mckinsey telecoms. recall no. 10, 2010 - cost management
TRANSCRIPT
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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
Telecommunications Practice
Klemens Hjartar
Co-leader of McKinseys
Operations and Technology in
Telecommunications Practice
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5RECALL No 10 Cost Management
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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7RECALL No 10 Cost Management
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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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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9RECALL No 10 Cost Management
One cent per minute: Cost excellence in mobile telecoms
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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11RECALL No 10 Cost Management
One cent per minute: Cost excellence in mobile telecoms
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.
Fabian Blank
is an Associate Principal in McKinseys
Berlin office.
Andr Levisse
is a Director in McKinseys Singapore office.
Vivek Pandit
is a Principal in McKinseys Mumbai office.
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13RECALL No 10 Cost Management
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.
Michal Cermak
is an Associate Principal in McKinseys
Prague office.
Dmitri Dorofeev
is an Engagement Manager in McKinseys
Moscow office.
Pablo Echart
is an Expert Associate Principal in
McKinseys Madrid office.
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19RECALL No 10 Cost Management
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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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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21RECALL No 10 Cost Management
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.
Kurt Cohen
is an Associate Principal in McKinseys
Stamford office.
Sumit Dutta
is an Associate Principal in McKinseys
Mumbai office.
Pradeep Parameswaran
is a Principal in McKinseys Mumbai office.
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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
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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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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.
Raffaella Bianchi
is an Associate Principal in McKinseys
Milan office.
Branislav Klesken
is a Principal in McKinseys Prague office.
Gareth Morgan
is an Associate Principal in McKinseys
Dublin office.
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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
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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
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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
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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