Simplify, digitize, consolidate — or else: The new paradigm
Roman Friedrich, Rolf Meakin
April 28, 2016
The corporate world at large is moving quickly to capture the benefits of digitization. Yet the telecommunications industry itself, while enabling its business customers to digitize their activities, has lagged in its efforts to move in the same direction. Struggling with outmoded IT systems, siloed organizational structures, and pre-digital corporate cultures, telecom operators have allowed faster competitors, notably the so-called over-the-top players, to gain the upper hand by offering better and wider-ranging services and more compelling customer experiences.
All is not lost — at least not yet. But if telecom operators are to catch up, they must first radically lower their total cost bases, simplify their product offerings, and devise better customer experiences. Then they must settle on their digital strategy and develop a much wider range of digital services for their customers, business and consumer alike. They will need to rethink the way they innovate to become much more agile and open to working with third parties. Finally, they need to engage more fully in the ongoing consolidation of their industry to generate scale, combine networks and infrastructures, and offer true fixed–mobile convergence, the basis of any effort to improve the customer experience and create the products and services their customers are now demanding.
The past couple of decades have been good ones for the telecom industry. These have been times of sustained growth and increased efficiency, thanks to the rise of the Internet, the development of new technologies like fiber optics, the advent of faster and more connected computers and mobile devices, and the increasing demand from consumer and business customers for greater connectivity, more data, and faster services.
But the days of rapid innovation are over, and they’re not coming back. Until recently, telecom operators grew primarily by providing the pipes through which all kinds of industries — entertainment, retailing, financial services, travel, and others — have begun to digitize and by fully saturating virtually every developed market with more phone and data subscriptions than there are people in that market.
Notably, however, the telecom industry itself hasn’t been transformed to the same degree as the industries it has served. Weighed down by legacy IT systems, outmoded organizational structures, and corporate cultures that are simply not up to the demands of the digital paradigm — even as regulators continue to put pressure on retail prices — few telecom operators have been willing to set forth on the radical path they must take toward their own digital future. Those that have begun the journey are typically newer arrivals, mostly in developing markets, and therefore not burdened with the legacy costs of the major incumbents.
Instead, established telecom operators have allowed competitors, notably the so-called over-the-top (OTT) players — Netflix, Skype, Spotify, Instagram, Snapchat, and the like, which offer better customer experiences — to steal a march on them. The OTT players distribute their innovative services “on top” of the operators’ networks for free, reducing expenses dramatically and investing the money they save in developing new innovative services, while leaving the operators with all the costs involved in maintaining their networks but little of the value to be captured. The result: Revenue growth and profitability over the past several years have stagnated, and for some operators, particularly in Europe, they have declined. In short, “business as usual” has become a recipe for irrelevance, if not disaster.
Given the enormous and growing demand for all kinds of digital services, telecom operators do have a commercially attractive future, but only if they radically reinvent themselves for the age of digitization — building the right capabilities to reimagine the customer experience, rethink their operating model to radically reduce costs, and re-create their corporate cultures to instill the agile mind-set that will enable their digital transformation. And they must participate even more actively in the ongoing consolidation of their industry to generate scale, combine infrastructures, and bring about the true fixed–mobile convergence (FMC) that must form the basis of their efforts to improve the customer experience and create the products and services customers are now demanding.
Whether they can succeed in transforming themselves into true digital telecom companies will depend on their ability and willingness to devise a workable digital strategy, build or buy the capabilities needed to execute that strategy, and then carry it out fully.
The CEO’s agenda
What must CEOs do to plan and carry out the transformation required to meet the needs of the digital world? Here are five steps that leaders of all telecom operators should take to ensure that they stay relevant in this increasingly competitive environment:
Define your way to play on the basis of the three strategic archetypes — the network provider, the digital enabler, and the digital life provider. This will require a careful assessment of what you can realistically accomplish, given your present state and the risks involved in tackling each strategic play.
Given the strategy you choose, redefine your operating model with the objective of simplifying and radically reducing your cost structure. Carefully assess your current management capabilities and level of digital maturity to identify the best transformation path.
Understand what digital really means for your specific strategic play, and remember that no matter which strategy you choose, you will need to develop an approach to culture and people that will enable the transformation. You will need new capabilities and business processes throughout your organization — in HR, IT, finance, and elsewhere.
Develop customer-centricity and digital design thinking as key capabilities for any play beyond the network provider.
Participate in consolidation with four objectives, in addition to cutting costs: to gain national market share, to acquire fixed assets in FMC markets, to acquire the necessary digital capabilities, and to grow the customer base to extract the most value from your digital innovations.
We cannot overstate the size of the opportunity that digitization presents for operators, or the risk they run if they don’t seize it now. Already, we are seeing telecom executives throwing their hands up and protesting that the transformation is too hard, their companies move too slowly, and they’re too bound up in old legacy systems, old ways of doing business, and pre-digital corporate cultures. Transformation is hard, but executives who don’t make the effort are dooming their companies to irrelevance at best and failure at worst. Operators that do make the effort stand a good chance of remaining central to the brave new world of digitization.
“Disruptive Times in the ICT Industry,” Strategy&, Nov. 13, 2015. Compound annual growth 2011–15, slide 6. Source: Strategy& analysis
“The 2015 telecom digital maturity survey: Preliminary results,” Nov. 2015.
“Disruptive Times in the ICT Industry.” Worldwide network infrastructure cost vs. Internet players’ revenues and value, slide 8. Source: OECD; Forbes; Infonetics; Strategy& analysis
“Disruptive Times in the ICT Industry.” Typical archetypes of “way to play” in digital services, slide 14. Source: Strategy& analysis
“Disruptive Times in the ICT Industry.” Slide 14.
Simplify, digitize, consolidate — or else: The new paradigm