IT as a Value-Creation Lever

IT as a Value-Creation Lever

The Delta Perspective

Time for Telecom Operators to seize the Opportunity

Authors Javier Garabal - Partner -
Kostadin Atanasov - Manager -
Govind Balan - Principal -

Key Highlights

While telecom CEOs are staring towards the horizon in search of value creation opportunities for their investors, the answer may well be hidden in plain sight within the organisation itself – the IT function.

Traditionally regarded as a cost centre and “second class citizen”, the IT function holds the potential to take telecom operators to a new level of performance through a fundamental revamp based on two key steps.

The first is reaching the “expected” level of operational efficiency and reduce unnecessary wastage of resources. The second is boosting business performance beyond the baseline by directly and indirectly increasing the operator’s capabilities across virtually all functional areas.

In fact, improving the IT function is not just an opportunity, but a must in an industry where telcos will have no choice but to excel in agility and efficiency as well as across analytics, customer experience and partnerships with third parties (among others) – all attributes fundamentally enabled by IT systems.

Extracting substantial incremental value from IT does not happen overnight – it requires a structured and disciplined approach across several fronts. This whitepaper outlines exactly how operators can leverage IT to capture hidden value – starting today.

Why: Industry at a crossroads

Today, the telecom industry globally operates in a tough environment and faces many challenges. Subscriber and revenue growth are slowing as most markets are heavily penetrated. Pricing is under pressure from competition. Telcos are looking for ways to cut costs and improve profitability, while they still need to invest in their networks in order to accommodate increasing data traffic.

The industry is also impacted by evolving consumer behaviour, advancing technology and changing market structure trends. Consumers are using a variety of devices for information and entertainment. Cloud computing is becoming increasingly widespread. Telcos are no longer the centre of an ecosystem including over-the-top content providers (OTTs), handset manufacturers and IT players who are forming alliances, managed services relationships and outsourcing symbioses.

To address that new reality, telecom operators are embracing a spectrum of changes—from reorganisations and headcount reduction plans to creating “digital” subsidiaries or launching ambitious “big data” initiatives.

Yet there is a key value-creation lever that has been underexploited: a fundamental overhaul of information technology (IT) function. This whitepaper will show how a well-managed, state-of-the-art IT function can generate a significant uplift in performance and can be a source of sustainable competitive advantage.

What: Creating value through IT

Traditionally a ‘second-class citizen’ in most operator organisations, IT is a non-visible catalyst with enormous potential to improve business performance and value creation. Telcos need to reconsider and seize the opportunity to make IT a driver of efficiencies and top-line growth.

In short, there is substantial value to be unlocked from an operator’s IT function. In some cases, we have found that harnessing the untapped potential of IT could result in EBITDA improvement of 8 percentage points and above. There is no reason for telecom operators not to mine this opportunity, strengthen their environment and enter a new phase of growth.

1. Minimise business disruptions

Before all else, operators must put their houses in order and launch structural initiatives to minimise business disruptions caused by IT, which are, unfortunately, common in the industry. Business disruption is an area in which seemingly minor glitches compound into serious issues of poor execution, dissatisfied customers and lost revenue. These issues are in theory basic IT hygiene, yet they happen far too often—they are very real and very costly.

Time to market for new products is a frequent victim. In 2011, a mobile operator in a competitive Middle Eastern market accumulated a pipeline of more than 60 product-development requests and struggled for almost a year to push them through. Customers were churning to competitors, while at the back-end the IT and marketing departments were defining and redefining product functionality and attaching a “high priority” label to all pending requests.

Another common source of business disruption is the loss of customer data. A converged player was struggling to align data from its separate billing and customer care systems. Customers complained that their service access was cut off due to “unpaid bills”. In fact, the payment information from one system did not synch with the other, resulting in disrupted service and revenue lost. The situation turned worse when the same issue surfaced in the following month, affecting the same customers.

