McKinsey Telecoms. RECALL No. 10, 2010 - Cost Management

8/2/2019 McKinsey Telecoms. RECALL No. 10, 2010 - Cost Management

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Telecommunications

Cost Management

RECALL No10


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3RECALL No 10 Cost Management

Welcome ...... to our newly designed RECALL publication for lead-

ers in the telecommunications industry. This issue fo-

cuses on cost management.

Globally, most operators are adjusting their expendi-ture levels not only to respond to the current economic

situation, but also to align their operating models and

cost baselines to better compete in an increasingly

demanding and margin-stressed industry.

In our issue on operational transformation, we dis-

cussed the importance of taking an end-to-end view

and simplifying operations and how this enhances

customer experience. Our current focus is not a

departure from but an extension of this, as we take a

more functional look into cost management. This does

not diminish the relevance of the holistic approach.

Instead, we believe that offering key initiatives and

frameworks to optimize spending is of particular

importance now and in the immediate future.

To set top-level aspirations, we begin by sharing insights

into how selected operators in emerging markets have

achieved one-cent-per-minute cost levels in their net-

works. The network is the largest spending area for

telcos. Hence, we then discuss successful approaches

to reducing operational expenditure and capital invest-

ment. We also describe how transparency and standard-

ization can lower overall costs, freeing up vital cash.

What follows is a discussion of key initiatives to improve

back-end systems and core services. We begin with

customer services, taking a deep dive into cutting call

center costs without jeopardizing revenues and simul-

taneously enhancing service quality. Following this,

we discuss ways to optimize business support and back-

office operations. These two areas account for nearlyhalf of a telcos operating expenditure and improve-

ment potential is high. We then look at how three tacti-

cal levers can increase IT efficiency and effectiveness:

application development and infrastructure, project

portfolio prioritization, and vendor consolidation.

Finally, we explore how operators can benefit from

leveraging both procurement excellence and a global

footprint. We first share our perspect ive on how to opti-

mize procurement processes a dual strategy of saving

costs and transforming sourcing capabilities. Then, we

cover a topic of special interest to multinational opera-

tors by sharing our experiences on how to ef fectively

leverage scale and an integrated, cross-border opera-

tions setup to save on costs while boosting revenues.

An interview with Telecom New Zealands CEO Paul

Reynolds rounds out our reflections, revealing practical

challenges that cost reduction efforts can involve and

ways to overcome hurdles that telcos could encounter.

We hope that this RECALL issue provides you with

insights that trigger ideas or discussions surround-

ing the challenges and opportunities you face. We

look forward to your feedback and thoughts on thesearticles as well as on topics you would like to see

addressed in future issues.

Jrgen Meffert

Leader of McKinseys EMEA

Telecommunications Practice

Fabian Blank

Leader of McKinseys EMEA

Mobile Operations Service Line

and Editor of this RECALL issue

Tomas Calleja

Co-leader of McKinseys

Operations and Technology in


Klemens Hjartar

Co-leader of McKinseys

Operations and Technology in



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Contents01 One cent per minute: Cost excellence in mobile telecoms 7

02 Network opex: Not just what but how to cut 13

03 Capex marks the spot: Zeroing in on the telecoms cash flow challenge 19

04 Press 1 for success: Boosting call center performance 25

05 More than a helping hand: Optimizing telco business support functions 33

06 Clearing the clutter: Improving back-office operations 41

07 Lean on IT: Transforming information technology 47

08 Bargain hunters: Two telcos successful sourcing 55

09 Fractured planet: Helping telcos leverage global scale 59

10 Capping capex: An interview with Paul Reynolds, CEO, Telecom New Zealand 67

Appendix


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One cent per minute: Cost excellence in mobile telecoms

01 One cent per minute: Cost excellencein mobile telecoms

In mobile telecommunications, one thing is certain:

per-minute prices have been falling drastically over

recent years a trend that is expected to continue.

This means per-minute costs need to be driven down

in a similarly drastic way or even more so to further

increase the resulting profit margin. This prospect

should energize mobile players in both emerging and

developed markets to aspire to the one-cent-per-minute

cost levels that some emerging-market players have

already achieved. Step one: operators need to examine

costs on the same basis as pricing by the minute.

Ask mobile operators what their per-minute price is.

Their response will likely be immediate and this, con-

jugated across numerous rate structures. Ask the same

operators what their per-minute cost is and they mayhave to think twice or three times. The question might

even draw a blank or puzzled gaze. By rote, operators

can recite how much they charge per minute used

but surprisingly, they are not always aware how much

that minute costs them. In a predominantly fixed-cost

context, costs frequently fall into the have to live with

it but well work on reductions bucket. In maturing

markets where operators must maintain profit growth

despite negligible revenue growth, players are now

more than ever forced to reconsider just how fixed their

costs really are and rethink the assumption that mar-

ginal revenues equal profits.

While growth has often been the preoccupation of

mobile players, managing costs is climbing up the agen-

das of top executives. A closer look at the operating prof-

it margins and average revenue per user (ARPU) levels

of mobile players around the globe reveals a startling

fact: the less customers pay, the more operators seem

to profit at least as a percentage of revenues. The best-

performing emerging-market players earn EBITDA

(earnings before interest, taxes, depreciation, and

amortization) margins of up to 60 percent despite the

price of one minute of talk time having reached the level

of 1 US cent and monthly ARPU rates as low as USD 5.

In contrast, margins in developed, typically postpaid

markets average only 20 to 35 percent even though

ARPU levels of USD 40 to 60 are common. Customers

in developed markets do consume and spend more, but

this doesnt mean there is a comfortable zone of con-

tributions to the fixed costs of a network especially in

the context of further eroding prices.

So how do emerging-market players achieve such

remarkable one-cent-per-minute cost levels in their

networks? Telecoms operators in prepaid markets

have learned how to realize prof it on customers who

consume as little as one minute per day based on a

concept that the fast-moving consumer goods industry

calls sachet marketing. They package mobile service

into affordable, bite-sized quantities. For these opera-

tors, revenue divided by overall minutes rather than

ARPU is the more relevant metric. Yet we found that a

companys EBITDA margin actually shows little or no

correlation to its revenues per minute (RPM). Given that

both price leaders (measured in price per minute) and

utilization leaders (measured in minutes of usage per

site) post high margins, we have to move beyond these

simple metrics to understand these players sources of

distinctive profitability.


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8

EBITPercent of revenues1

InterconnectionchargesPercent of revenues1

SG&APercent of revenues1

Revenues/siteUSD thousands

Network costs/site2

USD thousands

Selected mobile operators

1 EBIT taken from company reports. Calculated as a percentage of mobile service revenues for Airtel, AIS, China Mobile, Digi, Excelcomindo, Globe, Smart, andTelkomsel, while as a percentage of total mobile revenues for Celcom, China Unicom, DTAC, and Idea

2 Includes all costs not embedded in direct and SG&A costs like network costs, depreciation, IT

SOURCE: 2008 annual reports

22 15 53 155 27

Excelcomindo

(Indonesia)

China Unicom

Idea (Indonesia)

DTAC (Thailand)

Airtel (India)

AIS (Thailand)

Globe (Philippines)

Celcom (Malaysia)

Digi (Malaysia)

China MobileTelkomsel (Indonesia)

Smart (Philippines)

10

12

16

17

23

25

28

30

32

3542

51

71

63

48

212

233

194

184

242

152156

248

62

33

29

19

62

18

65

94

61

60

44 65

87

25

16

29

43

32

42

11

22

27

57

7

18

24

16

11

13

6

13

16

16

3110

8

41 2 3

Profitability can be broken down into four elements01

Understanding the our elements o proftability

Of the four main elements of mobile profitabilit y illus-

trated in Exhibit 1, the first three are classic costs.

