Insight: Efficiency in telecom
To better understand efficiency – and efficiency characteristics of the telecom operator sector – a unique insight is provided here. If you would like to use some of the information in the page, please do, but only if you refer to the source.
- What is (operational) efficiency?
- How to improve efficiency?
- Characteristics of efficiency in the telecom operator business
- How to measure efficiency
- Rules of thumb
- Drivers of efficiency (MythBusters)
- Improving efficiency in telecoms
What is (operational) efficiency?
Take a look at the picture to the right.
Operational efficiency, or "efficiency" for short, could be said to be the output vs. input ratio.
In the picture to the right, your business should ideally be positioned "west" or "north" of the grey, typical, line – rather than "south" or "east" of it. If so, you have a better than typical output vs. input ratio.
What is then output and input?
Examples of input factors are: Money (OPEX, CAPEX, other investments), people (headcount), time & effort
Examples of output factors are: Money (revenue, cash, margin), new customers, customer loyalty, market differentiation, productivity (of headcount), innovation, quality, speed, agility, complexity, opportunities
Too often, comparisons are made solely on the input side ("How much do you spend?"). An operator can e.g. be criticised for having used more CAPEX than another operator. What if the CAPEX has been used for a new IT solution that improves the productivity of the company by reducing the need for manual tasks and thereby avoiding costly errors? If comparing also the productivity as an output factor, the operator that spent more CAPEX might have a better output vs. input ratio.
How to improve efficiency?
Efficiency can be improved in many ways – by improving the output vs. input ratio.
The picture to the left features four improvement strategies:
- Same for less
- More for less
- More for same
- Much more for more
A common misconception is that efficiency improvement is always about using less. You can improve efficiency while using more as well – as long as you improve the output vs. input ratio.
In order to improve efficiency, you have to measure efficiency. There are two questions you have to answer to improve – the first one is often forgotten.
- "Where am I?" is answered by analysis & benchmarking
- "Where do I want to get?" is answered by strategy
Characteristics of efficiency in the telecom operator business
There are a few characteristics that are quite specific to the business of telecom operators:
Local, not global, competition
Unlike e.g. electronics, automotive, raw materials or software industries, telecom operators are seldom meeting global competition. Instead, they compete with a number of local operators that also have been given licenses in the country of question.
Since licensing of fixed networks isn't tied to spectrum, competition can be more global within the fixed network business compared to mobile. In a local perspective, though, the cost to build (or rent fixed network capacity from the incumbents) is often a cost barrier for outsiders within fixed.
In-house was the norm
Also non-incumbent operators that were given licenses in the 90ies started by handling most tasks in-house. Rapid growth, nice margins and a lack of capable partners contributed to this.
Ten or fifteen years later, in certain emerging markets – especially India – operators went for a partnering model instead. Even though the initial driver was speed and risk avoidance, not cost saving, the success inspired operators in mature markets to start challenging the previous in-house norm.
Today, 20% of used headcount is with partners in mature markets. Emerging markets are at 40%.
Scale doesn't drive efficiency yet
In truly global industries, like software or automotive, scale drives efficiency – even if scale is not the only explanation to success.
Telecom operators in large countries are however generally not more efficient (in e.g. unit cost or productivity) than operators in smaller countries. One explanation might be that competition in larger countries is tougher than in smaller countries, but this should also be to the benefit of the operators since the competition between their possible partners and subcontractors is tougher too.
The likely explanation is instead a combination of "Local, not global competition" and "In-house was the norm". Larger operators generally compare themselves to other larger operators – missing out on the efficiency innovation that smaller late-entrants have had to do. Larger operators are also having a stronger preference for in-house compared to smaller operators: The percentage of headcount with partners is lower the bigger an operator is.
Some operator groups have realised the decoupling of scale and efficiency and try to internationalise functions that aren't market specific – as e.g. central network operations, billing, product development, IT and support functions.
