Copyright Value Partners S.p.A. All rights reserved F E B R U A R Y Telecom Quarterly

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1 Copyright Value Partners S.p.A. All rights reserved F E B R U A R Y Telecom Quarterly

2 Chinese telecommunications operators: developing a specific telco offer for SMEs Jenny Ng Partner Taylor Lam Manager Justin Carew Consultant Corporate customers have traditionally been an underserved market segment for telecommunications operators in China. There is a strong focus on the consumer market and telcos have not done enough to develop relevant and compelling offers for companies. International experience shows that the approach to corporate customers is becoming more selective in segmentation and comprehensive in service capabilities. Emerging trends indicate that within the enterprise segment, large corporates dominate, but Small and Medium Enterprises (SMEs) are attracting increasing attention as this segment tends to be comparatively underpenetrated, is potentially a good fit for all-inclusive bundles, and also displays opportunities for next generation cloud-based ICT offerings. Whereas SMEs currently tend to be served by standard offers, international benchmarks demonstrate that this segment can be better served by customised solutions and integrated offers. In response to these findings, Value Partners conducted a mystery shopping exercise to examine the SME service offerings of telcos in China, and compared this to offerings provided by leading operators in the developed markets of Hong Kong and Singapore. We evaluated China s leading telcos based on several parameters, and the results paint a striking picture which highlights that there is significant room for improvement in devising tailored ICT solutions for SMEs. The SME segment exhibits strong growth potential but is currently underserved by Chinese operators Historically, Chinese operators have placed a strong emphasis on the offering of telecommunications services to consumers, and unsurprisingly this segment has become their major revenue driver. Enterprise customers, on the other hand, currently seem to be of secondary importance to operators in China. Within China Telecom, the enterprise segment s largest player, its 17m enterprise customers account for around 30% of its total broadband subscriber base in Within China Unicom, enterprise is less significant at 20% of total broadband subscribers, just below 10m in China Mobile has the least number of enterprise broadband subscribers (~20k), however mobile enterprise lifts enterprise revenues to account for around 10% of the total, still modest if compared to the 30% revenue contribution of enterprise within China Telecom. Both China Mobile and China Unicom have not been able to provide services that are compelling and comprehensive enough to entice churn from China Telecom, and are therefore inclined to look to the consumer segments for market share. Within the corporate segment, operators have traditionally focused on serving the large enterprises that possess more advanced ICT infrastructures, and have high revenue generating potential. SMEs on the other hand, possess less sophisticated ICT infrastructures and operators currently have done little in terms of segmentation and development of customised bundles specifically for SMEs. Consequently, SMEs are frequently aggregated to the residential market and are provisioned by standard consumer offerings to meet their communication requirements. Overall, the demand for ICT services from SMEs is sufficient to merit dedicated services and distinct segmentation. 2

3 In recent years SMEs have become a central focus of the PRC government as a key driver of economic growth, acknowledging the significant potential within this segment. In 2010, there were over 10 million SMEs (size of less than 2,000 employees), constituting 99% of total enterprises in China. In the same year, SMEs contributed to 60% of China s GDP, 50% of tax revenue and 80% of urban employment in As China s economy gradually transforms from an export-driven economy to one supported by internal consumption, SMEs are expected to play an increasingly prominent role in the economy. At present, ICT penetration is substantial in SMEs, with 95% of all SMEs possessing at least one computer, and 93% possessing an Internet connection only slightly lower than benchmarks from the European Union. In firms of all sizes, Internet penetration has rapidly developed, largely due to the recognition of Internet as a fundamental commercial tool: e.g. in January 2011 over 43% of SMEs in China had their own website, and 42% engaged in e-commerce. Internet penetration of Chinese SMEs by size overall: 92.7% 83.5% 94.9% 97.4% 98.0% less than 10 employees employees employees employees Source: China Internet Network Information Center (CNNIC), Value Partners analysis Research indicates that although ~50% of SMEs use enterprise and over 43% possess online customer services, ~80% of SMEs have no specialised ICT staff. This implies that operators must adopt an entirely different approach and provide targeted product offerings to address the needs of this segment. SMEs lack specific knowledge or willingness to expend significant effort in this area, making integrated bundles crucial to tapping this segment. SMEs are looking for a trusted advisor to meet all of their demands in a convenient service bundle and operators are well positioned to fulfill this need Operators are able to leverage their existing relationships with SMEs to become a one-stop shop for all ICT requirements. SMEs lack the specialised know-how and are looking for a trusted advisor to provide integrated offerings which meet all ICT needs and guide them through future requirements. It is therefore important that operators up-sell relevant services and develop progressive and integrated solutions. 3