Business disruptions can also come in the form of product functionality flaws. In a recent example, a highly publicised new tariff plan launch resulted in a large initial uptake and an even larger embarrassment for a mobile operator when customers realised that their credit was “leaking” due to an implementation glitch originating from an unstructured IT development process at the back-end. The operator was forced to compensate all affected customers, wiping out three months of revenue and leaving new customers disillusioned.

Finally, business operations can be disrupted by simple system outages. For example, downtime in the provisioning system of a large South Asian mobile operator meant that for three days, customers were unable to activate their data bundles which resulted in customer dissatisfaction and substantial revenue loss.

All the examples illustrated above stem from two key root causes:

  • Imperfect IT governance processes (within the IT department, but even more often between IT and internal business units), e.g.:
  • ineffective communication between IT and business units
  • sub-optimal demand management
  • poor capacity management
  • unstructured development processes
  • sub-optimal testing and quality assurance processes
  • Imperfect system architecture, e.g.:
  • fragmented architecture and obsolete systems
  • silo-based chains (e.g. order entry + provisioning + billing systems)
  • fault-prone interfaces with legacy systems
  • structural defaults in architecture or IT infrastructure

Addressing the root causes outlined earlier should eliminate the majority of small issues and, more importantly, contain the negative impact on business performance. This will also allow IT organisations to channel their resources and time into more strategic issues.

2. Opportunities to boost business performance

By learning from the new digital economy, telcos can improve revenue growth by customising their products to individual customers. The data for personalisation is readily available, it simply needs to be analysed and exploited. Taking the concept further, how you cross-sell is equally important—proactively suggesting the “next product to buy” and making real-time offers and promotions can result in revenue uplift almost immediately. Furthermore, telcos can cross-sell an existing multitude of content and applications by integrating their IT systems with third-party (OTT) providers and pushing those products and services to their existing customer base.

In the area of cost reduction, migrating customer transactions to online channels can reduce support requirements and cut call centre costs by double-digits, as a European telco has recently shown. As a result, live agents can shift their attention from supporting to selling. Similarly, back-office operations can be streamlined by aggressive automation, reducing manual work. Finally, inventory-related costs (e.g. storage, logistics and shrinkage) can be dramatically improved through an end-to-end IT-enabled supply chain.

The best way to tackle churn is through structural levers. Step one is to reduce customer dissatisfaction (in some cases by up to 20%) by reducing order errors, lead times and call centre waiting time—all of which can be tackled almost entirely by IT mechanisms. The overall customer experience can be improved through IT adjustments at all touch-points. For instance, a seamless experience of multi-channel interaction such as “order on the web, pick up in the store” will differentiate the customer experience. Interacting with customers over social media and addressing customer complaints and issues interactively online is a great way to communicate with customers directly in a timely fashion and to differentiate their customer experience.

3. Extra benefit: optimise costs within IT itself

An IT transformation programme requires investment but also generates savings from optimising the costs within the IT function itself. Traditionally, the IT department has been a cost centre without direct revenues. In addition, operating costs and capital expenditure are often high. Depending on an operator’s scale, IT setup and operational maturity level, IT spending can vary significantly.

It is critical to understand that not all costs are equal in nature. Benchmarking one operator’s overall IT costs with those of other operators worldwide will only give half the picture. Cutting IT costs across the board can potentially be harmful to an operator’s capabilities to compete and grow. The approach to IT cost optimisation should make a clear distinction between three types of costs—costs to operate, costs to grow and costs to transform.

Operating costs are costs required to operate the business (“to keep the lights on”). Such costs include data centre operations, hardware and software maintenance costs and IT helpdesks. Operational costs are the black sheep in the herd. They have a tendency to grow rapidly if unchecked. If an IT department is to undergo optimisation, these costs must be tackled first.

Growth costs are related to new developments—e.g. new products and services, new campaigns and the creation of IT support for new processes (or optimised ones) in the organisation. These costs are necessary for an operator to respond quickly to changing market dynamics. Although these are healthy costs, experience shows that there is much room for improvement without impinging on an operator’s agility in the market.

