PRINT THIS PAGE The fixed network market in Western Europe
12/07/2006. Source:Mercer.
In the past, Western Europe’s fixed network incumbents managed profitability by cutting their costs and by improving their efficiency, says Mercer Management Consulting. However, their business processes remain too inefficient and cost-intensive when compared with those of other service-based industries. What is more, the cost gap promises to widen further due to continued revenue losses in the original business segments of voice telephony and data transmission. Headcount reductions alone are not sufficient for overcoming the cost pressure. On the contrary, what Western European fixed network carriers have to do is reduce the complexity of their products and automate all of their business processes. This is what the International Telecommunications Benchmarking Forum study has found. As part of the study, Mercer Management Consulting has collaborated with the world’s 40 largest fixed network providers to compare their processes and costs in the fixed network segment.
Formerly state-run telecommunications incumbents like British Telecom, France Télécom, Telecom Italia and Deutsche Telekom are still among Western Europe’s largest employers. In the fixed network segment, they currently employ 440,000 people and generate revenues of EUR 114 billion. Their fixed network business is highly profitable. In 2005, they drew some EUR 46 billion in profit, which corresponds to 42 percent of sales.
Over and above that, fixed network carriers in Western Europe have made great strides professionalizing their organizations in recent years. They have shrunk their costs by EUR four billion since 2002 and cut more than 70,000 jobs. Whereas in 2002 they lagged behind their North American counterparts and other service-based companies by 31 percent in terms of efficiency, that figure dropped to 22 percent in 2005. This trend will continue. The established players plan another EUR eight billion in savings by 2008.
Headcount reductions alone are not enough
A challenging market environment is increasing the pressure to cut costs. Western Europe’s fixed network incumbents are losing more and more market share while prices continue to fall. Telephone charges have dropped five percent in Western Europe since 2001 while the number of minutes spent on fixed network calls decreased by three percent. In that same period, the market share of the ex-monopolists fell from 70 percent to 60 percent, and in their core business of voice telephony, they are currently losing around EUR four billion a year in voice revenue from their customers.
The sale of preliminary products to competitors can make up for only a part of this loss. “The tremendous revenue losses are not attributable to the competition by new, agile fixed network carriers like Tele2, HanseNet and Cegetel alone. Mobile phones are also taking away market share from fixed network telephony,” says Uli Prommer, telecommunications expert at Mercer Management Consulting. In 2001, one fixed network minute corresponded to 21 seconds of mobile traffic. As early as 2007 we will be looking at 45 seconds. In its latest benchmarking study Mercer concludes that the market volume for fixed network telephony in Western Europe will drop twelve percent by 2010 and that the market share of the established carriers will shrink to less than 44 percent by 2008. If the telecommunications incumbents want to keep pace with financial market demands, they must reduce the costs in their fixed network business by nearly 20 percent.
One of the chief responses to the cost pressure among former monopolists is headcount reductions. France Télécom let go of some 22,000 employees in its “Fixed Line” division between 2001 and 2005, while British Telecom cut 17,000 jobs. That corresponds to 19 percent and 17 percent of their respective workforces.
Finnish company Sonera reduced its fixed network staff by more than one-third during that period. And Deutsche Telekom, which has let go of more than 20,000 people since 2001, intends to slash the number of employees in its fixed network division T-Com by further 20,000 between now and 2008. “Letting employees go but continuing to run your business the way you did before is not enough to sustainably reduce costs,” emphasizes Uli Prommer. “What really matters is streamlining the product portfolio as well as simplifying business systems and automating them more without adversely impacting the customer.”
Oversized product portfolios drive up costs and complexity
Since 1999 Mercer Management Consulting has been offering the International Telecommunications Benchmarking Forum, which now counts 40 world leading companies as participants - companies that use the forum to regularly judge their performance against that of their competitors. The most recent benchmarking study indicates that there is still enormous potential for Western Europe’s fixed network carriers if they would just streamline their product portfolios and automate their workflows more.
Some of the region’s telecoms offer their residential customers as many as 2,000 products. “Such oversized product mixes are almost impossible to manage and keep straight,” notes expert Prommer. What is more, analyses of excessively large product mixes show that 97 percent of the revenues come from less than 15 percent of the products, with the other 85 percent accounting for only three percent of sales. Prommer explains, “Telecoms with smaller, more transparent product portfolios tend to be more customer-driven, more efficiently organized and more profitable.”
Online portals are often nothing more than a façade
Customer care, product and service sales, the technical work that goes into making products available and invoicing are still largely manual tasks at Western Europe’s fixed network carriers. This is labor and cost-intensive, as the example of product sales demonstrates: When customers need telephone service in a new apartment, they place a call to the call center or visit one of the company’s stores, where the order is taken and forwarded. Nearly one-quarter of all orders are then re-processed in a back office by a second sales employee, meaning the information is checked manually and re-entered into the system. “Sales and service champions like eBay, Amazon, Dell and McDonald’s, who have served and helped their customers for years using automated systems, would be shocked by this kind of waste,” explains Prommer.
On average Western European fixed network carriers handle only five percent of their sales via online portals. And even that minute portion is not completely automated. Customers may enter their orders online, but a back office employee prints them out and inputs the information again by hand. Mercer estimates that some seven to ten percent of all online orders are re-processed manually at some point along the way.