4 Evolution of ICT service offering 1 Connecting the office Fixed and mobile communication Data transmission services Network services 2 Managing the infrastructure Data Centre and IT infrastructure management HW and OS management Integrated solution provider 4 The company in a Box 3 ICT in a Box Business process outsourcing Resource outsourcing Utilities Financial services... Software as a Service (Saas) Unified communication solutions Remote management of standard applications Source: Value Partners analysis Chinese operators are expanding their enterprise product offerings but have developed few comprehensive packages for SMEs After recognising the opportunity in the enterprise segment, operators have taken some steps to improve their offerings. They have established separate enterprise brands: i-power (China Mobile), Biz Navigator (China Telecom) and CU Connected (China Unicom) and represent the first step in providing and promoting differentiated and target offering. Progress has also been made in moving up the ICT value chain, from basic communication services to Fixed-Mobile Convergence (FMC) products, infrastructure services and application services but these are generally targeted towards larger enterprises and there are few bundled products let alone specific SME packages. 4

5 Chinese operators enterprise solutions scaling the value chain Application Services SME Products Fixed-Mobile Convergence Wireless Phone fixed tariffs on mobile handset Unified Virtual Private Network short numbers, lower tariffs among fixed and mobile group? Infrastructure Services Local Area Network office network installation Network security firewall and anti-virus services Internet Data Centre server hosting, /web hosting, storage Leased line interoffice dedicated fibre rental? Video surveillance remote viewing applications Call centre solution automated response service, intelligent call routing CRM contact database management, issue processing, statistical analysis Location based services vehicle/ product tracking Radio Frequency Identification access tags, attendance logging Single number same extension for fixed and mobile phone ICT value chain Source: Value Partners analysis Overall, the three operators offer a comprehensive enterprise proposition, and despite packaging concerns, each one has its own distinct strengths and weaknesses. Rating the product offering of Chinese operators China Mobile China Telecom China Unicom rating comment rating comment rating comment Fixed telecoms Smallest fixed network Still not fully integrated with China Tietong Largest fixed network Second largest fixed network Mobile telecoms Largest mobile network Most sophisticated offering Smallest mobile network Nascent mobile offering Second largest mobile network Strong WCDMA network IT services Strong mobile IT solutions Lacks fixed IT solutions Strong business process solutions for large enterprises i.e. CRM, hotel management Most comprehensive IT solutions Good IT solutions for large enterprises Lacks broad range of services Source: Value Partners analysis high medium low 5