Subsidisation: The decoupling of hardware cost and perceived value
In mature markets, mobile handsets and fixed set-top boxes have typically been subsidised by operators – against a customer commitment to stay for a certain period. It has driven the penetration of advanced electronic equipment within the customer bases of operators, enabling customers to benefit from new services. Long contracts have given operators better business predictability as well thanks to lower churn.
Regretfully it has left the customers with a misconception of the relationship between hardware cost and value, though – a misconception that is really diffcult to break even if operators try. Consequently, operators in emerging markets are avoding the subsidisation model.
Maybe you can think of a few other characteristics?
How to measure efficiency
1. Measure a variety of KPIs
Since efficiency is about output vs. input ratio, both inputs and outputs have to be measured. In addition, the load and complexity has to be measured in order to understand under which conditions a certain output in achieved.
To exemplify, customer service calling patterns vary significantly between countries. People have a stronger preference for human interaction (and a stronger negative sentiment about self-serve) in certain countries. This is not only based on what you do, but on what other companies, in different industries, have done historically and the anticipation people have when contacting customer service. An operator trying to penalise a behaviour takes a significant risk of customer dissatisfaction. Of course you can try to make it as easy as possible to use self-serve, but you might have to accept uptake to be slower than in a neighbouring country having a different preference.
2. Interpret the KPIs in the light of the strategic differentiation
Now that you have measured a variety of KPIs, you have to compare/benchmark the values against others to understand where you are. Too often, the strategic differentiation of operators is not taken into account doing such KPI comparison: A KPI value of an operator differentiating with highest service quality, human interfaces in customer service, widest store footprint and technology innovation is compared to the KPI value of an operator differentiating with lowest prices, unlimited allowances and most aggressive marketing.
Instead, you should strive to interpret each KPI value in the light of your strategic differentiation. If one of your differentation strategies is that customer service quality should be the best – and with a higher element of human interaction – this comes with a certain cost. You have made a deliberate choice not to be as cost efficient within customer service as the leanest operators – since you mean that this money is invested to make you more competitive and efficient overall. To compare you with the leanest operator, criticising you for overspending within customer service is to criticise your strategy – which wasn't the point. Comparing you with operators having a similar strategy – or adjusting for the differences in strategy – is fine, though.
This thinking is well summarised in the picture to the right.
Comparison or benchmarking that stops already after the quantitative analysis is more or less useless: It drives all operators in the same direction, providing little means for differentiation.
Rules of thumb
We've just spoken about the need to measure a variety of KPIs when measuring efficiency and have strategic differentiation in mind.
Still, a few good rules of thumb could come handy when we speak about telecom operators:
|Averages||Mobile operator in a mature market||Mobile operator in an emerging market||Fixed operator in a mature market|
|Marketing, sales commission and hardware subsidy of net OPEX||45%||35%||20%|
|Customer service of net OPEX||10%||5%||>10%|
|Networks of net OPEX||10%||25%||35%|
|Personnel of net OPEX (incl. in OPEX items above)||20%||<20%||>30%|
|Customer service headcount of total headcount||50%||30%||>30%|
|Networks headcount of total headcount||<20%||15%||30%|
|Subscriber acquisition cost, contract||150 EUR||20 EUR||20-250 EUR depending on service scope|
|Subscriber retention cost, contract||140 EUR||n/a||n/a|
|Customer service OPEX per any contact||<1 EUR||<0,5 EUR||>1 EUR|
|Networks OPEX per base station and year||10000 EUR||18000 EUR||n/a|
|Outsourced headcount of total headcount||20%||40%||15%|
Drivers of efficiency (MythBusters)
As indicated in the "Characteristics of efficiency in the telecom operator business" section, scale is not a driver of overall efficiency within operator business – yet:
EBITDA per subscription does not increase with the number of subscriptions an operator has
EBITDA per subscription is rather explained by the competition level and market shares in the local market.
Are there other myths?