Network costs per site (1) are shown in total, while inter-

connection charges (2) and sales, general, and admin-

istration (SG&A) expenses (3) are shown as a percent of

revenues. The last element, revenues per site (4), mea-

sures the economic utilization of the network. In a clas-

sic accounting sense, revenues per minute have little todo with the cost side of the equation. From a per-minute

cost perspective, however, utilization the driver

behind these revenues has everything to do with low-

ering per-minute costs in a high-capex environment.

Systematically improving costs

The most significant part of the cost position is largely

driven by the factory, in other words, what opera-

tors need to deliver services across their networks and

how they can optimize their operations. We can best

observe a network cost position by reviewing the net-

works costs per site (or per erlang to allow for differ-

ences in technical configurations). Here, we see broad

variations in performance (Exhibit 2), with network

operating expenditure (opex) and depreciation ranging

from USD 20,000 to a staggering USD 100,000 per site,

assuming that one site carries about 50 erlangs. Thus,

opex and depreciation for one erlang vary by a factor of

five, signaling a great deal of savings potential.

Successful operators explore network utilization,

design, operations, and tarif f negotiation to opti-

mize costs toward the goal of one cent per minute.

Systematically tackling all four levers can lead to annual

opex savings in the order of 5 to 15 percent of the total

network opex base and to capital expenditure (capex)savings of around 20 to 40 percent of investment. For

most operators, this represents improvement potential

in the range of hundreds of millions of dollars.

Better utilization can reduce an operators cost base by

3 to 10 percent. This requires redesigning legacy cell

clusters to handle 3G traffic, adapting to real demand by

reducing the number of transceivers in each cell, fine-

tuning target quality levels using enhanced cell and

frequency planning software, and more systematically

leveraging features like the adaptive multi-rate (AMR)

codec, available on nearly all networks and handsets.

Whats more, mobile operators can halve both their

capex and their opex by designing small lean and

green sites, by structuring fiber link swaps, and by

sharing sites with competitors. Over the course of only


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27

12

12

11

12

18

28

33

33

25

36

52

46

39

29

35

48

26

6

6

18

21

26

32

28

29

29

Excelcomindo (Indonesia) 33

China Mobile 44

Digi (Malaysia) 60

Celcom (Malaysia) 61

DTAC (Thailand) 62

AIS (Thailand) 65

Telkomsel (Indonesia) 65

Smart (Philippines) 87

Globe (Philippines) 94

53

Airtel (India) 18

Idea (Indonesia) 19

China Unicom

Network opex1

USD thousands/siteNetwork depreciationUSD thousands/site

Total network costsUSD thousands/site

Little to no 3G investment

1 Opex + personnel costs

SOURCE: 2008 annual reports

Emerging markets excel in opex and network depreciation02

a few years, we have seen the overal l cost of a cell site

dropping by a factor of three or four.

Operational levers, such as temperature optimization,

site management, closed-loop return on investment

(ROI) of sites, and inventory management can reduce

operating costs by up to 10 percent.

Finally, negotiating contracts for maintenance, site

rentals, and equipment based on an expected three- to

five-year total cost of ownership can reduce costs by

5 to 10 percent.

Interconnection charges mostly comprise interconnect

and roaming fees, which greatly differ among operators.

The very high investments in transmission and core

equipment associated with rapid bandwidth growth

and packet applications just might push operators

to rethink their backhaul strategies (for example, by

adopting packet-based transport). It may also shift

the debate from the cost of radio equipment to the

best backhaul strategy.

Lastly, YouTube-type content (more prominent with

younger audiences and in English-speaking coun-

tries) drives significant international gateway costs

that operators can reduce by compression and

caching as well as the procurement of economical

international links.

Considering 3G

While this article focuses on voice, most points can

be adapted to data by focusing on cost per megabit

per second (Mbps), rather than cost per minute.

Newly established operators can significantly

improve their cost positions by deploying newer,

cheaper technology; small footprint, low-energy

designs; and higher spectral efficiency. Older opera-

tors may find that migrating voice to 3G networks

is both an opportunity (to benefit from the efficien-

cies mentioned above) and a threat (of stranded,

underutilized 2G assets). To achieve an economically

sound transition, careful redeployment of 2G network

equipment should lead managements agenda.


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Revenues/siteUSD thousands

Selected mobile operators

SOURCE: Merrill Lynch Global Wireless Matrix, Dec 2008; 2008 annual reports

Cost leadersCosts/site

USD thousands

0

50

100

150

200

250

050100150200

EBIT ~ 60%

EBIT ~ 15%

EBIT ~ 40%

DTAC Globe

Smart

Telkomsel

Excelcomindo

China Mobile

Celcom

Digi

China Unicom

Airtel

Idea

AIS

Revenueleaders

Driving down costs per site is a key lever in boosting profitability03

One reason is that interconnect or roaming prices vary

by country and are generally regulated. Another is that

the proportion of off-net traffic and traffic asymmetries

widely vary from one player to another. And, instead of

booking them as costs, some players net interconnec-

tion costs from revenues (lowering ARPU, but increas-

ing EBITDA as a percentage of revenues). Since these

costs are often subject to government regulation, they

may seem diff icult to challenge. However, beyond nego-

tiating tariffs, actions to encourage a positive f low of

interconnect for example, by stimulating incomingcalls or steering traff ic have proven effective.

SG&Acosts often account for 20 to 30 percent of an

operators total costs. As these are mainly allocated

costs that hold no evident link to volume, we find that a

comparison as a percentage of revenues is the simplest

and most relevant. Variances are driven by handset

subsidies, channel commissions (ranging from 4 to 16

percent), acquisition and retention costs, and scale.

Capitalizing on utilization

Taking a closer look at profitability reveals that someoperators lead on costs, while others lead on revenues

(Exhibit 3). A good measure of an operators ability to

capitalize on its network investment is revenues per

cell site (or per erlang), since this captures the pricing

component (RPM) as well as the elasticity of demand

in minutes of use. These metrics show a very broad

range: some operators are able to generate more than

USD 250,000 per site annually, while others carry less

than USD 50,000.

Some revenue leaders manage pricing depending on

utilization, by using either the mobile network station

or a time band as the basis upon which to maximize

revenues. The best-performing utilization players maxi-

mize revenues per site using techniques similar to air-

line yield management: like the airline seat that remains

vacant at takeoff, any foreseeably unused mobile minute

Discounting underutilized airtime

The innovative African operator MTN uses a yield

management technique borrowed from the airline

industry for its MTN Zone, which offers customers

a discount of up to 95 percent on the minute base

rate. The level of the discount displayed on the

subscribers handset at any given time depends

on the local networks utilization (i.e., tailored to any

given location, time of day, and level of network traf-

fic). This technique is rapidly being replicated by other

operators in high-growth markets.


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is a mere cost factor. Selling that minute at any price

above zero will ultimately boost profitability. This ele-

ment of cost performance reflects an operators degree

of freedom to capitalize on network utilization and

maximize returns (see text box on previous page).

Overcoming complexity and multiplicity toboost proftability

While the potential for achieving cost improvement

using these four levers is significant, top management

may encounter practical hurdles. One is sheer technical

complexity. Understanding what the cost of an erlang in

a rural sett ing should be, for example, is no trivia l mat-

ter. Another challenge is the multiplicity of variants:

there are often thousands of types of sites, contracts,

and equipment and in general, no evident big wins.

The last hurdle is the open-loop culture often prevalent

in network organizations: operators calculate the ROI

for sites during planning and approval phases, yet fail

to assess target achievement or investigate the cause of

deviation afterwards. Successful operators put in place

clear design-to-cost standards for sites, specify an opti-

mal mix across the network, and implement programs

and operational dashboards to track cost performance.