6 In comparison to international peers, Chinese players lack integrated packages, customisable solutions and relevant applications for SMEs. In Singapore for instance, market leader SingTel has tailored its service offerings and sales process specifically to the needs of SMEs. The operator offers a range of packaged solutions for SMEs through its dedicated account team, including broadband, mobile, desktop security, IT support and cloud services. Additionally, SMEs are able to choose and tailor each package according to its requirements, allowing for significant portfolio diversity without restricting uptake due to complex segregation of individual services. Cloud-based applications in particular are becoming a major focal point of SME offerings with emphasis on packaged all-inclusive suites, which are often granted free of charge with the purchase of connectivity solutions. In addition to product offerings, operators must focus on the entire customer relationship experience to effectively target SMEs. Building a relevant product portfolio may be the first step in attracting SME customers, but operators must also consider four main aspects, namely customer education and marketing, sales channels, provisioning and delivery, customer care and up-selling. Caring for SMEs throughout the customer lifecycle 1. Marketing & Education 2. Sales channels Operator strategy SME issues Operator strategy SME issues SMEs are diverse in their knowledge of telco product may know everything or nothing Often use the web to research prior to seeking advice SME sub-brand for greater awareness and ease of research Comprehensive web presence Promotions to attract attention 4. Customer care & up-selling Lack of technical know-how or dedicated team to deal with issues Want compelling offers with rewards for loyalty Quite passive after acquisition only move operator if pushed Account manager should oversee troubleshooting as well as new sales requirements Up-selling through targeted promotional packages 1. Marketing & Education 4. Customer care & Up-selling Customer lifecycle 2. Sales channels 3. Provisioning & Delivery Want a trusted advisor Do not appreciate unsolicited marketing approaches e.g. cold calls Place high value on good customer service Account manager system Integration of sales force: one-stop shop 3. Provisioning & Delivery Appreciate simplicity Low administrative capacity dislike of complex billing structures Often require significant connection consistency Issuance of single monthly bill inclusive of all services Quick and synchronised installation of multiple services Commitment to SLAs SME issues Operator strategy SME issues Operator strategy Source: Value Partners analysis 6

7 Key findings of the mystery shopping exercise To carefully examine the service offerings of Chinese operators, Value Partners Beijing conducted a mystery shopping exercise. Our consultants contacted the call centres of each operator with a predefined set of requirements that reflect those of a start-up SME in Beijing, China. These included: 1 broadband connection of at least 4Mbps Office LAN set-up with firewall 10 telephone lines, each with a common prefix 10 accounts with webmail support 10 Blackberries with and voice 1 storage server of at least 500GB To provide benchmark comparisons, the mystery shopping exercise was also conducted with leading operators PCCW in Hong Kong and SingTel in Singapore. We analysed a total of 8 parameters of operators service offerings across product offering, pre-sales capability and post-sales capability to gauge how effective they are at targeting SMEs, including comparisons on: (a) Requirement fulfilment (b) Service Level Agreements (c) Call centre response (d) Up-selling process (e) Account management system (f) Installation process (g) Technical support (h) Billing process In general, although many relevant services are provided, it was evident that SMEs were not a distinct target segment for Chinese operators. China Mobile suffers from a lack of integration with China Tietong as it is unable to provide integrated services, sales information, billing nor account management. China Telecom, although not offering any specific SME packages, was able to best fulfill the requirements of the exercise, and was also able to provide synchronised installation, quick technical support and integrated billing to some extent. China Unicom did not offer any SME packages, and partially fulfilled the requirements through separate services but lacks scope in IT solutions. Sales information was split by service and no account management system exists, but China Unicom did offer partially integrated billing by making available the total bill sum online. 7

8 China Mobile China Telecom China Unicom A. Requirement fulfilment No or storage service Fragmented between China Mobile and China Tietong Most comprehensive offering No storage service No or storage service B. Service Level Agreement No SLA commitment No SLA commitment No SLA commitment C. Call centre response quality Delay in transfer to appropriate sales assistant Lack of product knowledge No hold time Lack of product knowledge Several waiting periods for internal enquiries Most knowledgeable staff Transfers needed for each service D. Up-selling Only operator attempting to up-sell Offered faster broadband connection and leased line solution No attempt made to up-sell No attempt made to up-sell E. Account management Account manager assigned by China Tietong as single contact for all fixed and IT requests No China Mobile account manager No account manager offered No account manager offered F. Installation process Fastest installation time Synchronised installation within 5 to 10 days Slowest installation time Synchronised installation within 30 days Synchronised installation within 7 to 25 days G. Technical support Dedicated hotline Committed to service restoration within 4 to 6 hours Dedicated hotline Committed to service restoration within 4 to 6 hours Dedicated hotline Committed to service restoration within 24 hours H. Billing Separate payment per service No indication of total bill sum Provides highest level of bill integration One bill for fixed voice and mobile service Total bill sum (w/o breakdown) viewable online Separate payment per service Total bill sum (w/o breakdown) viewable online Overall assessment high medium low Source: Value Partners analysis 8

