GCC Telecom Operators Need to Reduce Waste and Can Achieve Cost Savings of Up to 30 Percent

Published September 1st, 2010 - 07:02 GMT

As the telecom markets in the GCC are on the verge of saturation, while prices decline due to increasing competition, GCC telecom operators are now seeing their profits under very high pressure. This is demonstrated by the results for the first half of 2010 where several GCC incumbent telecom operators stated profit reduction between 15 to 30 percent.

However, a new study by The Boston Consulting Group (BCG), Lean Advantage in Telcos: Reducing Complexity and Transforming Culture, suggests that GCC telecom operators can achieve their full potential through cutting waste and saving costs.

"Telecommunications is still one of the most inefficient industries, with as much as 30 percent of its cost basis eaten up by waste. This waste is difficult to see because it is embedded in telecom processes", states Joerg Hildebrandt, Partner and Managing Director at BCG Middle East.

While some companies have set up rigorous cost reduction programs to protect profit margins, one-off cost reduction measures like cutting marketing spend, travel, advisory, and renegotiation of major vendor / supplier contracts are the usual suspects for immediate scrutiny.

However, these traditional cost-cutting approaches will not be able to capture the enormous potential savings according to the BCG analysis. Very often the measures are not bold enough to meet current challenges because they exempt sacred cows and most importantly, they aim to cure the symptoms rather than address the root causes of waste. And still other approaches lack end-to-end focus. Waste cannot be compartmentalized; inefficiency in any one process tends to spill over into others.

GCC telecom operators need to continue searching for growth, but equally important, they must find ways to secure or improve earnings by optimizing their operations. Most providers are far from achieving operational excellence. BCG has found tremendous waste: as much as 30 percent of costs are incurred because of rework (correcting process or product defects), overproduction (producing items before they are required), inventory (storing products), and over-processing (using more resources than necessary). "This is true not only for incumbents in saturated markets, but also for companies in developing markets. We believe the telecom industry could save 20 to 30 percent of total operating expenses by eliminating waste that still resides in its processes", highlights Hildebrandt.

Perhaps most importantly, few cost-cutting programs produce lasting cultural change. They target specific kinds of waste on a short-term or one-off basis and don't achieve the larger goal of enabling organizations to improve continuously in terms of operational excellence. "Therefore, traditional cost-reduction efforts don't deliver significant and sustainable competitive advantage", confirms Hildebrandt.

Combating Complexity

Complexity is the key driver of cost inefficiencies in both telecom processes and business models. GCC telecom operators have been in 'growth mode' over years, not being able to catch up with customer demand. Over decades of operations complexity has been exponentially increased through new products, partnerships, and various service levels to customers.

BCG's Lean Advantage Telco Complexity Index shows that complexity is greater in typical telecom operators than it is in a lean, fully optimized operator.

Telecom operations can reduce complexity through four distinct yet interrelated frameworks, or "lenses."

1. The Strategic Lens. Setting overall objectives for transformation using this lens involves identifying and managing the strategic tradeoffs that drive a company's operating model.

2. The Operations Lens. Analyzing a company using this lens helps it prioritize available methods, or levers, for achieving excellence in its processes and systems.

3. The People Engagement Lens. Involving employees and receiving their full cooperation are often the missing links in improvement efforts.

4. The Performance Governance Lens. Viewing an organization through this lens helps a company measure—and maintain—change by choosing the correct structures and measurement systems. 

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