We invite operators in developed markets to consider

how these lessons learned from operators in emerging

markets can be adapted to their own situations. While

50 percent of the gap to best practice is linked to struc-

tural cost elements such as taxes, regulation, intercon-

nection regime, or local labor costs, diligent operators

could capture the other 50 percent.

* * *

More than a catchy phrase, one cent per minute of-

fers operators a valuable lens through which they can

examine their operations for cost improvements. Here,

we have highlighted various marketing and operation-

al levers that operators can utilize to capture EBITDA

increases of 5 to 15 percent enough to help them

maintain profit growth in an industry characterized

by falling prices.

The authors would like to thank Kushe Bahl, Michal

Cermak, Sumit Dutta, Javier Gil, Lorraine Salazar, and

Robert Tesoriero for their significant contributions to

this article and the underlying research they conducted.

Nimal Manuel

is a Principal in McKinseys

Kuala Lumpur office.

[email protected]

Fabian Blank

is an Associate Principal in McKinseys

Berlin office.

[email protected]

Andr Levisse

is a Director in McKinseys Singapore office.

[email protected]

Vivek Pandit

is a Principal in McKinseys Mumbai office.

[email protected]


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Network opex: Not just what but how to cut

As the current economic situation makes cash king for

telcos, best-in-class network opex reduction programs

combine preselected savings levers, must-have design

principles, and an approach tailored to the specific cir-

cumstances of the individual operator.

The economic downcycle has made extracting cash

from network operations an urgent concern for tele-

coms operators more accustomed to boosting revenues,

introducing new products and services, and spurring

business development. At some companies, the dash

for cash actually began before the economic downcycle

did, as wireline and wireless operators in maturing mar-

kets attempted to increase their operational eff iciency

to earn higher investment returns.

While some operators have always viewed efforts toreduce operating expenditure (opex) as one-off activi-

ties focused mostly on tactical, stand-alone approach-

es undertaken to meet current budget targets other,

more visionary players have launched broader transfor-

mation programs. These programs aimed at continuous

opex reduction often cause managers to rethink their

current operating models with an eye toward lowering

the cost base and improving quality.

The network makes a logical starting point to reduce

opex since it represents the highest cost bucket for

wireline operators (i.e., 40 to 50 percent of compressible

opex) and a significant share of costs for wireless opera-

tors (i.e., 20 to 30 percent of compressible opex).

Based on McKinsey experience, simply choosing the

right levers to pull wil l not guarantee success. Instead,

managers need to implement several must-have

principles and tailor their approaches to the operators

specific circumstances.

Typical opex reduction levers

Telcos have a wide range of opex reduction levers at their

disposal. Some operators, for example, audit individual

network opex categories to identify stand-alone savings.

They thoroughly review key network maintenance con-

tracts to optimize scope and service level agreements

and to renegotiate prices. They look into energy spend to

seek out more economical energy providers and ways to

reduce energy consumption of installed equipment, e.g.,

new technologies for base transceiver station (BTS) air

conditioners, BTS temperature increase, and dynamic

transceiver shutdown during low-traffic hours. Theyalso analyze rental contracts to reduce high rents and to

free up location f loor space. This approach delivers con-

crete savings by category and identifies tactical actions

to achieve these. At some point, however, savings will

become only marginal with teams having already

plucked most of the low-hanging fruit.

Other players use lean redesign to optimize key end-to-

end processes (e.g., service delivery and assurance for

key wireline products such as ADSL or IPTV services).

Using lean tools and techniques, they eliminate waste,

reduce variability, and increase resource f lexibility.

This method delivers the advantageous second level of

efficiency improvement after stand-alone optimization

has already reached its limits. Leading companies also

adopt the lean transformations continuous improve-

ment ethos to replicate efficiency gains year after year

02 Network opex: Not just whatbut how to cut


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and to achieve a sustainable advantage over competi-

tors. Some operators also automate key processes and

activities to reduce costs and improve quality for

example, automated handling of BTS electricity alarms

from the network operations center (NOC).

To radically alter their cost structures, operators can

either outsource or offshore activities and process steps.

Typical outsourcing candidates include field operationsand maintenance or even the entire fault management

process (including NOC and optimization). While this

approach can cut costs, operators must understand how

much outsourcing and offshoring saves in a given area

in order to translate a high share of the outsourcers

efficiency improvements into price reductions. Wireless

players are increasingly exploring how much they can

save from network sharing with other players in areas

not yet covered and in rolling out the 3G data network.

Network sharing can also serve as an additional lever

to optimize topology and lower space rental costs based

on renegotiation. Radical network opex transformation

can even be achieved by simplifying what operators use

in terms of products, platforms, and network technolo-

gies. Experience shows that reducing complexity in

commercial offerings and basic telecommunications

products can deliver visible market success and con-

tribute significantly to lowering costs throughout the

operators business.

Must-haves in successul opex reduction

Operators who have taken this route know that no

single blueprint exists for the best one size fits all

opex reduction approach. Instead, different playersmight take radically dif ferent actions at different

times based on their starting positions and their ulti-

mate objectives. However, to successfully reduce costs

and optimize the network domain, an effective opex

reduction program will need to include several must-

have principles.

First, managers should define clear objectives up front

in the process (such as optimal trade-offs between opex

and capex savings), the importance of business objec-

tives (e.g., serv ice quality or customer satisfaction),

and the time horizon for improvements. As practical

experience shows, unless the rules of the game are

clearly art iculated, budget owners tend to use the sim-

plest solutions that do not necessarily lead to the results

desired by top management. Such simple solutions are

illustrated by claims like give me better equipment and

opex will go down significantly and such comments

are more common than one might think.

Second, it is critical to establish full transparency

regarding the network cost structure and cost drivers,

then determine which cost baseline should be used (e.g.,

current costs, trend-line projections, or an aspiration-

al budget). In this light, maintaining a holistic picture

of all key cost elements is crucial to avoid the redistribu-tion of costs to different buckets.

Third, enlisting strong senior management support for

and ownership of the program can send a clear message

to line managers who may otherwise resist part icipating

in the process.

Fourth, line managers need to specify initiative details

in terms of impact, resources required, and timing,

while gaining a solid understanding of their implica-

tions for other parts of the organization.

Finally, the improvement team must prepare a com-

prehensive implementation master plan, summariz-

ing all key milestones, deliverables, and additional

resources required.

While these principles may seem logical, practical,

and rooted in common sense, many companies fail to

include them from the outset. This, in turn, sends out

an unintended signal to the rest of the organization that

undermines credibility and unnecessarily places the

project in jeopardy.

Two cases: Tailoring programs to operatorcircumstances

To illustrate the points above, what follows describes

how two telecoms players recently applied the principles

of successful cost reduction and tailored various levers

to their own unique circumstances.

Telco A took a fast and radical new approach to design-

ing its opex and capex cost reduction program since

it needed to realize significant savings in the current

budget year. Over the course of ten weeks, the organiza-

tion set up a rigorous monitoring process to regularly

track savings actions, making upper-middle managers

responsible for achieving overall targets. Despite the

urgency of reducing costs, the company met its ambi-

tious objectives because it took the following intelligent

and deliberate steps:


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Network opex: Not just what but how to cut

Specify a transparent cost baseline by category and

budget owner and set absolute top-down savings

targets for all of the cost categories contained in the

baseline; back this up with EBITDA margin targets

Establish a common understanding of objectives

among all key budget owners this allowed the telco

to concentrate efforts on priority cost drivers and

optimization levers, resulting in a very short timefrom action implementation to savings

Generate a common perspective on savings potential

among budget owners by holding analyses-based

iterative problem solving and syndication sessions,

while enlist ing the support and active involvement of

top management and key budget owners

Incorporate savings identified into the current years

budget and use the most common target-setting

approach to facilitate the clear articulation of targets

Develop a short-term implementation plan, set up a

project management office, and concentrate efforts

on execution.