9 Below are our key findings and performance analysis in comparing the Chinese telcos and leading operators PCCW from Hong Kong and SingTel from Singapore. Product offering Both PCCW and SingTel offer bundled solutions containing voice and broadband specifically for SMEs. SingTel is now also offering SMEs several additional packages such as cloud computing and IT security and offers several SLA packages depending on budget, allowing significant flexibility for SMEs requiring a high level of stability in their connections. In comparison, none of the Chinese operators were able to provide bundled solutions (let alone those specific to SMEs) and each service had to be purchased separately. Additionally no attempt was made by any of the Chinese operators to commit to a service level agreement (SLA). Pre-sales capability Call centre staff from PCCW and Singtel were quite knowledgeable about the service offerings, and requested follow ups via to ensure all requirements were fulfilled and queries were fully addressed. Staff in Singtel also attempted to up-sell by actively pushing a cloud service package as a relevant service for start-up SMEs. Both PCCW and Singtel provide an account manager who fulfils the trusted advisor role sought by SMEs, addressing both technical issues and future demand requirements. The call centre staff of the Chinese operators either had little knowledge on product offerings or had to transfer the customer to a different operator for each service and, with the exception of China Mobile, little attempt was made by operators to up-sell services. No Chinese operator has fully implemented an account management system. Post-sales capability PCCW and Singtel provide synchronised installation within seven days and fifteen days respectively, and have integrated billing capabilities, but this is still restricted to bundled items. In event of technical difficulties, both PCCW and Singtel will send a technician within two to four hours. Additionally, Singtel provides flexibility by allowing customers to choose varying levels of reaction time depending on budget. In general, the post-sales capabilities of the Chinese operators are comparable to international peers as all operators provide an integrated installation process and fast technical response times via a dedicated hotline. Both China Telecom and China Unicom made some efforts to integrate billing but still suffer from separation at the system level 9

10 Conclusions Based on the findings and analysis of the mystery shopping exercise, it can be concluded that Chinese operators are able to create SME packages from existing product portfolios, and can take further steps to reduce churn and up-sell more effectively. The following subsections provide recommendations on key elements of possible value proposition enhancement. Product offering Introduce SME bundles. Bundling common SME services (e.g. mobile, fixed voice, broadband and IT services) into one consolidated package effectively boosts sales to SMEs. This can prevent SMEs from looking elsewhere for individual services and provides scope for upselling solutions SMEs may have little knowledge of IT services and only purchase when conveniently offered with connectivity solutions. Operators can begin by bundling existing services to lock in customers across the service portfolio, before expanding to include relevant IT services and developing multiple standalone packaged solutions. China Mobile may find this more difficult, as it implies full integration with China Tietong. Expand the SME product portfolio. Operators need to expand their portfolios to encompass services more relevant to SMEs, moving away from focusing solely on large enterprises or providing only basic connectivity solutions. Initial additional products should include cloud computing services and network storage solutions which can subsequently be integrated into packaged solutions. The portfolios of China Mobile and China Unicom will require more improvement than the more comprehensive portfolio of their rival China Telecom. Marketing Construct an SME sub-brand. There is currently little clarity in the solutions appropriate for SMEs and given the current focus on enterprises, constructing an SME sub-brand will prevent these enterprises from purchasing lower value consumer products. Operators should first label certain sub-products (i.e. certain broadband speeds) under the sub-brand, before incorporating separate solutions, packages and eventually constructing a dedicated SME hotline and website subspace. As each operator has already constructed a standalone enterprise brand, an SME sub-brand is the logical next step. Ensure that all product information is readily available online. SMEs will generally conduct significant background research online before contacting a service provider, so it is necessary that all products and services are adequately communicated online. SMEs may opt to contact the sales team of one operator over another due to a more attractive, comprehensive, or easy to understand online catalogue. This recommendation is most relevant for China Unicom as its website has less detailed and consolidated product information compared to its rivals. Sales channels Create an SME sales team. In order to maximise the sales effort towards SMEs, a dedicated team must be constructed to effectively target this segment. This will allow staff to be better informed regarding relevant products and, knowing common issues, more effectively up-sell. It was evident that no operator had a team dedicated to SMEs and obtaining information regarding the products required was a slow process involving multiple staff. 10