The biggest cost item for an operator in a mature market is subscriber acquisition and retention. Does scale have an impact on it?
Acquisition and retention cost does not decrease with the number of subscriptions an operator has
Acquisition and retention costs tend to follow "the market price". Efficient operators have loyal customers which lowers the need for acquisition and they manage to retain customers with slightly lower financial incentives than elsewhere in the market thanks to a higher customer satisfaction. These characteristics are not specific to larger operators as such. On the other hand, one could expect larger operators to get better prices when sourcing (subsidised) handsets and equipment. Possibly such a saving is eaten up by larger operators having higher channel costs.
But within customer service call centres, scale matters:
Customer service OPEX per minute of agent handled call decreases with the number of subscriptions and operator has
A call centre needs a fairly high load to reach a low unit cost. Outsourcing is therefore recommended for smaller operators since an outsourcing partner can achieve a higher load by servicing several customers. Operators are successful in offloading the call centres with Internet or smartphone based e-tools. This can consequently lead to a higher unit OPEX in the call centres.
Since acquisition and retention cost is the largest cost item in mature markets, surely it would have an impact on customer service? The more money potentially available for customers, the more time they will spend with call centre agents trying to get the best deal?
The average number of minutes per call centre call increases significantly with the acquisition & retention cost
This effect is worth having in mind for operators when doing sales campaigns. Not only is it a cost, it can also negatively affect the quality that customers experience when calling about other issues as e.g. bills, service provisioning or service disruptions.
A larger network must have much lower unit cost, right? There are more network elements to spread the cost over in a large network compared to a small?
The networks OPEX per base station does not decrease with the number of base stations an operator has
The networks OPEX of a mobile operator is very much driven by the radio network. Site leases and rents, transmission costs and energy are among the biggest cost items and none of these scale well. Personnel cost related to the maintenance is another significant cost item – with the potential to scale. Most larger operators have, however, organised themselves in clusters, each handling a certain part of a country and then missing out on most of the scale benefits. Outsourcing could be a solution, national (or international) centralisation another one. These two can also be combined. Network sharing could also be a catalyst, but non-transformational operation set-ups (like different operators having the responsibility in different part of the country) should be avoided.
This opens for the next hypothesis: Operators that outsource within networks have lower unit cost?
The networks OPEX per base station decreases with the outsourcing rate
Since cost saving is a major driver for outsourcing in the first place, this is not really surprising. With the exception of emerging markets, outsourcing levels are still low within Networks, though. The current level of 10% of headcount is much lower than the overall outsourcing level within operators (see "Rules of thumb" above).
Finally, high productivity means that quality suffers, right? When there are less people, there's not enough time to take quality to a high level?
Network quality does not decrease with productivity
Instead, a high productivity (measured e.g. as base stations per networks headcount) tends to lead to higher network quality. High productivity is a result of good organisation, clear responsibilities, strong tool support, centralisation and automation. All of this leads to higher quality, not lower.
Improving efficiency in telecoms
There are plenty of hints how to improve efficiency in telecoms above. We can sort these (and others) into either of these four categories:
|Strategy||Complexity||Return ||Risk |
|Improve cost efficiency and productivity through automation, centralisation, market differentiation and reengineering of work processes (including partnering)||Low||Medium||Low|
|Realise national economy of scale by mergers & acquisitions with competing operators (including network sharing)||High||High||High|
|Realise international economy of scale by implementation of cross-border working processes||High||Medium||Medium|
|Realise national economy of scope by integrating fixed, broadband, TV or mobile businesses||High||Medium||Medium|
The three latter categories can be seen as structural, transformational, changes with high complexity. Pursuing any of these should not be seen as a replacement to the first strategy of continuous improvement – there is always something more that can be done to improve the efficiency within the business as it is today.
The Efficiency Index is a start. It provides operators with the answer to the question "Where am I?" and guidance on the "Where do I want to get?" question.