Nokia Siemens Networks Consulting Worldwide efficiency rank How efficient is your organization?
Significant opportunities for efficiency improvement can be found in all markets Most Communications Service Providers (CSPs) claim to be highly efficient, or to have the right efficiency improvement initiatives in place that will lead them to be the next top industry performers. It is true that over the last few years, efficiency has been a key strategic area for many CSPs. Facing an increasingly competitive environment, CSPs have indeed significantly improved in areas such as network performance, business processes and operations and maintenance. Cutting OPEX has helped operators improve EBITDA even as they have experienced a drop in average revenue per user. Players in emerging markets have been able to achieve some of the highest EBITDA levels in the industry (5-60%), thanks to best-in-class OPEX and CAPEX control and optimization levels. When comparing the industry average with the results of best performers in each region results show that if all CSPs operated at the level of the 3rd best in their region, the industry could have improved EBITDA margins by 7%. If they were operating at the level of best-in-class in their region, EBITDA improvement will approach 0%. Although this is a pure theoretical analysis and many variables have to be examined to identify why a CSP is performing better than others, it still gives an indication of the tremendous improvement opportunities that are still to be realized. Nokia Siemens Networks has studied more than 300 CSPs (accounting for 90% of worldwide revenues) and have found that there are still significant performance gaps from one organization to another. Table : OPEX saving opportunity across regions, million USD 50,000 00,000 80,000 OPEX saving opportunity Estimated OPEX with regional 3rd of class margin 60,000 0,000 20,000 0 NA LAM APAC CE WSE MEA Source: data based on Strategy Analytics statistics, 2009
Do you know how efficient you are compared to your peers? Let Nokia Siemens Networks analyze that for you To specifically measure and benchmark the actual efficiency of any given company, business unit or key business process, Nokia Siemens Networks has developed the Efficiency Calculator. This tool also helps identify efficiency gaps and potential new improvement initiatives, as well as to assess their financial impact to the CSP. The following table captures the Top Ranked Wireless Efficient CSPs in 2008. NTT DoCoMo, Verizon and SFR were the most efficient operators in 2008, at the overall company level. Particularly remarkable is the improvement of NTT DoCoMo in 2008 vs 2007, given the fierce competition in Japan and its mature-market status. Table 2: Worldwide Efficiency Rank - top 20 wireless operators Operator NTT DoCoMo Verizon Wireless SFR (Societe Francaise de Radiorelephone) Telefonica de Espana (including Movistar) Telcel (Radiomovil Dipsa) Vodafone Germany Vodafone Italy Deutsche Telekom (T-Mobile) Germany Vodafone Spain Turkcell Wind Italy AT&T Mobility (Cingular Wireless) KDDI (incl au and TU-KA) O2 UK Vodacom South Africa MTN Nigeria Rogers Communications Cosmote Chungwa Telecom MTN South Africa Source: Nokia Siemens Networks Analysis Efficiency Rank (2008) 2 3 5 6 7 8 9 0 2 3 5 6 7 8 9 20 Change in Efficiency rank (2007-2008) 8 6 9 9 5 6 3 2
Learn lessons from how leading CSPs have answered to intense competition in mature markets: NTT DoCoMo was the most efficient CSP worldwide in 2008 despite revenue loss Fierce competition and market saturation has led to an aggregated 8% revenue loss for NTT DoCoMo during 2006-2008. However, despite revenue decline, NTT DoCoMo has managed to improve EBITDA margins by 5% over that same period (from 33% in 2006 to 38% in 2008). Additionally they have also managed to reduce overall yearly CAPEX by 2% in 2008 compared to 2006. Table 3: NTT DoCoMo key financial indicators evolution 2006-2008 Revenue / EBITDA evolution Fiscal year 2008 (03/2008-2003/09) Billions of Yen.788.575.72.639.8.678 OPEX evolution CAPEX evolution Fiscal year 2008 (03/2008-2003/09) Fiscal year 2008 (03/2008-2003/09) Billions of Yen Billions of Yen 0.20 0.6 0.6 OPEX /sales 0.8 0.83 0.8 CAPEX /sales 93.0 3.903 3.67 5 759.28 738.66 98.3 35 36 9 75 776 89 00 80.29 767.50 8 828 872 665 520 90 2006 2007 2008 EBITDA Revenue 2006 2007 2008 2006 2007 2008 Selling, General & Administrative Depreciation & amortization Cost of equipment sold Cost of services General capital expenditure PHS Other equipment 2G Network 3G Network Source: NTT DoCoMo 3
