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Success transformation strategies

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pmarshall
Beginner

Over the last couple of years I have been focused on identifying sustainable business models for communication service providers. As part of this analysis I have investigated the return on invested capital (ROIC) as a ratio of weighted average cost of capital (WACC) for a variety of service providers globally. The Exhibit below summarizes the results for several Tier 1 service providers. For the sake of comparison I included companies that are not telecom providers, including Walmart, Procter and Gamble, RIM and Nokia and Visa.

The WACC essentially represents the minimum rate of return that a company must achieve before it creates value for equity and debt holders. In cases where the ratio of ROIC to WACC is less than one, we are essentially seeing capital value erosion. A variety of household names including Verizon, Vodafone, Comcast and Deutshe Telecom fall below the line, ATT is on the line, and players like Orascom and American Movil, Telstra, Telefonica and Orange/FT are in positive territory. Players who are doing well all have significant emerging market assets from which they drive disproportionate capital value creation?

roicwacc.bmp

With service providers coming under continuous pressure to offer more for less, capital value creation is a challenge, and generally depends on effective transformation strategies. Although service providers have made efforts to transform, most have failed. In several recent studies I have investigated why we have seen such lackluster performance in these transformation efforts.

To support this analysis, I formulated a scorecard which analyzed the service provider business in terms of six categories, namely their access networks, core networks, organizational structure, IT infrastructure, financial state, and partnership ecosystem. Based on this analysis, I came to the following conclusions:

  1. Service providers tend to have straddled strategies with conflicting objectives. On the one hand they want to embrace the next 2.0 that comes along. On the other hand they are incapable of self-disintermediation needed for the 2.0 initiatives to thrive.
  2. Employees must be incentivized to transform the business. Even with the best intentions and network technology investments, status quo will prevail unless remuneration is tied to transformation initiatives
  3. Transformation strategies are overly focused on the access network evolution. These are long lead investment items, and while they impact transformation initiatives, they do not drive transformation.

Transformation starts with organizational re-engineering that incentivize self disintermediation, followed by strategic IT investments to reduce transaction friction for broader ecosystems. Until service providers take this approach, we believe that many will continue to see capital value erosion.

2 Comments
knagesh
Beginner

Thanks Phil for joining our community and sharing your insights. Your conclusions are, indeed, thought provoking.

Conclusion #1 on the need for disintermediation drives home the need challenges many operators are facing as the Internet business models collide with the traditional SP business models. We often fall victims to over protection of modus operandi of the past resulting in failiure to recognize the inevitable market transitions.  Be it walled garden vs open app marketplace, custom API vs standards, or fear of competition versus exploiting opportunities with partners.

Why can't we buy the device we want from any channel and then sign up with the operator we like? Why can't we buy the application we want from any developer so long as it meets certain "standards", with assurance that they will work on our device on any operator's network or service? Many industries/markets have shown that often disintermediation is the best way to keep our crown jewels. I believe the savvy operators that recognize this will reap massive rewards. When do you believe these will become realities?

Conclusion #2 and #3 have several cultural and organizational implications. I believe that transformations have numerous pieces integrated holistically, yielding exponential benefits far surpassing those from siloed behavior. For example, the mobile internet transformation mandates transformation on at least three dimensions: delivering integrated user experience, scaling the infrastructure and personalizing the services, and innovating new business models. Do you see interesting partnerships emerging to pull this integrated transformation in the mobile space?

I agree with your conclusions and the challenges you pose to SPs and infrastructure providers. Even more in the wake of impending disruptions in the value chains.

Nagesh

pmarshall
Beginner

thanks Nagesh,

With regards to your comments, I think the "open device" capabilities are coming faster than the industry expects. Our market surveys show a heightened interest/preference for smart phone devices. I think that the demand for smart phones coupled with efforts to reduce IOT hurdles and the muscle of players like Apple and Google will accelerate the market towards open access over the next 36 months.

In terms of interesting partnerships, I think that it is worth noting the HTC/T-Mobile/Google work with Android and the Amazon/Qualcomm/Sprint tie up for the Kindle device. Hopefully these types of partnerships will support much needed industry transformation.

Phil

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