The art of successful operational transformation

The art of successful operational transformation

Contents 1. Introduction 2 2. Operational transformation drivers 6 3. Alignment of operational transformation 8 to the business lifecycle 4. Operational transformation industry 10 comparison and best practice 5. Getting Into operational transformation 12 what to do next? 6. Operational transformation key learnings 14 7. Operational transformation recommendations 15 and key actions 1

1. Introduction Key ingredients to successful operational transformation Clear business goals are a must, as are direct alignment of external and internal drivers to transformation objectives and rigorous discipline in planning and executing the program. We also believe that some major operational transformation activities are needed at certain times in the lifecycle of a business to stimulate growth or recovery or even to move on to the next stage in the lifecycle. There is significant value in getting the operational transformation programs right. Many operators have launched such programs but few have achieved the desired results. We have looked at the realization of EBITDA gains over time of such programmes to examine the business impact and have found: Transformation Initiatives lacking well-defined objectives possess a risk of going off track Communications Service Providers (CSPs) viewing transformation as network- and technology-centric, rather than taking the more beneficial customer-centric approach Customer and Product Migration is key to ensure consistency between as-is and to-be operational states and should not be underestimated Operational transformation must also consider the interplay between strategy, process, people and systems 2

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2. Operational transformation drivers Identifying and categorizing appropriate operational transformation drivers based on clear business goals lays the foundation for any successful transformation program. Both external and internal drivers should be considered in the context of a CSPs organization and the likely timeframe that affects the business. Pre-emptive operational transformation programs can then position the CSP for improved competitive advantage. Looking forward for 2010, there will be major global changes for CSPs over the next five years that should be considered as triggers for operational transformation. Additionally, consideration must be given to the applicability of these trends in the context of the local and regional market conditions. The drivers cover all aspects of the telecommunications business including industry disruptions. These include major changes to the existing telecoms business model, mergers and acquisitions and cross-industry plays into media and entertainment. Being aware of the total environment is vital to ensure that the operational transformation reflects both outside-in and not just inside-out issues. Personalization Specialization Organization Figure 1. Identification of Potential Triggers for operational transformation 4

In customer and market behavior, in the competitive environment and regulatory areas, we see the advent of individualization taking precedence over personalization as the market and end-customers seek to be unique in their identities and service usage, mass customization across business and personal usage. CSPs will need to address this movement in parallel with increasingly tough competition that will eventually result in a few successful candidates. The regulatory environment will also become increasingly tough with regulators exerting a global reach and pushing hard to ensure that no individual is without connectivity to basic voice services and eventually broadband becoming available to all. Business management becomes more responsible, driven by the lack of credit that is likely to extend well into the next decade. Eventual release of equity will be slow and careful with focused investment on only those organizations demonstrating strong stewardship and governance. Businesses throughout the world will also deconstruct to engender less hierarchy and more agility. This on-going trend paves the way for much more efficient and lower cost operations which are essential to maintain margins. Supplier and vendor relationships will in the interim period of the middle of the decade be such that the boundaries between the CSP and the vendor and CSP to CSP are blurred. This symbiotic relationship will be beneficial to both parties with the CSP opening up access to business areas previously unaddressed by specific vendors. This paves the way for an end-to-end, value-based relationship for all stakeholders. Lifestyle issues will drive CPE usage in the domain of end-user service enablers and applications. Demand for new services will be near real-time in response to major day-to-day events and the operational systems will have to react to this. Home appliances will be linked to communication devices and will also form connectivity for individuals to help manage their day-to-day activities with an increasingly hectic schedule. Mobile devices will become smarter and evolve to become embedded in the very fabric of each life. Bio-sensory feedback mechanisms will help individuals manage their life-style needs through mobile devices. Social networks will further evolve to become more widely connected communities that are tailored to individual preferences and choices. IT and Network infrastructure are obvious drivers for operational transformation, there are specific disruptive trends that should be noted. In the IT space, cloud computing is becoming a reality and inter-connected domains are already taking shape in 2010. The eventual movement to new technology based on bio-technology will see these inter-connected domains becoming more powerful. Nextgeneration plans for the BSS and OSS are vital for the CSP of the future, and while these are already planned transformations, these will start to take effect this decade. In the network space, advanced optical and bio-switching will drive changes in overall network architecture supporting the delivery of massive streams of information. This will be in both the fixed and mobile networks as LTE also evolves. In our opinion, all the major market, industry and technology disruptions (marked in orange in Figure 1) will have a significant impact on the operational capabilities needed in the business. Each will need to be addressed either singularly or as part of an on-going operational transformation programme. 5