As a result of their program, the company lowered its

sales, technical, and administrative expenses by rough-

ly 8 percent, they cut the projected network opex by

20 percent despite the expectation of double-digit mar-

ket growth, and they reduced capex by about 40 percent

compared with applicable baselines. Furthermore, the

company was able to keep the implementation timeline

for the proposed initiatives within one to three months,

primarily because it made sure that key stakeholdersagreed with the recommendations and felt a sense of

ownership in pushing the initiatives forward.

Telco B began by conducting broad diagnostics across

all compressible cost categories in its pursuit of opex

reduction. It focused not only on the network but also

on commercial areas, support functions, and procure-

ment. Based on the diagnostics, it defined its overall

aspirations and calibrated its targets for network opex

reduction against other areas.

To kick-start the transformation program, the operator

defined specific cost savings initiatives through mul-

tiple deep dives into key network cost subcategories.

Specifically, this operator followed a similarly

systematic approach, focusing on the following

components:

Review the main network operations outsourcing

contract, looking for improvement ideas

Take go and see trips into the field and hold several

vendor workshops to identify and address sources ofinefficiencies

Analyze and redesign key end-to-end processes (such

as the corporate solutions delivery process and the

network planning and deployment process)

Assess the productivity of and value generated by

internal network departments, review key network

and infrastructure maintenance contracts, and rene-

gotiate electricity terms and space rental costs.

This bottom-up hands-on approach helped the opera-

tor define a set of initiatives aimed at delivering overall

opex savings of 21 percent across all network functional

areas, with cost reductions in internal and outsourced

network operations reaching up to 16 percent. The proj-

ect team handed these initiatives over to the responsible

line managers. Based on these calibrated savings tar-

gets and the cost initiatives, the operator then launched

a comprehensive transformation that was very tangible

for line managers because it clarified for them where to

start implementation in their areas of responsibility.

* * *

Successful opex reduction programs require a combi-

nation of three elements: appropriate cost reduction

levers, defined must-have principles that ensure

buy-in and com mitment, and an approach tailored to

the operators circumstances. The best-practice opera-

tor will move from a project-based effort to a full-bore

transformation program, continuously pushing for effi-

ciency improvements that become anchored in the work

of every manager, engineer, and technician. In the best

tradition of continuous improvement, these workers

fully understand that their actions will save a bit more

every day and that by becoming more efficient, they

continually build the operators competitive strengths

and contribute to long-term market success.


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Vito Caradonio

is a Principal in McKinseys Rome office.

[email protected]

Michal Cermak


Prague office.

[email protected]

Dmitri Dorofeev

is an Engagement Manager in McKinseys

Moscow office.

[email protected]

Pablo Echart

is an Expert Associate Principal in

McKinseys Madrid office.

[email protected]


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Capex marks the spot: Zeroing in on the telecoms cash ow challenge

As revenue growth stagnates, cash flow has begun to

slow for many telecoms operators. Zero-based bud-

geting and better frontline engineering performance

together can help quickly reverse this trend.

Telecoms operators are facing major challenges. A com-

petitive pressure stronger than ever requires them to

make major investments in next-generation networks.

At the same time, many operators are scrambling to re-

duce their capital expenditure (capex) budgets because

this is the only quick way for a telco to generate suffi-

cient free cash flow (EBITDA minus capex) in an era of

low revenue growth and flat EBITDA margins.

This new pressure on capex requires managers to gain

even tighter control of their investments. This is no sim-

ple task, as telcos often have limited capex transparen-cy. They lack a standardized network design approach,

have highly complex capex decisions, distributed deci-

sion making across engineers, limited fact bases, and

less senior management involvement than needed.

To help industry players work through these cash flow

challenges, McKinsey has developed two complementa-

ry approaches that optimize capex: zero-based budget-

ing (ZBB) and frontline engineering performance im-

provement. ZBB is a process of analysis and evaluation

that enables telco managers to select the best invest-

ment portfolio possible. The focus of frontline engineer-

ing performance improvement is standardization, with

the objective of reducing network deployment costs.

Both approaches are highly impactful. ZBB typically

achieves 20 to 30 percent savings on the entire capex

budget within two to three months. Furthermore,

it helps introduce cross-department and cross-BU

investment prioritization on an ongoing basis; this

improves the quality of top management decision

making and increases the focus on each investments

business benefits. Frontline engineering performance

improvement, on the other hand, can achieve 10 to

15 percent savings on the network deployment budget

within twelve months. More importantly, it builds

capabilities in the organization: engineers work with

their management to determine whether an engineer-

ing project should move forward and how to execute

the project in the most ef ficient and effective way,

ultimately improving the yield on capex invested.

Zero-based budgeting

A long-standing methodology, ZBB requires managers

to justify every dollar or euro in their budgets not just

increases. Our version of ZBB has two further advan-

tages: it helps structure investments so that benefits are

clear and comparable, and it provides an effective pri-

oritization process. Managers analyze the entire capex

budget and re-rank investments based on shared priori-

tization criteria. They keep higher-priority investments

and cut the ones deemed least critical. ZBB increases

effectiveness by aligning an operators capital spend-

ing with top management priorities, while providing a

capex reduction of 20 to 30 percent. ZBB also enables

top managers to make fact-based capex decisions and

avoid conflicts among spend owners.

Companies can follow a structured process for roll-

ing out ZBB. This process begins with capex target

03 Capex marks the spot: Zeroing in onthe telecoms cash flow challenge


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20

setting and does not end until the organization has

fully mastered and taken complete ownership of the

approach (Exhibit 1).

Break capex into its component parts. Managers split

the capex budget into decision units. These represent

discrete investments that are independent of each other,

so the company can modify one unit without affecting

the others. As an example, a company might divide a

USD 2 billion budget into 30 to 40 independent decision

units; units might include 3G network, Fiber To TheCurb footprint expansion, core network reliability im-

provement, or development of new consumer products.

Decision units are further split into decision pack-

ages, which ref lect the incremental investment goals

contained in a given decision unit (e.g., achieving the

minimum regulator-mandated 3G coverage in a market

or extending coverage to the next 10 or 20 percent of

the population). Each decision package has a single

clear business benefit. Examples of benefits include

revenue increase, opex reduction, and meeting regula-

tory requirements.

Evaluate the components. Teams then gather crucial

financial information investment amounts, anticipat-

ed revenues and savings, and net present value along

with nonfinancial information, such as a qualitative

description of the benefits and a structured analysis

of the risks avoided by the investment. The exact type

of information to be gathered depends on the type of

business benefit.

Prioritize, force-rank, and iterate.In this step of the

budgeting process, the CFOs of each business unit come

together and individually rank the proposed decision

packages from first to last (or in quartiles). Changes

mandated by regulation would usually have top prior-

ity, as would expenditures needed to keep the lightson. The CFOs then combine all of their rankings into

a single force-ranked list that they discuss and adjust

until they can make no further prioritizing decisions

based on the information at hand. The group then gath-

ers additional information and meets in a second work-

shop one week later. These workshops will ultimately

produce a force-ranked list of decision packages, mak-

ing budget-cutting decisions very straightforward

the company simply continues to cut the lowest-ranked

packages until it achieves its capex reduction goals.

Question every design assumption. Teams disaggregate

big capex units (towers) into their various subcom-

ponents and question every design assumption based

on minimum technical or regulatory requirements.

