November 4, 2012

Collaborative Technology Synergies: The Key to Achieving Optimal Value and Maximum Gains

Booz & Company evaluate the need for telecom groups to adopt a cooperative approach to technology synergies so as to further ensure that they reap the utmost qualitative and quantitative results.

Today, the rapidly-changing and highly-competitive telecom market has spurred a strong need for technology synergies. After all, the industry is characterized by telecom groups that have direct business interests in their home markets and possess large portfolios of wholly or partially-owned stakes in operating companies in other markets. With capital costs being a major line item for them, these telecom firms are continuously striving to obtain favorable prices from vendors. As a result, they have traditionally sought to achieve technology synergies by centralizing procurement. However, while this method is potentially effective, it has proved to be contingent on specific conditions and greatly consume both time and resources. In light of this, management consulting firm Booz & Company has found that successful technology synergies can also be accomplished using a decentralized, collaborative approach instead.

A Necessary Transition

In this day and age, the need for telecom groups to generate cost savings stems from multiple financial pressures. Indeed, intensifying competition in the provision of services to consumers and enterprises, along with regulation, make it more difficult for companies to charge more. Furthermore, competition in the consumer and enterprise markets derives not just from other telecom firms – there are new players in the field as well, including technology and Internet companies. In parallel, fiscally-challenged governments see the cash flow-rich telecom sector as a source of easy pickings and consumers are more demanding.

A Go-To Market Approach: There are myriad reasons why telecom groups have typically responded to these pressures via a centralized procurement strategy. “This method has an intuitive appeal to telecom organizations with holdings in multiple operating companies. This is because, by consolidating most procurement at the center, they save money through the standardization of equipment and aggregation of purchasing power,” explains Olaf Acker, a Partner with Booz & Company. “Moreover, the groups’ business model seems to encourage centralized procurement, as globalization and international expansion have delivered more cost benefits than has direct incremental revenue growth coming from the operating companies.”

In truth, synergy programs bring together technology procurement across a telecom group’s international footprint; this allows it to use the combined scale of its technology needs to obtain favorable prices by purchasing standard equipment for all of its operating companies.

The Limits of Centralized Procurement: In today’s volatile marketplace, the centralized procurement model is less applicable to many telecom groups; this is due to the fact that the centralized buying of technology solely helps large telecom groups that have spent several years building group-level procurement capabilities.

“Time and predictability are important factors in a viable centralized procurement program,” said Hilal Halaoui, a Partner with Booz & Company. “Emerging telecom groups, however, do not have such luxuries and their technology needs are frequently redefined by the accelerating pace of innovation. They must, instead, aim for properly understood synergies which are valuable because they go beyond mere cost considerations. Additionally, this approach can help Operating Companies within telecom groups to actually question their cost agenda and determine whether it positions the organization and its operating companies for growth.”

More specifically, centralized procurement poses three main difficulties for emerging groups:

  • Adapting to local considerations: Local technological considerations can hamper a centralized approach that puts forward standardization. This is a particular concern for telecom groups that hold operating companies in a number of markets spanning varied levels of maturity.

  • Exerting management control over operating companies: Centralization requires that a group exert a degree of management control over its operating companies – and this comes through majority shareholdings in the operating companies. The telecom group may have to use this position of control and this poses the risk of companies opposed to centralization becoming marginalized.

  • Striking the right balance between local and central procurement: For all its theoretical appeal, centralization can lead to practical complications because it is difficult to guarantee the correct procurement balance between the group and operating companies.

The Middle Eastern Market: “Among the emerging telecom players likely to encounter these challenges are the main telecom groups in the Middle East – as they have expanded rapidly in recent years, branching out well beyond their home turf”, said Dany Sammour, Senior Associate with Booz & Company. “As these firms begin to establish themselves, the maturity level of the local markets will drive very specific technology choices on the operating companies, which, in turn, will prevent the groups from standardizing and centralizing their procurement. Similarly, these emerging constituents often own a portfolio consisting of majority and minority shareholdings.”

In actuality, in this particular region, half of the operating companies within telecom groups are partially owned – significantly reducing the efficacy of a centralized synergy approach. For such reasons, a decentralized, collaborative approach will work better for them.