Transformational costs are the “good” costs. These are mainly investments that help an organisation acquire new capabilities, such as developing new business models, entering new market niches and becoming more competitive. These are costs that increase the company’s assets and lead to new revenue sources, such as through opening new segments or capturing a bigger share of existing markets (e.g. the investment required for M2M offerings for specific industry verticals).

4. Putting things in perspective—parallel with internet brands

We do not have to look very far to see how IT can be leveraged to create enormous value (and in some cases whole business models). The best evidence are internet brands such as Google, Facebook or Amazon—all born in the internet era, built out of bits and bytes, and clear examples of the way business is done in the 21st century. There is no reason why telecom operators cannot leverage IT to become “21st century” too.

IT makes new business informed and intelligent. With the help of deep customer understanding supported by information technologies, agile businesses adapt a global product to customers not locally but “personally”. From the way Google remembers your language preference to the way Amazon recommends your next purchase—rich customer data helps those businesses be informed, intelligent and relevant to their customers.

IT makes new business quick. The length of product development cycles are shrinking. Competition is unforgiving and a month delay translates into percentage points of lost market share. When Kenya’s Safaricom introduced M-Pesa ahead of its competitors, it locked-in a massive customer base, which is difficult to lure away with aggressive price competition.

IT makes new business efficient. Availability of robust business information helps better business decisions; efficient operation keeps management attention on the big picture and lean automated processes keeps costs low and customers happy.

IT makes new business partner-friendly. By linking with other players in the ecosystem, businesses exchange information in real time and are able to offer integrated products. This helps them not only boost revenues but delight customers by offering them streamlined experience across more touch points.

How: The four pillars of value creation through IT

How should operators leverage IT in order to capture the opportunities described above? The answer lies in approaching the issue from multiple angles, collectively involving all functional areas in a concerted effort. All CxOs should bear in mind four main pillars: (1) connecting IT with business operations; (2) drawing up a clear vision of the future and execution plan; (3) improving the “factory” on service delivery; and (4) spending intelligently. These approaches are not to be dealt with sequentially, nor are they mutually exclusive. The optimal strategy depends on the unique situation of each operator. The business benefits are illustrated below together with the broad guidelines on applying these principles successfully.

1. Binding IT and business operations closer together

A key factor that serves as a common foundation for all IT-derived value is ensuring that IT is not a “technology silo” but rather a unit that shares and drives the business objectives of the organisation. This often requires a fundamental change in mindset within IT and all other functional areas of an operator. In practical terms, this means the IT department must (among other matters):

  • Know and understand the overall company goals, their importance and priority
  • Understand its fundamental role in helping to achieve these goals
  • Share the responsibility for the core commercial key performance indicators (KPIs)
  • Communicate and be informed continuously on progress and achievement

IT and commercial functions should create a layer of intelligence for managing demand—an area often overlooked with far-reaching consequences. For many operators, the product and feature development pipeline is often filled with second-priority requests with undefined business impact. This tends to consume IT capacity that could otherwise be assigned to more relevant efforts. Even worse, an incorrect understanding of the business drivers behind a requirement can end-up in over-delayed / over-budget IT projects that fail to capture any business benefit.

The most important function of this “demand organisation” is to ensure that communication between IT and business is truly open and transparent. We believe there should be an element of joint exploration and learning on how things work and why—both from IT and commercial units. Communication must be frequent, interactive, formal and informal in approach, while respecting established vehicles (e.g. documentation and test forms). Commercial teams should discuss product plans with IT on at least a three-month horizon, while IT units should discard their order-taker mindset, present in most organisations today. This communication must happen in all phases: not only design or prioritisation, but also during project execution and implementation.

Bringing IT and the rest of the organisation closer has a big positive impact on time-to-market for new products and features. Shortening the time-to-market often requires a complete process alignment between IT and commercial units. Delta Partners’ experience has shown that improvements of as much as 50-70% in time-to-market are possible by simply optimising the product development process (i.e. with changes in roles, people, governance, process and so on), for a given—often complex—existing architecture.