A detailed study of design specif ications is then used to

unearth real insights. For example, teams question if

Separate capex budget into

decision units and each

decision unit into decisionpackages

Evaluate size of each

decision package

Determine standard business

benefit of each decisionpackage

Gather qualitative and quanti-

tative info about businessbenefits, e.g., financials

Define dependencies be-tween decision packages

Revise key capex management

processes to introduce zero-based budgeting prioritization

Review capex managementorganization

Address managers mindsets

and behaviors to encourage

adherence to spirit of zero-based budgeting

Adapt IT systems to enable

prioritization process, e.g.,

introduce decision unit/deci-

sion package split in enterpriseresource planning system

Break capex into components Evaluate components

Institutionalize

new approachPrioritize and force-rank

Iterate

Prioritize decision packageswithin each decision unit

and then rank within eachbusiness unit

Consolidate business unit

rankings into a single listacross groups

Select the lowest-ranking

decision packages to be cut

SOURCE: McKinsey

Zero-based budgeting brings capex transparency and forces prioritization01


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Capex marks the spot: Zeroing in on the telecoms cash ow challenge

air-conditioning can be replaced with simple exhaust

fan air cooling in selected environments, whether it is

possible to have a wall-mounted battery instead of an

air-conditioned room, or if all towers really need to be

painted when they are already galvanized.

Improving engineering perormance

Our frontline engineering performance improvement

approach strictly standardizes the decision making

processes companies use to deploy given network ele-ments, such as 3G base stations. This approach can

yield field engineering capex reductions in the range

of 15 to 20 percent.

We employ three steps that focus on frontline engineer-

ing decision making (Exhibit 2).

1. Prove the case for action. Managers need to under-

stand how the company makes decisions today, how

much variance exists, and whats causing it. They can

use case study methodologies and direct interviews to

understand the extent of cost variances and their driv-

ers. Differences can be significant: several telecoms

operators used a case study methodology to examine

proposed solutions from various engineers for the same

projects. Nearly all were startled by the cost differences

across solutions for the same problem. Solutions pro-

posed by four engineers working on the same problem

typically showed cost variance of five to ten times. We

have even seen cases where the most expensive solution

costs over 80 times more than the cheapest.

Our experience suggests that operators have control

over a minimum of five variance drivers:

Problem solving approach. Differences occur because

managers optimize for a variety of factors, such as

cost, technical quality, or local leader goals.

Financial rigor. Different teams often make cost and

quality trade-offs differently (e.g., low-cost versus

gold-plated).

Guidelines. Teams might also vary in their adherence

to company guidelines (e.g., how we do things versus

how headquarters does).

Tools. Individual engineers might use different tools,

resulting in different outcomes.

Leadership goal clarity. Companies can lack top-down

clarity regarding strategic focus.

2. Build and implement the framework. During this

stage, the organization builds its approach to improv-

4-week diagnostic 9- to 12-month program

Prove the case for action

Understand how decisions are made

today, the extent of the variance, and

drivers of that variance

Case study methodology

Interviews to understand extent and

drivers of the variance

Build and implement the framework

Develop the path to improve capital

decision making

Consistent engineering design

process

Decision making governance

Frontline capability building

Transparency in individual jobs

and among engineers

Develop mechanisms for sustainment

Ensure impact is sustainable by institut-ing the following actions

Constant leadership involvement

Consistent and regular communication

Ongoing change management

of framework

Tool change management

Continuous training to address any

capability gaps

Step 1

Step 2

Step 3

SOURCE: McKinsey

A three-step approach is used to improve decision making

in frontline engineering02


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22

ing capital-related decision making, which rests on four

key elements. First, companies develop a consistent

engineering design process with rigorous, step-by-step

engineering practices for the most common problems.

A built-in financial case forces managers to make ex-

plicit capex/opex trade-offs. Second, telcos need to cre-

ate specific decision making governance policies. For

example, teams must submit every spending request

for review and approval by a manager and director, andmanagers need to follow a standard method for priori-

tizing project spending.

The third element concentrates on frontline capability

building and involves the introduction of a new coach-

ing role for peer design reviews as well as periodic,

highly specific poor-good-better-best evaluations

of every job and worker to spur continuous employee

performance improvement. Engineers and managers

also undergo professional development in the forms of

training and structured feedback sessions to achieve

the desired proficiency.

Finally, companies need transparency in individual

jobs and among engineers. A number of solutions

present themselves, but one highly effective approach

involves using a simple Web-based tool to capture

solution designs and serve as a repository of spending

requests. Such a tool should provide a description of the

problem, its quantif ication and a suggested diagnostic

path, details of the proposed solutions, the effectiveness

of the chosen solution, and its financial impact.

3. Develop ways to sustain the progress. Once a compa-

ny has built a solid frontline engineering performance

improvement foundation, it can pursue a number of

ways to sustain and even ramp up progress. For exam-ple, constant leadership involvement sends a clear

message to the organization that continued success in

this area is important and will be rewarded. Managers

can reinforce this story through consistent and

regular communication and by offering continuous

training and coaching to address any capability gaps

within the organization.

* * *

Telecoms players need to take what the industry once

considered to be extraordinary measures to make sure

they have enough cash on hand to survive today and

build for tomorrow. The two approaches discussed

here zero-based budgeting and frontline engineering

performance improvement can quickly release the

cash f low telcos need to quench their thirst for capital

during the current credit dry spell.

Giuliano Caldo

is a Senior Expert in McKinseys

Rome [email protected]

Martin Jermiin

is a Principal in McKinseys

Copenhagen office.

[email protected]

Kurt Cohen


Stamford office.

[email protected]

Sumit Dutta


Mumbai office.

[email protected]

Pradeep Parameswaran

is a Principal in McKinseys Mumbai office.

[email protected]


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25

An eff icient and effective call center operation delivers

both savings and great customer satisfaction. Heres

how to get there.

The current economic situation has forced many telcos

to reexamine their entire operations in new and often

excruciating ways, as they seek the cash and capital

needed to survive the downcycle and eventually thrive

when good times return. In such undertakings, a tel-

cos call center organization is typically considered a

target-rich environment, representing a significant

share up to 10 percent of operating costs.

Still, experience shows that when calling for big reduc-

tions in call center costs in times of economic uncer-

tainty, managers must balance cost efficiency against

the need to provide positive customer experience andgenerate revenues. By cutting service too close to the

bone, telcos can disrupt service and degrade its quality,

alienating customers, increasing churn-related costs,

and ultimately causing revenue losses at a time when

they can least afford them. In an economic downcycle,

winning telcos work extra hard to collect every penny

of available revenues by cross-selling and up-selling

current subscribers, and the call center organization

plays a key role in these activities. Clearly, attempting

such actions on top of poor basic service is impossible.

Exceptional players know they can achieve best-in-

class cost, quality, and revenue levels simultaneously,

without negative trade-offs.

To help telecoms players cut costs without also inad-

vertently slashing revenues or chopping down cus-

tomer numbers, McKinsey has developed and repeat-

edly applied an approach that typically delivers 15 to

25 percent cost savings, while simultaneously improv-

ing quality and revenue performance.

This approach adopts McKinseys overall operations

philosophy as applied to services, which holds that com-

panies need to address the three dimensions of opera-

tions simultaneously: the operating system model, the

management system, and the mindsets and behaviors

of the companys workers (Exhibit 1).

Operating systems: Achieving our key goals

We concentrate on achieving four key operating sys-

tem goals when pursuing improvements in call center

efficiency and effectiveness performance: preventing

the need for calls, automating calls, simplifying agentaccess, and preventing repeat calls (Exhibit 2).

