Rethinking operational processes can offer telcos competitive savings

Abstract The telecommunications industry is changing as applications, networks, and end-user devices are moving to modular architectures. This is resulting in a much wider range of competing offerings than ever before. Consumers are shifting towards increasingly complex products like IPTV, Internet, and mobile data services just when carrier margins are falling. Add to this new reality the current economic slowdown, which will limit revenue growth for telcos in the near term, and telcos nd themselves under mounting pressure to reduce costs. Indeed, we see telcos facing some difcult challenges: Customer support costs are increasing because of the higher call volumes and longer handle times that result from the more complex services. Network costs are also rising as carriers deploy and maintain new infrastructure to support advanced services. These services are usually more asset intensive than the legacy telephone services squeezing cash margins. Customer acquisition and retention costs are also likely to increase due to market saturation and competition. Internal process costs are typically higher for the newer IP and wireless data services than for legacy wireline and mobile voice services. If telcos are to maintain and improve their margins, we believe they must nd new ways to optimize their operations and reduce costs. While there are several levers managers can pull to optimize operations, including service delivery model, organizational simplication, operational processes, and external spend, some of the most effective strategies are in the area of improving operational processes. Three key approaches to consider are: Standardizing and simplifying the processes for newer IP services and mobile voice service in order to reduce absolute costs and generate scale efciencies as demand for these new services grows. Based on our observations, this can result in savings of up to 20-40% for impacted functions. Focusing on reducing dispatches and improving the efciency of install and repair technicians on the network side, which together, based on our observations, can result in savings of 18 to 29 percent of addressable costs. Improving immediate-term efciencies of non-network areas such as call centers, eld sales, retail stores, and the order to cash process which, based on our observations, can result in savings of 28 to 44 percent (these short-term savings can be used to fund longterm cost-reduction initiatives). By streamlining these three operational areas, telcos should be better positioned to handle the challenges they are facing and nd the capital necessary for the inevitable transition to IP services. This article examines the changing environment for telcos and presents a targeted approach for telcos to consider in their efforts to achieve these cost reductions.

The shifting telco environment Technology and regulatory changes have transformed the communications landscape and created a difcult situation for traditional telephone service providers. Emerging technologies have placed telcos in signicant intermodal competition with both cellular service providers and cable TV companies. Additionally, the move to common high-level protocols (e.g., IP) enables the separation of applications from transport services, with the result that much of the increased customer utility is captured by third-party application providers which, in turn, reduces product margins. Finally, increasingly sophisticated customer equipment has resulted in the loss of traditional network control points, resulting in rapid trafc growth that has been difcult to monetize in the current competitive market and application arbitrage of transport costs. Skypes model, which converts high-revenue voice trafc into low-unit revenue data trafc, is an example of this. Then there is the regulatory environment. Very bluntly, it has not been kind to incumbents and has been slow to recognize industry changes. Asymmetrical regulation of cable, wireline, and wireless carriers has resulted in economic advantages for only some providers and they do not include telcos. Carrier-of-last-resort obligations, together with service standards and unbundling requirements, have created a situation in which incumbent telcos must deploy capital to economically unfeasible areas, retain obsolete technology, and maintain service standards that are not required by some customer segments or are actually inappropriate for new technologies.

Externally, customers are shifting towards increasingly complex products like IPTV, Internet, and mobile data services. The shift in consumer preference towards video and peer-to-peer applications is driving consumer demand for more bandwidth. To address this demand, telcos have invested in ber infrastructure and are continually upgrading the bandwidth capabilities of access infrastructure. Funding these infrastructure investments is a challenge in todays environment given the additional pressure of rising customer support costs. The competitive environment is also getting more difcult with open access platforms, newer devices, and smaller, more nimble competitors. And while these various trends require telcos to make investments in network infrastructure and customer support, there is limited opportunity to pass on these additional costs to the customer.

Where are the anticipated IP benets? As IP has evolved and been widely deployed, there has been an industry expectation that it would create a number of infrastructure and operational benets for carriers, including: Signicant supply-side benets from a converged network The operational benets of separating service platforms and transport Reduced customer-service and care costs resulting from replacing internal labor with customer labor (e.g., Web self-service and care) The ability to deploy and change products rapidly to respond to market conditions. However, with the exception of the last benet, these have yet to materialize. And that last benet, in fact, is currently one of the factors contributing to increased costs as product change and variety confuses both staff and customers and can offset any benets provided by new economies of scale. In the case of one provider, IP service volumes increased about 50 percent over the last ve years while network operations staff had increased by close to 80 percent. In addition, many of the old operating models have been used as the basis of the new processes.

