a currently popular trend worldwide.