3. Alignment of operational transformation to the business lifecycle Operational transformation must be thought of as a continuous theme throughout the lifecycle of a business. Operational transformation must be thought of as a continuous theme throughout the lifecycle of a business. Some transformational activities will invigorate a business that is stuck in one place. For example, in a mature business, activities may be needed to push that business to the next stage. CSPs may also consider executing specific operational transformational programs to gain competitive advantage. For example, a customer service focus transformation early on in the growth stage may help position a new-entrant ahead of its rivals. Each CSP has unique external influencing factors that will determine the specific timing of any transformation activity. In Figure 2 we have indicated the ideal time to execute specific operational transformation programs, the reality of execution may be somewhat different dependent on business need. Organization stabilization Process optimization Figure 2. Operational Transformation Programmes in the Business Lifecycle. (Source: Nokia Siemens Networks Analysis) 6

In the start-up phase we anticipate no operational transformation programs are needed, but strategic consideration must be given to the future mode of operation. High costs will be incurred to fix problems in the growth phase created as a result of ad-hoc organization, process, infrastructure and systems deployed in the start-up phase. The growth phase introduces the complexity of the need for business stabilization without affecting customer and revenue acquisition and profitability. High capital investment is needed in people, networks and systems supporting standardized business processes. In reaching the maturity phase, review of the existing mode of operation is a critical milestone in the business lifecycle. Many of the external factors, such as technology change, market conditions and regulatory requirements, will have changed. Therefore, many operational transformation initiatives will be required across all areas of the business. While essential to the survival and success of the business, many CSPs falter in this phase, seeking some mechanism for assurance of business benefits. We see many operational transformation programs in this phase. Some examples are given below: Operational Transformation Programme Description Customer service focus Change from a product-led or technology-led approach to focusing on improving the customer experience and quality of service Channel efficiency Reduce the number of channels to market and improve the profitability of each channel. Development of below the line distribution channels and self selling packages. Network efficiency Improve the utilization and functionality of the network and IT infrastructure with minimal investment or less cost Operations efficiency Through the whole organization and across all functions improve the productivity of all activities by increasing output with less or minimal incremental cost Supply chain efficiency Improve the relationships up and down the supply chain to reduce the end-to-end costs and issues for inventory re-order, stock control and distribution. JIT delivery model for main assets to improve IRR Process optimization Review and enhance all processes to meet faster time to market and new market demands. Operational transformation programs during the decline phase may also be seen as an extension of the maturity phase. Radical programs such as those that involve major change to the business model may have the effect of phase shifting the organization to a previous state such as the growth phase. Operational transformation is a continuous activity throughout the lifecycle of a business, while there may be discrete programmes, management cannot be complacent and expect that the one program has done its job. Various industry dynamics are changing (see Section 1) and will drive the program for change. 7

4. Operational transformation industry comparison and best practice Telecom operators lag behind other industries (eg. automotive, manufacturing) in embracing operational excellence to create value and drive sustained competitive advantage. Toyota- or GE-like performance characteristics in telecoms could mean lead times for provisioning and repair shrinking to minutes and hours from days and weeks and customer satisfaction scores exceeding 95%. Toyota exhibits five distinct elements in its approach to operational excellence. They are long-term philosophy of cooperation with all stakeholders, organizational culture of problem solving and continuous improvement, role of managers to drive team achievements, process standardization and performance measurement. Let us analyze how telecom operators can learn from some of these aspects and apply some of these principles into driving every day operational excellence. 1. A long-term philosophy of cooperation: Telecom operators must adhere to some core principles of cooperation with different stakeholders including customers, third party providers, system integrators and telecom vendors. The trust and long term philosophy of cooperation with different stakeholders ensures that all stakeholders stay coordinated to drive everyday operational excellence. 2. Organizational culture of problem solving & continuous improvement: Toyota has developed a culture of learning, which helps them go to the source of the problem to find the facts to make correct decisions, build consensus and achieve their goals. CSPs can drive operational excellence by investing in problem-solving process to drive operational excellence. 3. Role of managers to drive team achievements: Managers in telecom operations need to move beyond the traditional responses to emergency situations and, instead, teach staff to solve problems on their own. The learning of the organization is worth the short term pain. 4. Process standardization: Telecom operators are plagued by non-standard processes. With standardized work, any deviations on the work can be monitored by managers and can be seen as a challenge for improvement of this knowledge, leading to an improved standard. 5. Performance measurement: CSP operational heads need to set challenging and ambitious goals based on clearly communicated business priorities. Targets are developed by customer facing managers and support is drawn from the operation teams to meet these performance objectives. 8

Toyota or GE performance characteristics in telecoms could mean lead times for provisioning and repair being shrunk to minutes and hours from days and weeks and customer satisfaction scores exceeding 95%. 9