Customer support costs are rising As illustrated by the metrics from one provider who we have worked with (see charts A-D), newer products and services are driving signicant increases in customer support activity. IPTV, Internet, and mobile data services are more complex than traditional voice services. These products generate higher volumes of inbound calls with longer average handle times, sometimes nearly double the minutes required to handle a call for a wireline voice service.
Chart A. Percent of phone hours by product queue North American wireline telco
2007

Wireline

2006 2005

IPTV

74% growth from 20052007 69% phone hours in 2007 10% 20% 30% 40%

Internet

0%

Percent of phone hours

Chart B. Average handling time for product queue

2005 Average Product Internet IPTV Wireline handling time 11.9 11.9 7.8 2007 Average handling time 15.1 13.8 7.8

Chart C. Operational metrics by technology type (illustrative only)

Metric Trouble Calls Per Network Access Per Year Trouble Call Handling Time (Average Duration In Minutes) Inbound Call Center Calls Per Customer Inbound Call Handling Time (Average Duration In Minutes) Network Accesses Per Network Ops Headcount Wireless 0.23 11.9 1.37 4.6 16,100 TMD 0.6 7.8 0.58 7.9 7,200 IP 3.05 15.1 2.64 7.5 1,700

Chart D. Customer care call volumes (2007) North American wireless telco
Average call handle time
12

Call per subscriber

0.020

10

Jump coincides with promotion of smart phones

0.018 0.016 0.014 0.012

Further compounding the problem is that a signicant percentage of inbound support calls are not even related to products that telcos provide. As illustrated by the metrics from one of our clients (see charts E-G), connection and email issues can typically make up more than 75 percent of all Internet tickets, and the root cause of a consumers connectivity issue may be computer hardware or software (operating system, email programs, anti-virus or anti-spam software, etc.) or user conguration errors. Consumers often call the telcos rst when these issues appear especially as many of the companies that sell these products do not offer free support (and in many cases offer no support at all!). This combination of higher volumes and longer handle times means that these services now account for the majority of customer service phone hours and care costs about 70 percent as of 2007 based on our research. For wireless providers, customer acquisition and retention costs are also likely to rise given the maturity of the market in the United States. For example, in work with one of our clients, we found that wireless devices with data plans take approximately 45 minutes to sell in-store versus 28 minutes for those devices with a voice plan only. Since market penetration is already very high, growth will have to come through taking customers from competitors and from the sale of wireless data devices and services. Cost per Gross Addition (CPGA) costs may climb as carriers offer richer incentives to new customers in the form of Customer Premises Equipment (CPE) subsidies or service discounts.

0.010 0.008

4 0.006 2 0.004 0.002 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 0.000

Chart E. Internet ticket reasons

Account administration 4% Home network 6% Other 14%

Chart F. Connection tickets

Customer conguration Corrupt software No synch Third-party Authentication Other 4% 10% 11% 11% 21% 42%

Connection 52%

Email 24%

Chart G. Email (e.g., Outlook) tickets

Customer conguration Third party software Corrupt software Other 5% 4% 6% 86%

Where can telcos look for savings? Telco-operating costs can be classied into three categories (percentages are based on our research and are illustrative only): 1. Non-process costs account for 25 to 30 percent of the cost base (35 to 40 percent for wireless carriers) and include interconnection fees, taxes, CPE, and uncollectible items. These cost areas are more difcult to inuence and typically do not provide a signicant savings opportunity. 2. Support processes typically account for 20 to 25 percent of the cost base (15 to 25 percent for wireless carriers), and include marketing, HR, IT, nance, and other administrative costs. While savings opportunities may exist in support process areas, most telcos have done a better job of controlling these costs as demand mix has changed. 3. Operational processes typically represent about 50 to 55 percent of the cost base (40 to 45 percent for wireless carriers); the process costs include customer service, sales, billing, and network-related processes. It is these costs that carriers are challenged to control as the market changes, and this is where carriers should rst focus on nding efciencies and savings.
Chart H. Typical telco opex breakdown
100% Non-process opex (25-30%)* 75% Support process opex (20-25%) 50% Sales (20-25%) 25% Operational process opex (50-55%) Customer service (10-15%)

Operational processes The major operational process costs are network installation and repair (I&R), network operations and design, sales, customer service, and billing. Savings exist across these functions, although savings in network processes are typically more challenging to realize. Network-related operational process areas As shown in the charts H and I, network-related process costs (I&R, operations, and design) can typically account for 60 to 75 percent of operating expenses. We have seen improvements in these network-related areas that have yielded 18 to 29 percent in savings by focusing on two main areas: 1. Reducing dispatches: We have seen savings of 5 to 8 percent of total network operating expense achieved through better screening of tickets to reduce no-trouble-found dispatches, improved scheduling to reduce no-access dispatches, better management policies to reduce non-demand dispatches, and an increase in rst-pass resolution of tickets. 2. Improving the efciency of I&R technicians: We have seen savings of 12 to 18 percent of total network operating expense achieved by increasing the use of Good Jobs in Eight (a metric that measures the number of good jobs in eight hours per technician), and moving to a pay-for-performance model. It is important to note that achieving savings in networkrelated processes is challenging and typically takes a long time to implement (usually greater than 18 months) due to several factors: There are inationary pressures on infrastructure. The workforce required to maintain and build the network will, at best, remain the same or likely grow. The workforce is typically organized labor, so any wage changes, job description streamlining, or adjustments in the part-time/full-time/contract labor mix are long-term initiatives subject to contract negotiation cycles.