Prevent the need for calls. Our research shows that a

small group of users often accounts for a large share of

a call centers inbound calls. One credit card company

found that only 14 percent of its members made over

half of all inbound calls. If it could cut this number in

half, then it would reduce its overall call volumes by

more than 25 percent.

We also know that the impact of unclear communica-

tions at any stage of the call center/customer interaction

can be very high, as one telco learned to its regret. It de-

termined that fully one quarter of all incoming customer

calls resulted from unclear or inconsistent communica-

tions and that only 7 percent of its subscribers made al-

most half of all of its broadband-related technical calls.

04 Press 1 for success: Boostingcall center performance

RECALL No 10 Cost Management

Press 1 for success: Boosting call center performance


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26

Telcos can reduce customer interaction needs by under-

taking an end-to-end review of the communication

process, beginning with marketing (coherent campaign

message?), sales (correct terms and conditions?), pro-

visioning (clear installation and use instructions?), and

billing (clearly defined items and charges?). During

the post-sales phase, the review should include off-site

support (customer understands post-sales services?)

and on-site intervention (customer kept in the know

while waiting?). Overall, a telco should strive for com-

munications consistency in the sense that all of its pos-sible customer contact points always give the customer

consistent, accurate answers to the same question.

We find that an analysis of call types by customer can

reveal relatively easy ways to reduce unwanted or

unnecessary calls. For example, a credit card company

was able to reassure customers calling to see if their

payments had been received by inserting explana-

tions in billing statements. And, by prudently granting

automatic credit line increases to students, it saw a

significant drop in credit line increase requests from

this group of customers.

Automate calls. Call automation can play a major role

in reducing call center costs, either by moving some

calls to the Web or by closing calls in an interactive voice

response (IVR) system (see text box). But few things

enrage customers more than a poorly designed IVR sys-

tem, thus an optimal IVR layout will take into account

four key considerations:

Call volume. How many calls per transaction?

Customer service representative (CSR) interaction/

cross-sell. Do customers need to speak to a CSR due

to the issues cross-selling opportunities or emotional

factors (e.g., a lost credit card)?

Call center queuing. Is there a separate queue in the

call center to deal with this transaction?

Transaction automation. Can the transaction be com-

pleted without agent contact?

Companies can literally speed up IVR performance by

boosting the rate at which the system delivers words

to benchmark levels. One company found that its IVR

system lagged behind its fastest competitors by nearly

30 percent in terms of words per speech-minute, thus

lowering its overall system capacity and causing cus-

tomers to hang on the line longer, which often leads to

dissatisfaction.

Value-based call routing allows firms to handle cus-

tomers differently, depending on their potential value.

Sustainable

improvements

Building ownership for the lean

transformation at all levels of

the organization

3

2 Creating an organization to support

the new operating system

1 Improving procedures, systems, and

resources to achieve a step change

in operational performance

Costs

Revenues

Quality

Mindsets and

behaviors

Operating systems

Management

systems

Current

situation

1

2

3

SOURCE: McKinsey

Three action areas comprise the transformation into a service

delivery champion01


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Companies can harvest high-value, lower-volume

calls from the IVR and route them directly to special-

ized agents, while making every effort to handle all

low-value calls in the IVR system.

Simplify agent access and handle other calls ef ficiently.

Companies can follow three lines of attack to achieve

these goals: standardize call handling, optimize net-

work design and capacity management, and increase

outsourcing and offshoring efforts. For example, by

standardizing the handling process of technical calls,including the use of a standardized diagnostic process

and tools, companies can signif icantly boost their over-

all response effectiveness and reduce the response vari-

ability that can cause confusion and errors.

Likewise, the active management of call center agent

capacity will enable supervisors to match call volumes

with agent availability. A quick capacity util ization

diagnostic (e.g., productive call time divided by paid

time) can help managers determine where the organiza-

tion stands in this regard. Companies that master seven

disciplines accurate forecasting, capacity planning,

staff scheduling, activity management, attendance and

adherence, schedule adjustments, and real-time man-

agement do well when attempting to match supply and

demand if they overlay these disciplines with a robust

performance tracking system that has a transparent set

of key metrics and targets. Finally, companies should

increase their outsourcing and offshoring of the lowest-

value call types to reduce costs.

Prevent repeat calls. Repeat calls represent absolute

wasted value for companies, raising costs, clogging

queues, and angering customers. Regarding the final

point, our research shows that repeat callers tend to

switch services more often than other subscribers,

boosting churn and reacquisition costs at a time when

companies need to conser ve every penny. To preventrepeat calls, telcos should track CSRs and telemarketers

that have high repeat-call track records and offer them

incentives aimed at changing their behaviors.

Management systems: Recruit, manage,and reward

A telcos management system defines how things get

done within the organization: how the company attracts

and trains its people; how it tracks and manages their

performance as they do their jobs; and how it rewards

them for a job well done. All three elements play specific

roles in initiatives to improve call center performance.

Telcos have at their disposal sophisticated approaches

for attracting and retaining the best call center workers.

Best practices include having an end-to-end recruiting

Example

Efficiency improvement

Increment over baseline growth

(percent)

Number of initia-

tives pursued

US residential telco

Canadian residential telco

US small business telco

US wireless customer care

6

3

4

4

European residential telco

US retail bank

European retail bank

US credit card issuer

7

3

4

4Over 100 call

center cost

reduction

engagements

in last 3 years

SOURCE: McKinsey

30

15

12

10

20

16

15

20

McKinsey clients typically reduce their call center costs by more than 20%02




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28

process, under which managers develop a job position

profile, identify sources of potential hires, conduct a

telephone screening assessment and subsequent face-

to-face interview, and ultimately hire the best worker

for the call center position.

In assessing its ability to retain call center workers, one

telco found specific departure tr igger points over the

tenure of a new worker. The first trigger was the initialtraining itself, while the next came as workers tran-

sitioned from training into their assigned jobs. Other

spikes occurred when workers received their first job

report cards and when they switched to new teams.

Managers realized that they were either hiring the

wrong candidates for specific positions or that a signifi-

cant gap existed between the job candidates expecta-

tions and the realities of everyday work in that position.

As a result of this assessment, the company restruc-

tured its hiring and communication approaches and

initiated fewer transfers once a worker became part of a

full-time team. This company also discovered that the

best training approach for call center workers involved

an initial deep-dive session lasting one week, followed

by ongoing training for one to two hours at a frequency

of every two weeks.

The second element of a competent business manage-

ment system focuses on performance management,

which describes key management responsibilities: how

do you seed, grow, and cultivate an exceptional ly com-

petent organization? Our experience shows that a high-

impact performance management program includes

several essentials. For example, to monitor CSRs, man-

agers should introduce a strong reporting discipline

that provides standard daily performance assessments,best-practice sharing procedures, and consequence

management processes. Coaching is another crucial

performance enabler. A robust program will include

specific coaching requirements (e.g., structured feed-

back sessions), a monitoring and reporting system

managers use to review metrics with CSRs on a daily

basis, briefing sessions to review what worked and what

did not, and daily recognit ion sessions to celebrate indi-

vidual and team successes.

Companies should use multilayer scorecards and

incentives to drive these changes throughout the

organization, and they need to establish the right key

performance indicators (KPIs). For a commercial call

center, KPIs might include sales per call, answered calls,

average handling time, and customer-perceived quality.

In one case, a public sector company decided to

redesign its IVR system and wanted to pilot the

new system in a real setting before rolling it out.

Complicating the project, the company had to set upthe system in a short period of time with only limited

IT support. They decided to employ OpsTechLab call

center tools, which enabled them to model IVR flows,

examine flexible staffing options, experiment with

both skill- and attribute-based call routing, and create

call segmentation and triage plans.