“To stay competitive, the telecoms are going to have to conduct more than half of their sales over the web by 2010,” clarifies Prommer. “Especially when it comes to simple transactions like turning phone service on or off, switching rate plans or selling basic devices like modems, telephones and wires, Western Europe’s fixed network carriers will have to offer online applications going forward.” According to Mercer, this could bring selling and marketing expenses, which currently amount to as much as eleven percent of revenues, down to between five percent and six percent.
Better margins through standardized preliminary products and automation
The situation in technical customer service is similar. Fixed network providers shelled out some EUR nine billion in 2005 to install and repair fixed network connections for voice telephony, DSL and data services. That corresponds to some 20 percent of their total operating costs. According to the benchmarking study, they aim to reduce their costs in this segment by approx. EUR two billion between now and 2008. Here, too, the greatest leverage lies in simplifying and automating.
“In order to deliver a finished product like a telephone extension you often have to produce several preliminary products,” explains telecommunications expert Prommer. “The more preliminary products a telecommunications company has, the more complicated, costly and error-prone its production and customer service will be.” To simplify both, Western Europe’s fixed network carriers must substantially reduce the number of preliminary products they have and standardize them.
Some 40 percent of all voice connections and 65 percent of all DSL connections are installed manually in Western Europe. Differing products and poor availability of network data are to blame. In the US, by contrast, 95 percent of all installations are handled automatically because of the greater degree of standardization in the networks there. As a result, Western European providers have to spend about EUR 180 per installation, while their American counterparts pay out only EUR 42. The potential savings in the installation and repair of fixed network connections is currently as high as EUR three billion in Western Europe according to Mercer. Just by simplifying and automating, the established providers could see their operating margins climb from their present average of 42 percent to 44 percent.
Automation cannot stop short of invoicing either. Every bill that a Western European fixed network carrier sends to its customers costs as much as EUR 2.10, with the expense attributable to paper, printing, IT systems and postage. What is more, the charges on the invoice are often less than the cost of generating and presenting the bill. By comparison, a mere one percent of all residential customer bills are currently sent via e-mail in Western Europe. According to the benchmarking study, fixed network carriers intend to increase that amount to 16 percent by 2008 and to over 50 percent by 2010. “The advantages are clear,” says Prommer. “The telecoms profit from the far lower costs of online billing, while customers enjoy greater transparency with respect to their calls plus the cost and correct billing of those calls, because with a PIN they can view their account balances online at any time.”
Now is the time to set the course
Mercer pegs the cost-saving potential of Western Europe’s fixed network carriers at EUR 13 billion. All providers have acknowledged that simplifying and automating will create enormous opportunities to improve cost structures and business processes on a lasting basis. Some have already brought their business processes up to date by following the example of companies like eBay and Dell. Several others, however, have yet to start any kind of systematic implementation. Prommer is convinced that “the only companies capable of saving their margins are the ones that get on board now and make their operations more professional. Besides rescuing their margins, they would also be laying a foundation for holding their own in the approaching shift in the telecommunications market.” Mercer expects, for example, that most telecommunications companies will rejoin their fixed network and mobile divisions in the years ahead to create synergies and harness new market potential.
Five challenges for Western Europe’s fixed network carriers
Continue to reduce costs
Growing competition from alternative carriers and mobile communications is leading to serious revenue and market share losses for the established telecommunications companies. The pressure to cut costs will remain enormous going forward. Headcount reductions alone will not be sufficient to sustainably improve cost structures. All business processes must be simplified and automated.
Streamline product portfolios
Oversized product portfolios are almost impossible to manage and largely unprofitable. Transparent, customer-driven product mixes generate more customer satisfaction, more efficient operating processes and greater profitability.
Increase online sales
Currently, an average of only five percent of sales is web-based. To remain competitive, companies will have to handle more than half of their product sales over the Internet in the medium term. Online applications will be a must going forward, especially for straightforward transactions like turning service on or off and for ordering common equipment like telephones and modems.
Standardize preliminary products
The installation and repair of fixed network connections for voice telephony, DSL and data services currently account for some 20 percent of overall operating costs. Having fewer and more standardized preliminary products will help to simplify production, decrease the incidence of errors and improve customer service.
Push business combinations
The process of simplifying and automating business processes is linked to an increase in value. All fixed network providers must become more professional organizations now in order to maintain their margins later and to boost their attractiveness as potential candidates for the upcoming (re-)mergers with mobile divisions.
The study
In 1999 Mercer Management Consulting launched the International Telecommunications Benchmarking Forum, which now counts 40 leading telecommunications companies from Europe and the US as participants. Members of the forum provide their key performance figures for the areas of sales, marketing, technical service, network operations, IT operations and administration. Mercer breaks down the figures into over 20,000 records at regular intervals. The performance matrix of the Mercer study allows the participating fixed network providers to ascertain how cost-effective they are in the various business segments and to compare that performance with that of their competitors. Individual results from the forum members are not published. The study investigates best practices in the top firms and, in collaboration with the management teams of the forum members, pinpoints industry trends.
Mercer Investment Consulting is a leading global provider of investment consulting services, and offers customized guidance at every stage of the investment decision, risk management, and investment monitoring process. Our objective is to help clients make better investment decisions, increasing expected returns while managing risk and cost. We work with the fiduciaries of pension funds, foundations, endowments, and other investors in more than 35 countries.
|