2.Have a clear vision for the future and execute accordingly

The foundation for all future value creation is to have an IT strategic plan to support the organisation’s broader strategic goals in the medium and long term. This plan should cover all value-creation angles mentioned above and establish concrete initiatives on a 3-5 year time horizon which are measurable and linked to the organisation’s performance (financial and operational). The strategy should be fine-tuned on a regular basis to reflect the emergence of new technologies and changing business priorities.

Building such a plan requires: (1) a critical view of the current IT situation, the identification of gaps and defined improvement actions to address them; and (2) a set of structural initiatives, each driving incremental value. Developing a strategic IT plan clearly requires a broader organisational buy-in—especially from Marketing, Sales and Network functions, in order to facilitate execution and ensure full alignment with strategic plans from all other functions.

There are two factors particularly critical to the success of the strategic IT plan: the design of the architecture/system blueprint and the selection of vendors and partners to execute the plan.

IT must crystallise a very clear end-state picture of the capabilities required to support the plan. This often requires a complete re-think of the entire system architecture as per strategic requirements in all domains (e.g. CRM, billing, channel management, OSS...). As usual, the devil is in the detail. How these systems are expected to fit together and the desired capabilities of the whole architecture must be taken into account early on as it will fundamentally impact system blueprint design. Some examples include:

  • Required multi-channel capabilities
  • Degree of end-to-end process automation and process flexibility
  • Necessary real-time capabilities
  • The type of multi-service offerings that must be supported
  • Expected external interfaces and integration to third-parties

Also related to this is the platform/vendor selection. First and foremost, IT investment, typically in the range of tens of millions of dollars, should be viewed as “creating partner relationships” rather than “completing transactions”. Simply choosing the lowest bidder is not always the best or cost-effective approach. Instead, a thorough evaluation of all options should identify which platforms would best serve the longer-term goals of the organisation as per the strategic plan (i.e. the platform’s philosophy, its architecture and capabilities, integration scheme, etc.) and which system integrators are most prepared to embrace the complex challenges together with the organisation.

Last but not least is the question of execution. From a longer-term perspective, the organisation must ensure that plans are realistic, concrete and actionable, while implementation capabilities and processes are in place at each stage. It is common that the probability of planning and budget overruns (or outright project failure) grows in proportion with the project’s budget and its associated impact on business results. Project failure can wipe out a large proportion of the potential value expected initially.

3. Improve the “factory”—simplicity, agility and quality

While the traditional view of the IT department is a murky domain of complex systems inhabited by engineers speaking arcane languages and better left alone, there is no reason to perpetuate this illusion. The IT organisation is like any other, and its ultimate goal is to deliver clear and measurable results. Therefore the same operating efficiency principles should apply. More often than not, there is a clear need to shake things up and improve the “factory”.

First off, change must begin from within by evaluating the IT organisation. Given the high level of complexity, having clear roles and rigorous adherence to processes is more critical than ever. The exercise should include process flows, key organisational interfaces, SLAs/KPIs and clearly defined intermediate and final outputs. It should also include dimensioning the IT organisation, further defining key sub-departments, roles and responsibilities and the required skillsets. It is also critical to define which functions/roles can or should be outsourced and which remain internal. Unfortunately, in reality, many IT organisations are “inverted”—key roles are outsourced, while functions that could be executed much more efficiently by vendors remain in-house. Finally, a clear governance model must be defined to cover all aspects.

As with streamlining the human aspect of the organisation, IT should also streamline the mechanical elements (i.e. systems). In mature operations—and most telcos fall into this category—years of gradual growth has led to an accumulation of multiple and technologically different layers (including legacy assets) leading to a high level of system complexity. With so many undocumented case-by-case adaptations, custom fixes and patches, it is common to see a spaghetti-like environment. The lack of detailed documentation (which may have seemed a good 80/20 idea at the time) makes the technology stockpile difficult to operate even by highly-skilled engineers.

Needless to say, such a complex environment leads to additional costs (e.g. maintenance, further fixes and lack of standardisation for procurement), longer product development and testing cycles, higher probability of bugs and system outages. A complexity reduction programme should aim to: (1) reduce the number of systems by decommissioning or consolidating where possible; (2) streamline system interfaces; and (3) align/consolidate different technologies.