In order to iteratively test the IVR redesign, the team

set up and tested multiple scenarios within a week,

and the OpsTechLab made it possible for the compa-

ny to explore different IVR design scenarios, get feed-

back from callers, and make running improvements

to the system design. Small-scale pilot tests revealed

that the new IVR design reduced task completion

times by 30 percent a typical improvement rate.

IT enablement: From idea to impact

Call centers can benefit from targeted technology

upgrades designed to enhance performance with-

out veering into gold-plated solution territory. With

that in mind, McKinseys Operations TechnologyLaboratory (OpsTechLab) helps managers carry out

interactive voice response (IVR) simulations and rapid

pilot programs that can reveal and capture significant

call center improvement opportunities.

McKinseys OpsTechLab call center tools can typi-

cally reduce IVR task completion times significantly,

while simultaneously increasing first-call resolution

rates and boosting customer satisfaction. The call

center end-to-end simulator helps teams specify the

algorithmic and architectural changes that the sys-

tem requires to capture potential improvements. The

OpsTechLab has a number of engagement models to

meet individual telco needs, from a basic technology

tune-up to best-practice benchmarking.


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By choosing the right KPIs and then monitoring them

continuously, one telco captured a 22 percent improve-

ment in handling times and achieved a productivity

improvement among 3,500 agents in six months that

exceeded 30 percent.

Finally, an effective incentive plan typically has five key

components:

Noncash programs. Use contests and noncash awards

to generate enthusiasm and improve morale, while

providing long-term career opportunities.

Payout tiers. Determine the steepness of the in-

centive payout curve based on relative employee

value creation.

Metrics. Use stable, objective metrics to determine

the specific payout.

Consequence management. Make strict plans for

moving employees who consistently perform poorly

out of the organization.

Reporting and payout. Provide frequent performance

updates and pay incentives often.

We know a number of rules of thumb for incentive

systems that can help companies fashion such pro-

grams that suit their organizations particular needs.

Regarding the selection of tracking metrics, for exam-

ple, traditional approaches such as focusing on total

revenues per CSR can serve to encourage call churn-

ing. These approaches can prevent reps from extract-ing the most value possible from each individual call.

Therefore, companies should align their incentives with

rep value creation in order to retain high performers.

One company found that its star CSRs generated up to

USD 10,000 more per month than average reps. Thus,

they made sure that their payout curve amply rewarded

these high performers.

Mindsets and behaviors:Nurturing a perormance culture

Perhaps the most difficult transformation a company

faces is the one that must take place in the minds of

workers. Sometimes made cynical by prior, less-than-

effective performance improvement programs, workers

often want concrete proof that an initiative can produce

real results before they buy in to it. As a result, man-

agers need to foster leadership, establish a continuous

improvement attitude among workers, and actively seek

employee buy-in. We recommend four actions.

Bolster key roles among supervisors and team leaders to

increase their leadership and people management skills.

Actions should include monitoring staff efficiency and

effectiveness on a regular basis, communicating the

results, and defining actions that can improve perfor-mance. Companies should also make proper training

and technical materials readily available and work to

instill common behaviors among workers.

Stage feedback sessions on a periodic (e.g., daily) basis

on specific KPIs to encourage behavior changes and the

proper focus. KPIs might include call handling times or

the percentage of repeated faults within a week.

Use specific and targeted coaching approaches, includ-

ing periodic training sessions, ad hoc demonstrations,

and tools and scripts to gain buy-in and the trust of end

users. Our experience shows that high-performing

organizations typically ask their team leaders to engage

in significantly more coaching than do their less suc-

cessful competitors and that this ef fort translates into

superior top-line results.

Work to create a performance culture. Managers need

to establish a systematic way to identify worker develop-

ment opportunities, agree on improvement measures

(with daily indiv idual coaching sessions), and monitor

progress via follow-up sessions and improvement action

plans. One way to help kick-start this process involves

changing the layout, look, and feel of the call center tosignal the shift toward a culture of performance.

* * *

The process of improving the call center frees up

cash in the short term as it enhances medium- to

long-term performance. This enables managers to

reduce costs and boost the competitiveness of their

call center organizations. These ideas and approaches

can help managers build a highly eff icient and effec-

tive call center organization. Based on our experience

with more than one hundred call center cost reduc-

tion engagements over the past three years, we know

that cost reductions of 15 to 25 percent are possible.

More important, we have helped telcos achieve these

reductions, while simultaneously boosting customer

satisfact ion and revenue levels.




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Eric Monteiro

is a Principal in McKinseys Toronto office.

[email protected]

Raffaella Bianchi


Milan office.

[email protected]

Branislav Klesken

is a Principal in McKinseys Prague office.

[email protected]

Gareth Morgan


Dublin office.

[email protected]


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While often overlooked, business support functions can

make or break a telecoms players chances for success in

todays challenging markets.

Given the current economic situation, should telecoms

incumbents spend precious time improving their busi-

ness support functions (BSFs)? Should they advance

the efficiency and effect iveness of their finance, human

resources (HR), billing, collections, and other corporate

functions using dedicated tools and expertise?

Since BSFs account for roughly 15 percent of total fixed

and mobile telco spending and since they carry an aver-

age improvement potential of 20 to 30 percent, which

makes a reduction in total cost of 3 to 5 percent possible,

we would respond with an emphatic yes!

Beyond capturing value from improved efficiency,

telco managers need high-performing BSFs to improve

effectiveness. Greater effectiveness can mean a stronger

talent bench, shorter budgeting cycles, faster general

ledger closes, reduced working capital, faster IT devel-

opment times, and many other benefits. Effectiveness

improvements often deliver more value than eff iciency

gains. For example, most telco incumbents register

in the low 30s and 40s in student employer rankings,

which has a direct impact on talent choices and the skills

of recruits. Furthermore, companies with top-perform-

ing BSFs develop employees more fully with rotations

through support functions. Optimized business func-

tions also deliver speed and transparency. For example,

a typical full budgeting cycle can take more than nine

months to complete, while BSF best practice delivers a

14-week process with even greater reliability.

Telcos also have an imperative to quickly adapt BSFs

to their new roles and responsibilities, resulting from

the turmoil that this sector faces. Many telcos lag be-

hind other service industry players in terms of staff

performance, averaging nearly 50 percent more staff

than their peers in the service industry overall this

mismatch is especially apparent in the training and

personnel administration functions.

Stiff competition and deteriorating economic prospects

herald increasing margin pressures a development

accompanied by an explosion of business complexity,

as new business models, the convergence of existing

businesses, next-generation technology rollout, and

industry globalization take hold. Consequently, incum-

bents gain competitive advantage by transforming

their BSFs from helping hands to strategic enablersof sustainable success. Companies should prime these

functions to support the requirement for quicker busi-

ness decision making caused by shortened planning

cycles and the need to quickly identify and recruit

talent. Optimized BSFs can handle growing business

complexity as well as more flexible processes and sup-

port the synergies of globalization through effective

risk mitigation. Robust BSFs will also contribute to

cost optimization efforts by providing highly efficient

services. In short, telco incumbents really need what

strong BSFs can deliver.

Before managers can begin to improve their BSFs, they

need to know where they stand versus the competition

(Exhibit 1). For example, McKinsey segmented telecoms

players in terms of their HR and finance staff mem-

bers per 1,000 company employees. The team found

05 More than a helping hand: Optimizingtelco business support functions


More than a helping hand: Optimizing telco business support functions


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34

dramatic differences in each case, with bottom-quartile

players requiring three times more HR employees than

top-quartile companies, and nearly twice as many

finance people. Such wide gaps indicate significant

opportunities for capturing new value by improving

BSF performance. This article provides insights into

improving the efficiency and effectiveness of four key

BSFs: finance, HR, billing, and collect ions.