5. Getting into operational transformation what to do next? The importance of transformation planning and design There is significant value at stake in getting the operational transformation programs right. As we found in our business transformation study, many operators have launched such programs but few have achieved the desired results. While all operational transformation programs are unique, they also share several essential features such as: Delivering against business drivers and the business case Transforming the organization around demands of customers Optimizing and streamlining processes and ways of working Re-engineering tools and systems Migrating customers and products to new operational infrastructure. Nokia Siemens Networks has developed an operational transformation framework to guide the execution from strategy through to the realization of business benefits. The framework illustrated in Figure 3 shows a holistic approach to managing several dimensions and aspects of the overall operational transformation program. This should cover the areas of strategy, people, process, systems, security and facilities. Set Direction Assess, Envision and Roadmap Sweat the details Architect, Validate and Design Make it Happen Build, Test and Integrate Run it Stabilize and Improve Manage impact on customers & company Manage impact on internal resources and capabilities Strategy Design Build Operate Realize value for business & end customer Optimize business processes Re-engineer systems Govern data migration Ensure adoption and accountability (people) 1 2 3 4 5 Manage transformation Lead and manage transformation 6 Six threads integrated together to deliver business transformation results Figure 3. Nokia Siemens Networks Transformation Framework 10

Measuring success through the Transformation Dashboard The executive action plan for operational transformation should be measured by the operational transformation dashboard (Figure 4). Creating the CSP-specific dashboard helps with the successful execution of the program. The operational transformation dashboard identifies and quantifies major areas of focus for the program. These are reflected in the target objectives for the new operating model. How these objectives are achieved will be through a series of key business themes with specific targeted topics. Understandably, strategic project benefits should be linked to the overall business objectives. The example (shown in Figure 3) is based on the case study for a major mobile operator in Europe and the four major themes are expected to drive and improve the four main business KPIs for CSPs. These KPIs are: customer growth and retention; revenue growth, profitability, cost management and financial management. Themes are not limited to a specific number, but should be chosen carefully to drive the transformation programme and provide maximum coverage over the business KPIs. Market differentiation has been identified as the approach to improve customer growth and retention as well as revenue growth. A differentiation theme, in this case was appropriate due to the hypercompetitive market situation. Other alternative strategies, such as segmentation or pricing may work for other CSPs in different markets. Selective partnering can generate growth and customer retention. This boosts profitability and reduces cost. In this case the CSP had a large number of upstream and downstream vendors to manage. Not only were these vendors costly to manage, but, the handset vendors in particular were not helping to attract new customers. Asset optimization has been identified as another approach to boost profitability. During the growth phase, the CSP has actively encouraged rapid infrastructure rollout in the network and IT domain. Unsurprisingly, this had led to a proliferation of different network and system types and configuration many of which were proprietary. This theme would drive rationalization across many systems to avoid costly duplication in maintenance and future functional upgrades. New operating model Improving: Customer growth and retention Revenue growth Profitability and cost Financial management Market differentiation Selective partnering Asset optimization Performance and efficiency improvement Performance and efficiency improvement has been identified as the approach to impact profitability and cost management and overall financial management. Declining revenues coupled with increasing costs was recognised as significantly affecting margins. A program across all parts of the business would be necessary to improve performance at a lower or minimum incremental cost. A dashboard outlines specific topics and strategic projects that support each of these themes. The importance here is not just the identification of the areas, but also to use the dashboard as an ongoing executive management tool that identifies the status and benefit realization as the program executes. The operational transformation dashboard is critical to bringing about a successful operational transformation. Themes Topics Strategic Projects Brand refresh Product repositioning Focused marketing Network vendors IT vendors Handset suppliers Content providers Planned and future network IT functionality and capacity Operation and functional efficiency Organizational redesign Figure 4. Nokia Siemens Networks Operational Transformation Dashboard 11

