Between a Rock and a Hard Place: European Telecoms Operators have to Drastically Change their Cost Reduction Strategies in Order to Survive, Finds AlixPartners Survey
As cost pressures drive a wave of M&A across the Old Continent, operators need to cut costs of up to €100 billion
London (13 February 2014) – Although significant progress has been made by European telecommunications companies in rationalising their operational models, transformative cost reduction programmes, of up to €100 billion in total, are required if industry players are to survive and return to a sustainable growth trajectory. This is according to a new AlixPartners study and C-level survey on cost and profitability in the sector, which is published ahead of the Mobile World Congress in Barcelona.
The challenges facing the industry loom large in 2014, a year in which many experts expect to see a fifth consecutive revenue decline for European telcos. The AlixPartners 2014 EMEA Telecoms Executive Survey on Cost and Profitability Imperatives, which interviewed a representative panel of senior telecoms executives across France, Germany, Italy and the UK, finds that, although cost reduction opportunities in the sector are great, the best intentions of executives are not often reflected in the end results. The study proposes that, in order to return to a competitive footing globally, operators need to go beyond their current strategies of tactical and incremental cost cutting and instead pursue a transformative approach to achieve sustainable cost reduction and foster the necessary conditions for their other strategic priority, revenue growth.
Today, however, the stark reality is that companies are simply not doing enough in either area, and the AlixPartners survey highlights a fundamental tension in chief executives’ attitudes to cost reduction. While some 60% of respondents said they would like to adopt “radical” cost-cutting methods, over two-thirds (67%) admitted that their companies’ approach to cost reduction had not notably changed over the past five years, suggesting that, although the will to overhaul business models to ensure healthy future returns is not lacking at a boardroom level, companies are failing to deliver significant transformation.
The stakes have never been higher for companies in this sector, says the study. European telecoms operators are not only up against low financial returns but also a complex mix of structural, strategic and regulatory pressures, all likely contributing to increased M&A activity, with major deals in 2013 such as Vodafone/Verizon, Vodafone/KDG and America Movil/KPN, and many other deals now ongoing (e.g., Vodafone/Ono in Spain, Bouygues/SFR in France and Vodafone/Kabel Deutschland in Germany).
In a low-growth environment such as today’s, according to the study, telco CEOs are facing unprecedented pressures on their operating costs. At the same time, 56% of those surveyed anticipated that their funding needs for infrastructure investment, such as next-generation 4G technology, would increase, whereas only a third expected healthy returns on invested capital (ROIC) from their investments in mobile and fixed data services. The severe market view on European telcos (Price to Earnings ratio of 21.5 vs. 29.9 in North America) therefore seems to be shared by executives themselves, who, worryingly, seem to lack confidence in their own capacity to generate healthy returns, hardly a reassuring sign for investors.
A vast majority of executives are determined to take action to curb revenue declines, as 95% of those surveyed stated that their company had approved or planned a cost reduction project for the next 12 to 18 months, with the main areas cited by respondents as integral to this process being network upgrades, product reviews and strategic reviews of countries. Yet, their poor track record in executing such plans, added to the current turbulence within the sector, should be cause for scepticism, says the study. The survey shows that the failure of traditional tools (incremental cost reduction schemes, basic efficiency plans, etc.) can be at least partly explained by a lack of persistence in their implementation, with 43% of respondents saying that previous such programmes did not reach completion due to other projects taking priority. Caught between the rock of an unconvincing record in driving substantial operational change and the hard place of current pressures on business models resulting from the fiercely competitive market, European telecoms operators appear to be paralysed by the complexity of the challenge ahead, says the study, and they must learn to navigate these rough waters in order to avoid being swept away.
From its research as well as its industrial experience and expertise, AlixPartners recommends the following guidelines to European telcos to help achieve true transformation in their business models:
1. European telcos have to know their “destination”: understanding in detail their cost base and setting goals based on a detailed and forward-looking analysis that takes into account where the industry cost levels need to be a few years ahead.
2. They must challenge the fundamentals of their business model. Tactical or incremental cost improvements are not enough to avoid a ‘Titanic’ scenario. They must chart a transformative path to remove complexity from their business model, in order to face the various challenges of the years ahead: broadband, content, digital, etc. And they must seek to leverage step-changes in systems and architecture.
3. Above all, change must be driven imperatively by top management, through a strong, future-oriented corporate narrative which drives alignment combined with high CEO visibility and close management of the cost reduction programme by a strong and experienced PMO (project management office).
“Our executive survey sheds light on the immense challenges facing European telecoms operators, who are today the poor relatives of their North American cousins”, said Eric Benedict, Managing Director at AlixPartners and co-lead of the firm’s global TMT (telecommunications-media-technology) Practice. “In order to stem the tide of revenue decline, they must admit the difficult truth that their business models need to be fundamentally redesigned and further simplified. Time is of the essence: Our findings come at a time when cross-continental mergers as well as tactical divestments are gathering pace, with the potential to radically alter the industry landscape in the not-too-distant future.”