Our suggested optimization approach begins with

a diagnostic that includes proprietary benchmarks,an examination of key performance indicators (KPIs),

and a cross-BSF performance review based on a stan-

dardized poor-good-better-best ranking system

(Exhibit 2). The diagnostic enables managers to under-

stand the main efficiency and effectiveness improve-

ment levers in the telcos BSFs. From here, managers

move to the optimization stage, drawing conclusions

from the diagnostic phase and leveraging performance

improvement experience and knowledge resources.

Finally, after having optimized BSFs in terms of effi-

ciency and effectiveness, they establish systems and

ways of doing things (i.e., continuous improvement,

culture change) that will ensure the sustainability of

improvements over time.

In the following sections, we offer selected insights

into best practices as they relate to the efficiency and

effectiveness of improvements in the f inance, HR,

billing, and collections BSFs. What follows represents

only a high-level overview of the comprehensive work-

streams that teams undertake when they optimize

BSFs. With this in mind, these sections should serve

as an example of the breadth but not the depth of

McKinseys experience.

Finance efciency

Telcos typically apply efficiency levers for accountingoperations, planning, and reporting, but not for expert

functions or in finance and administration manage-

ment. Our experience suggests telcos can improve their

finance functions eff iciency by 20 to 30 percent with

the following five approaches.

Institute demand management, identifying non-value-

adding demands on the finance organization and active-

ly managing them to reduce costs. One telco reduced the

number of reports generated by the controlling organi-

zation by more than 25 percent.

Offshore or outsource labor-intensive transactional

work, such as accounting. Moving this work outside the

organization can deliver a greater than 25 percent cost

reduction, depending on how well companies manage

the performance of their vendors.

Finance

1 Total finance FTEs per USD 1 billion

in revenues should be less than 90

2 Outsourced and offshored finance

FTEs to low-cost locations account

for 40% of resources

The budget planning cycle should not

take more than 3 months

3

There is only one shared definition and

value for key figures such as ARPU

and internal network costs

4

Initializing the year-end report after

closing should not take more than

2 weeks (ready for audit)

5

Human resources

The number of HR FTEs should be

less than 1.51 per 100 staff

1

60 - 75% of employee requests

should be processed by employee

self-service

2

Average time to hire internally should

be less than 3 weeks

3

Training costs per employee should

be less than EUR 600 per year

4

60% of HR employees should be

organized in efficiency-oriented

shared services centers2

(for transactional tasks)

5

Billing and collections

The coincident loss rate should be less

than 1%

4

Share of e-bills should be above 50%3

The error rate in billing should be

less than 1.5%

2

Cost per invoice sent should be less

than USD 1 in paper bills

1

1 US around 1.0

2 Or outsourced, e.g., payroll

SOURCE: McKinsey

BSF improvement starts with a comparison to best practices01


34/75

35

Make organizational adjustments with a rigid division

of tasks in areas such as accounting operations and

financial planning and controlling. Companies can, for

example, create a shared services center (SSC), control

policies central ly, and eliminate redundancies. These

actions can reduce costs in proportion to the levels of

redundancy a companys service portfolio contains.

Pursue structural changes in processes. Telcos can

optimize core finance processes by identifying bench-

marks, mapping current activities, and eliminatingnon-value-adding processes.

Develop performance management capabilities. Telcos

can better manage the performance of their finance

employees by establishing and actively employing mea-

surable KPIs. By using such a process, one operator saw

a significant reduction in the number of complaints

focused on the finance function.

Finance eectiveness

Managers striving to boost finance department effec-

tiveness have captured value using five approaches.

Introduce a rapid, flexible planning and forecast-

ing cycle. Significant performance differences in the

finance organizations exist across telcos, and these

differences are ref lected in a given telcos ability to

achieve world-class performance. In terms of the

days required to complete the budgeting process, for

example, McKinseys research shows that the best-per-

forming companies accomplish this task in fewer than

80 days, while the worst performers require more than

200. Likewise, in terms of reporting (i.e., the number of

days after year-end to publish annual results), the best

performer finishes 3.6 times faster than the worst.

Implement best-practice financial controlbased on aneffective organizational design. Organization is a key

lever to ensure that the finance role in a telco functions

properly particularly within the controller dimension.

The key organizational principle is that the controller

needs to have full autonomy to act as the ultimate eco-

nomic guardian of the company. The implication of this

is that there is no single clear model: there are different

organizational alternatives that can work under differ-

ent circumstances if the incentives are right.

Improve reporting effectiveness to accommodate an

increasingly complex business model. Managers can

improve performance report quality by employing

consistent definitions, using KPIs, and streamlin-

ing and focusing management reports. One company

could eliminate the need for more than 25 percent of

its reports by getting r id of redundancies and obsoles-

Transformation trackingsystems

Culture change

Overhead benchmark-ing initiative/externalbenchmarking

Reviews across businesssupport functions

KPI assessment

Draw conclusions fromcase and approachdatabase

Understand the main effi-

ciency and effectiveness

levers in a telcos business

support functions

Sustainable change

managementOptimizationDiagnosis

SOURCE: McKinsey

An end-to-end approach ensures improvement sustainability02


More than a helping hand: Optimizing telco business support functions


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36

cence. In parallel, the company ensured they optimized

new reports to meet the actual needs of internal clients.

Develop excellent cost reduction and cash manage-

ment skills. In increasingly competitive markets, all

telco managers need to have these cost reduction and

cash management skills to reach the increasingly rig-

orous cost reduction targets necessary to achieve the

expected margins.

Develop global footprint skills in risk mitigation, trea-

sury, and taxation. Managers can significantly reduce

credit and foreign exchange risks by using these levers.

For example, improving treasury-related performance

can boost before-tax net income by 20 percent.

HR efciency

Telco managers have a number of options for optimizing

HR efficiency, which collectively can deliver savings of

30 to 40 percent.

Separate strategic from transactional tasks. Telco play-

ers should keep only the strategic tasks close by. They

should centralize transactions in an SSC. An SSC can

generate personnel services cost reductions that exceed

30 percent.

Move labor-intensive transactional work offshore. By

offshoring transactional work (e.g., pension adminis-

tration, travel) and outsourcing skill-based non-strate-

gic work (e.g., payroll, training), companies can achieve

cost reductions of up to 40 percent.

Benchmark HR activities both on an international

level and on a business unit basis. Companies should

promote unified HR demand management and engage

in a rigorous division of tasks (e.g., centralize policies,

eliminate redundancies). The impact of these actions

will depend upon existing redundancies and differ ences

in the service portfolio and can potentially deliver sav-

ings of 10 percent.

Review the HR process portfolio for automation

potential.By tapping into the automation portfolio

e.g., introducing an employee self-serv ice system and

online recruiting and consolidating or integrating

HR enterprise resource planning platforms and appli-

cations in some cases, companies often find that they

can handle up to 60 percent of employee HR requests

with automated systems.

Manage HR employee performance by setting up mea-

surable KPIs and then using these for act ive monitor-

ing. Newly established indicator programs ones that

employees take seriously and managers track vigorous-

ly can increase performance by 50 percent and reduce

complaint rates by more than 60 percent.

HR eectiveness

Companies have four main courses they can follow to

improve HR effectiveness.

Create transparency in the controllers office and in HR

planning. Managers should professionalize both HR

planning and the controllers office, increasing quan-

titative and qualitative transparency. This approach

enables the function to focus on the core topics like

recruiting and talent management.

Improve recruiting and talent management skills.

HR managers should implement best-practice recruit-

ing and talent management approaches by, for

McKinsey Telecoms. RECALL No. 10, 2010 - Cost Management

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