6. Operation transformation key learnings Telecom operators thinking about operational transformation should learn from early attempts of operational transformations in the industry. Nokia Siemens Networks, based on experience of these programs, has carried out an extensive study of leading operational transformation programs of incumbent CSPs, and have made the following observations: 1. Transformation initiatives lacking well defined objectives risk going off track Telecom operators that had articulated clear tangible business objectives were able to focus their transformation efforts to drive those quantitative measures. Often a transformation dashboard is developed at executive level to measure the success of a transformation program. Operators that left their business objectives not clearly defined and measured had difficulties in mobilizing the entire organization around a consistent set of objectives. This point was amplified in France Telecom s Next initiative, one of the most successful initiatives of its kind. The company clearly defined a set of operational targets and financial targets that it planned to achieve by 2008 via its transformation initiative called Next. In 2008, the Financial Times reported where the company stood in terms of target achievement and it also stated future steps in the form of Orange 2012 initiative. Time Elapsed vs. Absolute EBITDA Margin Growth best Absolute EBITDA Margin Growth (From start of transformation till 2008) worst low Time Elapsed (from start of transformation till 2008) AT&T and France Telecom emerge as the clear leaders in the group of incumbents studied - They have been able to achieve best EBITDA margin growth rates within a short time of launching their transformation process There are certain cases such as Telecom Italia, TeliaSonera and KPN where the incumbants have had success in their transformation initiative - however this is not reflected by the growth in their EBITDA margin, as various external factors such as regulator intervention, market dynamics, etc. have more than offset cost savings achieved from transformation Note: EBITDA Margin growth = EBITDA growth in 2008 - EBITDA margin in year of transformation initiation Company Confidential high AT&T Investments - USD 4 Billion Absolute EBITDA Margin Growth - 4.47% BCE Investments - NA Absolute EBITDA Margin Growth - (1.45%) Belgacom Investments - EUR 400 Million Absolute EBITDA Margin Growth - (1.12%) Bezeq Investments - NA Absolute EBITDA Margin Growth - 3.23% British Telecom Investments - GBP 10 Billion Absolute EBITDA Margin Growth - (6.68%) BSNL Investments - NA Absolute EBITDA Margin Growth - (10.17%) Deutsche Telecom Investments - EUR 1.2 Billion Absolute EBITDA Margin Growth - (4.68%) France Telecom Investments - EUR 2.9 Billion Absolute EBITDA Margin Growth - 5.02% KPN Investments - EUR 2.7 Billion Absolute EBITDA Margin Growth - (4.41%) Telecom Italia Investments - EUR 6.5 Billion Absolute EBITDA Margin Growth - (7.48%) TeleSonera Investments - NA Absolute EBITDA Margin Growth - (8.26%) Telkom Investments - ZAR 30 Billion Absolute EBITDA Margin Growth - (12.5%) Telstra Investments - AUD 1.5 Billion Absolute EBITDA Margin Growth - (0.36%) Figure 5. Nokia Siemens Networks Analysis of the Impact of CSP Transformation Programmes 12

2. Operators viewing transformation as a network and technology only initiative and not migrating to a customer-centric structure will not reap total benefits This is highlighted by the case of TeliaSonera, which evolved its geographic region-based structure to a more product-based and customer segment based unit structure this was done primarily to create greater customer focus and drive a customercentric transformation. Another case is that of France Telecom, which integrated all its brands into one common brand: Orange this was done in order to create greater recall, simplicity of offering and a customer centric structure. 3. Customer and Product Migration is key to ensure consistency between as-is and to-be operational states and should not be underestimated Operators that have a narrow focus on customer and product migrations run the risk of escalating costs and delayed rollout. The case is highlighted for Telstra where Telstra CFO commented the following in their press release when closing books on the transformation project: IT transformation project delivered $307m in cost savings and additional revenue this financial year, and these benefits were projected to grow to $1.2bn over the next two years. The billion-dollar increase in the project budget was primarily due to an increase in scope and added complexity in some areas, such as data migration. 4. Operational transformation must also consider the interplay between process, people and systems Operators can miss cost savings if they continue to run their next generation operational infrastructure with legacy business processes. This was echoed in Telus CTO comments on their next generation operational transformation program: Everything was IP but we weren t getting the savings that we were supposed to get. It hit us that its easy to introduce new technology and overcome the challenges, but if your IP network isn t using the next generation processes, then you haven t realized the benefit of your investment. 7. Operational transformation recommendations and key actions Know your steps: Successful transformation programs have a great amount of coordination in sequencing their approach to transform product portfolio, network infrastructure, organizational processes and OSS/BSS systems. Short sighted or narrow approaches to transformation will also result in gaps between evolving customer demands and operational capability to serve it. The following key steps would be essential for success: Perform an industry assessment to determine the key drivers for the business from a market and regional perspective Perform an efficiency diagnostic to identify operational performance gaps Create an operational transformation framework to carefully plan and execute the program Use the operational transformation dashboard approach to monitor and track progress of the strategic themes and projects. 13

Meet the consultants Dmitry Serdega Head of our Business Solutions sales in Russia, and is actively involved in the development of our approach to Operational Efficiency Lead transformations and related methodologies. Prior to his current role, Dmitry was the Principal Consultant for a large mobile operator in Northern Europe, and was involved in efficiency and architecture transformations projects. He has also had a number of executive positions for other Northern European mobile operators. Ankur Bhan Heads our Process Consulting practice and has lead the development of our approach to Process-Led Transformation and related methodologies. Prior to his current role, Ankur headed the Process Transformation Practice for a large IT player and was involved in some of the largest change programs in the communications industry. 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. Want to know more about operational efficiency? Visit us at www.nokiasiemensnetworks.com/consulting Copyright 2010 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 herein may be trademarks or trade names of their respective owners. Products and solutions herein are subject to 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