11 China Mobile will have greater difficultly with this task as it implies integration between China Tietong and China Mobile business units. Provisioning and delivery Commit to service level agreements. Operators need to recognise the importance of Internet consistency for many SMEs and the opportunity to generate extra revenue by providing SLA commitments. SMEs require higher service consistency than retail customers and in many cases connectivity consistency is crucial to their operations. Each player will have an equal motivation for implementing this recommendation as none currently commits to SLAs. Customer care and up-selling Assign account managers. Despite the substantial implementation effort required, an account management system can be effective in reducing churn and providing opportunities to up-sell. This can also benefit initial sales effectiveness, as account managers can act as experienced sales representatives and a one-stop shop for all SME sales enquiries. China Telecom and China Unicom may have greater difficulty in implementing this system than China Mobile, which may be able to migrate the existing China Tietong system. 11

12 About Value Partners Value Partners is a global management consulting firm that works with multinational corporations and high-potential entrepreneurial businesses to identify and pursue value enhancement initiatives across innovation, international expansion, and operational effectiveness. Founded in Milan in 1993, today it draws on 25 partners and over 275 professionals from 23 nations, working out of 10 offices in Milan, Rome, London, Istanbul, São Paulo, Buenos Aires, Beijing, Shanghai, Hong Kong and Singapore. Value Partners has built a portfolio of more than 350 international clients from the original 10 in 1993 with a worldwide revenue mix, as over 60 percent of the management consulting revenues are generated outside Europe. Value Partners combines methodological approaches and analytical frameworks with hands-on attitude and practical industry experience developed in an executive capacity within each sector: telecommunications, new media, financial services, energy, manufacturing and hi-tech. In 2007 Value Partners acquired Spectrum Strategy Consultants a leading UK company specialized in publishing, broadcasting, entertainment, IPTV and mobile thus further strengthening its international presence. Today Value Partners is a leading advisor in the telecom, media and technology sectors worldwide. At the beginning of the 2000s, Value Partners decided to expand its service offerings beyond management consulting to include complex, innovative and business-critical IT services: Value Team was created and, in less than 10 years, reached on 3,000 professionals active out of offices in 4 countries. In April 2011 NTT DATA one of the main players in the IT sector in Japan acquired Value Team for an enterprise value of over 270 million Euros, to make its platform for growth in the key European and Latin American markets. Value Partners and Value Team will continue to co-operate on complementary projects for individual customers. In Asia, Value Partners has been active since 2004 and has established a strong presence over the years, with offices in Hong Kong, Shanghai, Beijing, Singapore and Mumbai. We are committed to Asia and have capitalised on the opportunities that exist in both developed and emerging markets across the region. Value Partners serves clients in diverse industry sectors, including telecoms & media, industrials, consumer goods and retail amongst others. We also work across multiple functional areas and provide assistance to organizations in various capacities, ranging from corporate strategy, company valuation and international expansion, to cost optimization and business turnaround. For more information on the issues raised in this note please contact: telco.china@valuepartners.com Find all the contacts details on Milan Rome London Istanbul São Paulo Buenos Aires Beijing Shanghai Hong Kong Singapore 12