THE STRATEGIC ROLE OF IT IS RISING

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2 ABSTRACT As competitive pressures mount and technological advances accelerate, telecom operators increasing rely on IT for operational efficiency as well as strategic differentiation. Yet research by Oliver Wyman finds marked regional differences in IT investment. Operators in the Middle East and North Africa spend significantly less on IT than their European counterparts do. As a result, MENA players now have two opportunities to gain an IT-based competitive edge over regional rivals: 1) by investing more in IT, especially in differentiating elements like CRM, BI, and billing, and 2) by approaching IT outsourcing more strategically to realize its full value potential.

3 THE STRATEGIC ROLE OF IT IS RISING Telecom operators in the Middle East are facing mounting pressure. Regulatory changes have stiffened competition among traditional rivals and allowed new over-the-top entrants to gain a foothold. Consequently, telecoms have expanded into the ICT space both to protect core revenues as well as to generate new growth. At the same time, emerging technological trends, such as 4G, cloud computing, the digitization of content, the ubiquity of broadband, and the proliferation of smart devices, require companies to develop new business and IT capabilities or risk becoming obsolete. In this environment, an operator s ability to compete hinges on its IT capabilities. A robust product offering, the capacity to deliver a quick time-to-market, and the collection of high quality customer intelligence all require state of the art IT systems. Likewise, operational effectiveness and process quality need a sufficient level of automation. Essentially, the role of IT has changed. Managing technology is no longer enough: Companies rely on IT to enable strategy, and in many instances, IT plays a pivotal role in an operator s business transformation programs. Yet despite its importance, IT is underfunded in many MENA operators. EXHIBIT 1: RELATIVE IT SPEND AVERAGE TOTAL IT CASH COSTS/AVERAGE TOTAL OPEX 16% 14% 12% 10% 8% 6% 4% 2% EXHIBIT 2: SERVICE TYPE SPEND PERCENTAGE OF TOTAL IT SPEND 100% 80% 60% 40% 20% 0% Total Europe MENA 0% Application Development Operate Applications Desktop IT Servers Infrastructure Source: Oliver Wyman, 2011 ITB Source: Oliver Wyman, 2011 ITB Copyright 2012 Oliver Wyman 3

4 MENA IT INVESTMENT LAGS BEHIND EUROPE Oliver Wyman researched IT spending patterns among operators in Europe and MENA as part of the International Telecommunications Benchmark study (ITB, 2011). The research is designed to measure efficiency and quality and compare performance across roughly 50 participants. It is conducted every other year to provide longitudinal data on industry developments and trends. A comparison of overall spending levels between regions reveals a significantly higher IT investment in Europe than in MENA. While the average spend across all participants is 12% of total operating expenditures, Europeans spend twice as much (14%) as their MENA counterparts (7%) (exhibit 1). This suggests that MENA players are jeopardizing their competitiveness by underinvesting in IT. Not only do MENA companies spend less on IT than European players do, but they also allot their investments differently. While application development accounts for the lion s share of the IT budget in both regions (exhibit 2), a closer look into the breakdown of those dollars reveals marked differences. European operators, for instance, invest 37% of their application development budgets on front office & CRM systems. By contrast, MENA operators invest just 25% there. Along with billing solutions, these are the most crucial areas of investment in order to understand and serve customers better and gain a competitive edge. Instead, the Middle Eastern participants in our research spent a significantly higher percentage on G&A and Web platforms (exhibit 3). EXHIBIT 3: APPLICATION DEVELOPMENT SPEND PERCENTAGE OF TOTAL APPLICATION DEVELOPMENT SPEND 60% 40% 20% Europe 0% Front office & CRM Billing and offer management G&A Network IT Web platforms MENA Source: Oliver Wyman, 2011 ITB Copyright 2012 Oliver Wyman 4

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6 TWO LEVERS FOR MORE EFFICIENT IT SPEND IN MENA Spend more but do it strategically. MENA players can gain significant business value by spending more on IT. Operations can benefit from improved efficiency and quality through higher end-to-end automation. Top-line growth and margins can be boosted by strengthening customer relevant capabilities (differentiating service features, faster time-tomarket, and an enhanced customer experience). Indirectly, marketing and sales effectiveness can be improved by increasing the quality and level of information captured on customers. In order to ensure money is spent where it has the biggest business impact, an effective governance process is needed to align IT investment with business needs. Key questions CIOs need to ask themselves: 1. Is a joint strategy and planning process in place between business and IT that clearly identifies and prioritizes the capabilities and service levels required from IT? 2. Are effective processes in place to prioritize ongoing project requests from across the company (Marketing, Sales, Finance, HR, etc.) and ensure their timely delivery? 3. Is there a mechanism to ensure business units request only those projects and service levels that will generate sufficient value (such as through charge-back mechanisms)? 4. Are sufficient budgets and resources available to meet all long- and short-term business requirements? Rethink IT outsourcing for value generation. MENA players, especially incumbents, should consider a higher degree of outsourcing of their IT operations. A strategic outsourcing arrangement can cut costs while maintaining or even improving service levels. Outsourcing is even more relevant now in the context of pushing into the ICT space, where strong partnerships provide a competitive edge in the market. Equally important, MENA operators need to review the way they handle application development outsourcing. Significantly higher value can be captured than simple cost cutting by using cheaper contractors. Key questions to ask are: 1. Is there an articulated strategy on The objectives the company wants to accomplish with outsourcing (costs, know-how, innovation, project management, flexibility, etc.)? Which types of IT activities are outsourced, and in which model (near-/offshore, captive/third party)? The limits of outsourcing due to business strategy and associated risks? Which services will be moved into the cloud? 2. Is your vendor portfolio designed to meet the defined strategy, and are individual vendor relationships managed with long-term objectives in mind? 3. Are individual sourcing decisions made in line with the defined overall sourcing strategy? By examining and adjusting their IT spend, MENA operators can more effectively leverage IT and better compete in their markets. Copyright 2012 Oliver Wyman 6

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