Partner & Director
For many telecommunications operators, the good times are gone, but the challenges, it seems, aren’t going anywhere. Revenues are on the wane, competition is on the rise, and burgeoning data traffic requires costly network upgrades just when cash flow is under pressure. Little wonder, then, that more and more telcos are getting the message: a changing market calls for changes to the business model.
To be sure, telcos are taking some sound, battle-tested steps. They are embracing network sharing, for example, and striving to reduce complexity—a significant source of costs—in their offers. But the most successful transformations—those in which telcos don’t just keep pace with competitors but step out ahead—require pulling unproven levers, too.
One such lever is cross-border synergies—an approach that has been tried before and has been disappointing before but still warrants a fresh look. Even in their earlier failures, telcos were onto something: the need to boost scale.
Many network-technology costs are largely independent of operator size: the more subscribers a telco has, the more it can spread costs around. To get the optimal scale dividend, however, telcos need a lot of subscribers. Our analysis of the sweet spot for realizing cost benefits puts the number at roughly 20 million to 30 million subscribers. (See Exhibit 1.) However, most national markets—particularly those in Europe, the Middle East, and Africa—are just too small to support such numbers. Indeed, in many countries, even the market leader has fewer than 5 million subscribers. Yet for a telco with an international footprint, 20 million to 30 million is a subscriber level that might be attainable once the telco looks beyond its national borders.
Why is now the time to pursue international synergies? For one thing, there are lessons in those previous disappointments. What’s more, technology has changed. Recent advances have made it easier to centralize networks and IT platforms. But it is just as important that cross-border consolidation can provide a valuable assist to overall transformation efforts. It fosters more standardization and less customization, helping to reduce complexity. And it can play a central role in lowering the cost base.
Building on the lessons of the past and the technologies of today, we have developed a fresh approach to cross-border synergies, one that can bring telecom operators annual capital-expenditure, or capex, savings of 3 percent or more—and a 15 percent improvement in free cash flow after five years. Indeed, the benefits—increased scale, reduced complexity, consolidated platforms, and elimination of duplicate functions—are almost equally distributed across operating-expense and capex domains. (See Exhibit 2.) A cross-border platform can even boost shareholder value by increasing profitability at the group level.
These benefits are especially compelling because of the one thing that isn’t going to change anytime soon: the need for operators to reinvent—and reinvigorate—the way they do business.
We expect that, initially, telco executives might have some trepidation about international synergies. After all, most previous attempts at cross-border consolidation resulted in higher costs or lower savings than expected.
But just why did those projects fail? Technological limitations are part of the answer. Networks that had been built in the 1990s just weren’t capable of efficient and economical cross-border operation. They certainly weren’t designed with centralization in mind. But there were also problems in the way that cross-border projects were implemented. More to the point, there were common problems. The following difficulties appeared time and time again:
There are other common problems. It’s hard to get governance right, particularly as the number of countries involved grows. And then there is the potential for vendor lock-in. Using a single-service platform can mean working with one vendor, which can create dependence on that vendor, as well as vulnerability to climbing fees for support and maintenance. Disappointing performance can be hard to turn around, too, given the difficulty of replacing, or simply sparking some fear in, a firmly entrenched vendor.
By taking an approach that avoids these pitfalls, telcos are far more likely to realize the potential of cross-border synergies. This optimized approach is supported by three core pillars: standardization, deploying new technologies, and collaboration between the technical and commercial sides of the business.
As past failures demonstrate, customization has been the scourge of cross-border projects, triggering delays and increasing costs and complexity. But telcos should be questioning—and reducing—their need for customization regardless of their cross-border aspirations. One of the critical tenets of overall business-model transformation is that companies should drastically reduce product-driven complexity.
Although we are starting to see simplified offers, there remains a strong belief in the industry that local markets require customized products, services, and marketing. It is surprising that this is thought to be true even for markets that are quite similar. In a cluster of countries with common characteristics, local tweaks are still the rule. A global, or even regional, perspective, which is prevalent in many other industries, rarely exists on the local-operator level.
So how can cross-border projects break through this customization impasse? One idea is to think a bit smaller. Instead of replacing legacy platforms with comprehensive systems that must meet every business requirement of every local operator, telcos should set a less ambitious—and more attainable—goal. They should group fewer countries together and focus on capabilities that are conducive to standardization. Once this platform is up and successful, operators can gradually add to it.
To achieve that success, we recommend the following steps:
In past cross-border initiatives, technology proved more a hurdle than a solution. But new technologies make it far easier to deploy shared networks and services. The shift from legacy Synchronous Digital Hierarchy architecture to optical Internet Protocol (IP) networks, for example, allows for a centralized platform for providing services to customers. Network Functions Virtualization (NFV), meanwhile, enables services—such as IPTV or business voice—to run through shared applications on standardized, cloud-based servers, eliminating the need for customized, on-site hardware and allowing for faster time to market. Finally, Software Defined Networking (SDN) can centrally manage the connectivity layer, supporting full centralization of operations and providing affordable, massively scalable bandwidth.
What this all boils down to is an ability to centralize and automate much of what it takes to run a network and create an infrastructure that is easier to share and scale. Telcos that aggressively deploy these technologies will be well positioned to realize cross-border synergies. But there are a couple of caveats.
First, no matter how enabling these technologies are, complexity—the “kryptonite” of shared platforms—is still driven by the level of local customization. Indeed, if anything, these new technologies can potentially open the door to more customization. When network functionality is moved to cloud-based applications, traditional hardware and software restrictions are removed. This enables nearly limitless customization, making it all too easy to go overboard with local tweaks.
The good news is that telcos should be reducing complexity in product offerings and thinking through the transition to technologies such as NFV and SDN. So the efforts they make in their overall business transformation can boost their cross-border efforts as well. For example, one way to reduce complexity and improve time to market is to replace legacy services with new offerings delivered through an over-the-top (OTT) model. This approach enables highly standardized services that require only “light” network integration (preferably through standardized application-program interfaces). It also fits in well with the idea of localization at the edge. An OTT service might have a common application core, with local customization achieved through the front-end app that accesses it.
Second, as many operators have discovered, legacy vendors don’t always provide adequate next-generation solutions. In such cases, the approach taken by companies in other sectors—the likes of Facebook and Google—can be instructive: you can design your own architecture by using commodity hardware that is operated by open-source code and putting your own apps on top of it. This method also helps reduce dependence on a single vendor.
Cross-border programs are the ultimate team effort, and unless all stakeholders are on board, efforts can be torpedoed quickly. It is vital, then, to include all critical managers and decision makers who represent not only the participating countries but also various areas within the organization. One idea is to bring everyone together for a telco conclave—generally, a week or two of meetings—and hold discussions until the required alignments have been reached. But no matter what mode of interaction is chosen, certain imperatives are crucial:
Although market conditions continue to challenge telcos, operators do have a number of new, if unproven, means for dealing with them. In the months ahead, The Boston Consulting Group will publish articles exploring more of these levers—such as the use of big-data analytics to optimize network operations. But as telcos evolve along with the market, development of cross-border synergies is a particularly good place to start. They not only provide scale benefits and help lower the cost base, they also spur telcos to embrace standardization—and cut the cord on complexity. Cross-border synergies don’t only create leaner, more agile networks and IT; they also promote leaner, more agile—and ultimately more successful—telcos.
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