NTT DoCoMo three initiatives for indisputable leadership on our efficiency rank. Structured OPEX/CAPEX reduction program which has led to more than 250 JPY billion savings in 2008 While some CSPs have always viewed cost reduction activities as one-off projects and tactical initiatives mostly oriented to meet budget targets, other more visionary players like NTT DoCoMo have launched structural transformation initiatives. These programs are aimed at developing a continuous flow of ultra-efficiency initiatives highly adapted to current market conditions. Importantly they focus on setting goals on a selected set of KPIs and managers develop the right environment and organizational capabilities to ensure a lean and on time execution of the different identified initiatives. Following this approach, NTT DoCoMo has achieved (i) ~200-300 JPY billion OPEX reduction in handset procurement and sales costs thanks to closer partnerships with handset providers and innovative new sales schemes more adapted to an oversaturated market, and (ii) ~60 JPY billion CAPEX and OPEX reduction through improving cross-business efficiency and deploying a more efficient make vs. buy policy framework. Table 3 describes in more detail the major cost reduction programs launched by NTT DoCoMo Table : NTT DoCoMo key 2007-2008 efficiency improvement initiatives 2007 Rank 9 2008 Rank 2007-2008 OPEX/CAPEX savings Network cost reduction Operational process improvement Reduction of base station construction costs Consolidation and increase in the capacity of network equipment Reduction of equipment procurement costs Use of FOMA repeaters and FEMTO cell BTS equipment Reduction of communication network charges (cost for usage of other mobile operators networks) through improved make vs buy operations: e.g. deployment of own backbone to replace of circuits leased from NTT Cross-national integration of activities from regional subsidiaries Rationalization and consolidation of customer call centres and bill collection Consolidation and integration of IT support systems owned independantly by regional subsidiaries Standardization of operations common across different regions JPY 30 billion CAPEX Savings (EUR 23 million) JPY 28 billion OPEX Savings (EUR 23 million) Reduction in handset cost Reduction of handset procurement costs Worked closely with handset makers from the devlopement phase itself. For example, streamlined functionality to realise lower priced mobile phones for customers who prioritise design and price New sales schemes NTT DoCoMo changed its handset sales model to realize significant cost reductions ~JPY 200-300 billion OPEX Savings (EUR 23 million) Source: NTT DoCoMo and Nokia Siemens Networks Analysis
2. Innovative sales schemes leverage new market dynamics NTT DoCoMo s traditional sales model, under which it offered attractive handset sales incentives to agents and significant customer discounts, helped it to rapidly acquire new subscribers in a growing market. But as the Japanese market matured, growth in new subscriptions stagnated. Handset sales were no longer propelling the expansion of the subscriber base and instead were linked to handset replacement by current subscribers this put a downward pressure on the operating income of the CSPs. Additionally this system was criticized by customers for issues such as lack of transparency in prices and expensive breaking of customer contracts. To adapt to new circumstances, NTT DoCoMo launched a new sales scheme where handset subsidies were no longer offered and instead an amount equivalent to the sales incentive was discounted from the customers monthly charges to maintain customers value-for-money proposition. This reduced the additional cost stemming from the decrease in growth of subscriptions and an increase in the frequency of handset replacement by current subscribers as a result NTT DoCoMo s burden on cost of sales reduced significantly. Table 5: NTT DoCoMo sales schemes evolution Traditional sales scheme Suitable for growth market Handset sales incentives to attract new customers Gains from new subscriber acquisitions exceeded the cost associated with offering handset sales incentives Low handset prices High Monthly tariffs New sales scheme - in parallel with traditional approaches Suitable for saturated market No sales incentives - discounted tariffs instead Benefits from decrease in sales incentives exceeded the decline in revenue associated with discounted tariffs High handset prices Low Monthly tariffs Source: NTT DoCoMo 3. Launch of change & challenge action plan to improve customer loyalty through implementation of highest customer experience standards As the Japanese market matured and reached high saturation levels with more than 00 million subscribers, two new disruptive trends appeared: (i) difficulty in sustaining revenues, and even declining revenues as in NTT DoCoMo case and, (ii) the Japanese subscriber base shifted from new subscriptions to churners. In this new context, customer experience is becoming the key competitive advantage. Customer expectations are simple, they look for: best price, abundance offers and transparent price scheme; full internet and click-bang responsiveness; new innovative services; ease of use and installation and superior customer service. NTT DoCoMo implemented the change and challenge action plan which focused on exceeding customer expectations and earning customer loyalty by (i) starting with the basics and enhancing the overall quality of service at all levels network billing and customer care and (ii) developing new innovative and easy-to-use services leveraging on an existing open platform and new and existing developer partners. 5