Finally, the IT organisation must review internal functions and optimise output quality and productivity. Operational improvement programmes may vary in scope—from individual processes to entire sub-departments, for instance: software development, infrastructure operations and maintenance. In line with the overall IT strategy, operational improvement initiatives must weigh the cost/quality/productivity trade-offs and prioritise initiatives accordingly. To ensure sustainable results during the transformation exercise, the organisation must ask:

  • What are the root-causes behind sub-par quality and low productivity?
  • What KPIs are deployed? Are they part of performance evaluation?
  • What internal processes and policies can be restructured to speed up organisational functions?

4. Improve IT cost structure, focus on value-added spending

Although IT costs are 3-4 times lower than network-related expenses (the other technology-heavy aspect of the organisation), there is usually room for improvement, potentially in the spending mix. As mentioned above, to avoid crippling their IT capabilities, an operator should make a clear distinction between the three main types of costs: operational, growth and transformational. Cost reduction should focus on achieving sustainable control over operational costs, typically the largest cost component, and make enough room for transformation costs, which at the end of the day are the ones making possible the business performance boost mentioned in the previous chapter.

IT departments must distinguish the core and non-core functions within the organisation. Such analysis will help identify the systems and processes where outsourcing will reduce costs. The benefits of outsourcing and offshoring are known to operators. Cost reductions are often in the 20-40% range and, in most cases, this comes together with quality and time-to-market improvements attributed to structural improvements, incentive changes and the functional focus brought by the external partner.

In cases where outsourcing is already in place, there is often room for incremental improvements by consolidating ad-hoc fragmented contracts with many vendors into larger, mid-term contracts with a few select partners. As part of the outsourcing strategy (and similar to vendor selection for IT platforms), partner selection and negotiation are equally critical and require a clear, structured and methodological approach driven by fair rationale.

But outsourcing is by no means the only cost optimisation lever. IT departments should also look at optimising in-house functions. Some key angles to explore in this cost reduction exercise are: consolidation of assets (e.g. data centres) and teams, setting of budget “caps” (e.g. limiting maintenance spend vs. development), revision of service levels and—once again—prioritisation of demand.

Finally, it is essential to have robust financial and performance management measures in place to deal with increasing complexity. IT needs to develop a profit-centre mindset rather than a cost centre approach. This implies that various costs can be linked to broader company initiatives and returns on investment (ROI) can be clearly measured. Many companies struggle to understand their IT costs at a more granular level in the absence of chargeback mechanisms for shared costs. These measures have to be implemented for full accountability.

When: Time to act? Today.

The right moment for telecom operators to leverage IT as a strategic weapon for value creation is now. It is increasingly relevant at a time when investors see operators as mature utilities with limited growth potential.

The good news is that CxOs who act promptly will not only help their organisations break away from an industry-wide trend of deceleration, but will also gain competitive advantages in their own markets and, as a result, achieve greater market share and scale. Such structural wins bring incremental business value beyond the sum of the parts.

The challenging part is that rethinking—and putting into practice—a revamped IT role cannot happen overnight. It requires a well-structured, multi-step approach that can be of considerable complexity. IT transformations take time and telecom operators should not delay the moment to initiate this journey.

Delta Partners’ IT strategy offering

With our deep telecom expertise and broad global experience, Delta Partners can help operators define and implement IT transformational programmes that deliver the desired business value. Our independence from any vendor or solution provider (a pure-play consultancy), our dual business and IT resource profiles and relevant cross-functional perspectives differentiate us.

We have developed a suite of offerings to help our clients extract real value from the IT function. The mix of modules depends on each operator’s specific situation along several dimensions:

  • Stage of market development and competition
  • Level of product portfolio sophistication
  • Operator size (customer base, IT systems)
  • Development of IT systems/architecture
  • Level of existing IT capabilities
  • Maturity of IT processes in commercial and business planning areas
  • Extent of cross-functional efficiencies

The illustration above summarises Delta Partner’s offerings in the IT strategy space.