Synergizing Before Centralizing

Telecom groups can generate substantial value and reduce their capital costs if they create a culture of cooperation among the group and its operating companies. In effect, this decentralized approach will also provide considerable qualitative benefits in terms of knowledge sharing, customer experience, and encouragement to innovate.

“Managed in this way, technology capital expenditures become positively regarded investments, rather than negatively regarded costs,” said Halaoui. “Telecom groups can then transform how they operate in terms of technology acquisition and management, allowing them to identify which costs will give them the capacity for growth. The groups are therefore in a position to focus on the differentiating capabilities that will enable them to stay ahead of their competitors.”

This virtuous process is exactly what creates a lean cost agenda for groups and operating companies that are currently positioned to spend wisely and grow strongly.

Building a Decentralized Synergy Program: There are two main elements to building a decentralized, collaborative synergy approach: making the group the service provider and allowing the operating companies the flexibility to adapt to local considerations based on their experience.

The service provider model: The group-level synergy team proposes initiatives that the operating companies have the option to endorse. From there, operating companies can decline to adopt group proposals that do not fit with their locally driven strategies. By acting as a service provider, the group synergy team also supports operating companies during purchasing cycles. Another important effect of the service provider model is the alignment of group procurement targets with tangible benefits for operating companies. This collaborative approach strikes a fair balance in the relationship between group-level coordination and local decision making as well as gives operating companies an incentive to participate fully in technology synergies – so that they can take advantage of the group’s buying power.

Operating company leadership: The collaborative, decentralized approach allows the operating companies to lead the synergy realization program through two bodies. The first is a team of experts that draws on the experience of participating operating companies and the second is a governance council of operating company leadership teams. The purpose of the council is to ensure adequate buy-in from all stakeholders, as well as approve new initiatives and monitor the progress of ongoing efforts. On their part, the group convenes the team of experts and the governance council, and participates in both of them.

Quantitative Benefits: The decentralized method has clear quantitative benefits; these come from building sophisticated rapid cost analysis tools that lead to direct cost savings and enable a group to develop precise reference models that can build benchmarking capabilities. With such advancements, a firm can easily look at data from a new operating company – a useful capability when performing due diligence during an acquisition or price negotiations.

The transparency that these benchmarking methods deliver gives all Operating Companies very strong negotiation power against the vendors, while at the same time it allows them to procure the equipment they need at the pace they deem appropriate based on their local considerations. On top of this price transparency, the synergy team is able to drive volume discounts applicable to the total group spend with each vendor.

“We have built sophisticated rapid analysis tools that allow all Operating Companies within a group to have full transparency and very granular apple to apple comparison on all the technology equipment they are buying. This was never done in the past and the tools readily available on the market are too high level to allow enough transparency. Fortunately, through this strategy, the group team can also establish global price books to allow for better cost comparisons,” added Acker. “The decentralized method is as effective as standardization in addressing the opacity of technology prices. Its advantages even extend to IT as groups and operating companies using this scheme can achieve technology synergies for commodity items such as servers, storage, software, and other end-user computing products.”

Qualitative Benefits: “Technology synergies have important qualitative effects as well – with consequences that build a group’s capabilities. The most obvious outcome is an improvement in knowledge and experience sharing throughout the group and its operating companies”, added Sammour. “This is achieved by having the group synergy team support the operating companies in their identification of common areas for information sharing. The bottom-line impact of this is an overall improvement of the customer experience – an important capability in an era of consumer choice.”

Another qualitative gain is the ability of operating companies to cooperate on such technologies as New Generation Operations Systems and Software (NGOSS); with such tools, they can jointly innovate on areas such as machine-to-machine technologies, mobile health, and mobile commerce applications. Perhaps the ultimate qualitative benefit of collaboration is the fact that it equally helps telecom leaders overcome the difficulties involved in technology investment decisions. As the telecom sector becomes more technologically advanced and complex, telecom groups will surely need such mechanisms.

Characterized by stable knowledge-sharing platforms and a partnership-driven culture, the decentralized, cooperative approach allows telecom groups to create value despite the challenges of local considerations, control over operating companies, and difficult balance between local and central procurement. Simply put, this strategy works better than centralization and standardization because it challenges synergy teams to look beyond mere procurement consolidation. Most importantly, collaborative technology synergies help telecom groups and their operating companies manage their costs and deploy technology resources for the expansion and growth that they need.