Table 6: NTT DoCoMo Change & Challenge initiatives Change Key initiatives Promotion of customer-focused marketing and organizational processes - earn long-term customer loyalty by delivering the best possible service, safety and security to each customer Comprehensive review of all operations - from customer management to handset and network development Objectives Improve QoS and customer satisfaction Strong promotion of subscriptions and renewals by offering discounted tariffs and services 2 Expand usage Challenge Personalization: Expansion/enhancement and enrichment of services according to varying lifestyles and need Social Support: Launching new businesses in fields such as environment, ecology safety, security and health management Converged services: Linking of mobile phones with various devices to provide convenient services Collaboration of handsets and networks: Optimizing the allocation of functions between handsets and networks, in particular to leverage the high-speed, low latency, large-capacity properties of it s LTE network Expansion of international businesses and domestic investments and alliances Promotion of credit business 3 New revenue sources Source: NTT DoCoMo and Nokia Siemens Networks Analysis Looking forward from today s business In order to maintain a competitive position and build leadership for the future, CSPs will need to be ultra-efficient. In order to do so, they need to: Understand through benchmarking and analysis what are their current performance gaps compared to best practices from competitors on each business domain Move away from one-off cost reduction initiatives aimed at fulfilling budget targets and develop a continuous improvement framework clearly setting goals on a limited set of KPIs each year Ensure a lean and on-time execution of the initiatives launched Focus on customer needs and deliver service quality accordingly Continuously look after streamlined operations and simplified operating model Further develop partnerships with adjacent industry players to deliver new innovative services and open new revenue streams. Ensure simplicity, ease of use and installation for end users 6
Meet the consultants Eddie Chan Heads Efficiency Consulting and has co-authored the memo on Ultra-efficiency indicating important areas to think about in transformation to be efficient and prepared for the future. Prior to joining us, Eddie has worked across at operators, vendors and management consultants. He has been an interim CTO for a leading VoIP operator, a management consultant with one of the big five, worked for a major US network equipment vendor as well as with an incumbent and start-up operator in the UK. Guillermo Hernández He is a global efficiency expert within Nokia Siemens Networks and has co-authored this memo. It shows what operators need to think about to master efficiency and build a strong competitive position for leadership for the future. Guillermo has + years experience in the telecommunications industry and prior to joining Nokia Siemens Networks he occupied various senior management roles in different operators. He has been Group Director of Business Performance and Value-based Management for a global tier- operator, has worked as Director of Strategy and Business Development for a Spanish Operator and has worked as management consultant within a top strategic consulting firm. Do you want to know more about efficiency? Visit us at www.nokiasiemensnetworks.com/consulting Nokia Siemens Networks P.O. Box FI-02022 NOKIA SIEMENS NETWORKS Finland Visiting address: Karaportti 3, ESPOO, Finland Switchboard +358 7 00 000 (Finland) Switchboard +9 89 559 0 (Germany) Order-No. C0-0056-B-20002--EN Copyright 200 Nokia Siemens Networks. All rights reserved. Nokia Siemens Networks and the wave logo are registered trademarks of Nokia Siemens Networks. Other company and product names mentioned here in may be trademarks or trade names of their respective owners. This publication is issued to provide information only and is not to form part of any order contract. The products and services described herein are subject to availability and change without notice. Every effort is made to ensure that our communications materials have as little impact on the environment as possible www.nokiasiemensnetworks.com