Chart I. Breakdown of operational process opex

Billing (7-12%) Network I&R (40-45%)

0%

Network Ops and Design (18-23%)

Operational processes Support processes

*Non-process costs include interconnection, taxes, CPE, and uncollectible.

Case study: Sales and customer service (North American telco) (illustrative only) Some key areas of improvement in cost center functions, such as trouble/repair call centers included: Suboptimal demand management Lack of adequate policies and procedures to control call handling times and nonproductive idle times High overhead costs In prot center functions, such as direct sales call centers or retail stores, some key areas of improvement included: Diminishing returns on sales efforts Inadequate incentives to drive appropriate up-sell or cross-sell activity Insufcient customer targeting Addressing these improvement areas led to an accumulated savings of 26 to 41 percent Organization Cost centers Inbound repair center Credit services (excl. collections) Operator services Hybrid sales/service center Inbound call center Prot centers Direct sales (internal) Retail stores Total Percentage of Savings

Non-network operational process areas As illustrated in charts H and I, non-network operations can account for 35 to 45 percent of operating expense, and we have seen them yield 28 to 44 percent in cost improvements. Telcos should focus on non-network operational process areas, such as call centers, eld sales, retail stores, and the order to cash processes for a faster path to savings. The savings can be signicant and the implementation period can be less than 12 to 18 months. Key productivity levers for each functional area should be evaluated to determine potential improvement opportunities. Chart J shows the typical levers for cost centers and prot centers. To nd savings in non-network operational process areas, we suggest a three-step approach: 1. Analyze activities and business processes to highlight opportunities for reduction of out-of-scope work, cycle time improvement, and quality improvement. 2. Use benchmarks to further identify or conrm improvement opportunities. 3. Identify ways to simplify and standardize processes, eliminate duplication of effort, and improve the utilization of people and technology. We have seen that the simplication and standardization of processes, elimination of duplicated effort, and improved utilization of people and technology result in a savings of 15 to 30 percent. Savings typically result from reduction in total work volume and/or shorter cycle times required to complete the work.

38 - 46% 25% 15 - 50%

25 - 43%

15 - 40% 8 - 15% 26 - 41%

Chart J. Typical cost reduction levers cost centers and prot centers
Cost Revenue

Cost of services

Cost of sales

Units sold/ retained

Price

Workload

Non-productive time

Cost per hour Internal support

Time spent on sales*

Conversion rate Skill/ effectiveness Sales

Retention

Credit adjustments

Volume

Unit time Services

Shrinkage

Targeting

Attempt rate*

Cost centers: Operator services, credit services, and repair centers

Prot centers: Direct sales, and retail stores

Hybrid sales/service center: Inbound sales

*Diminishing returns

Case study: Field sales (North American telco) (illustrative only) In one North American telco, business sales reps were spending 45 to 75 percent of their time in non-sales activities. The causes of this were complex product sets and orders, and inefcient systems. Product
Currently little focus on direct sales Service Representative Sales Associate Account Representative Account Executive 0%
Direct sales

portfolio simplication, order process improvements, and system changes enabled eld sales reps to increase time spent on customer-facing sales activities, resulting in higher sales.

25% 27%

9% 26%

36% 21%

22% 9% 10%

3% 6% 8%

34%

15%

12%

13%

12%

14%

55% 25%
Order preparation Order entry

16% 50%
Customer service

4% 5% 75%
Management

9%

11% 100%

Administration

Direct sales: 28% of time spent Other support and ofce activities: 72% of time spent

Conclusion: Achieving sustainable cost reduction If telcos are to maintain their margins and their competitive position, they must seriously evaluate cost reduction opportunities and nd new ways to optimize their operations. To identify cost-reduction opportunities that are sustainable in the long term, telcos should look at the productivity levers that are specic to each functional area and then determine how to improve them. A onesize-ts-all analysis approach will not be effective in nding the real sources of inefciency. We believe that several supporting elements are necessary to realizing and sustaining efciencies: Process changes must be supported by updated policies to realize the full benets (e.g., call center hours of operation, call handle time targets, handling of outof-scope calls, and vacation and sick policies that align with staff utilization targets). Implementation and tracking of the right metrics (such as utilization of non-phone time in a call center environment or sales coverage in a sales organization) are crucial to encourage the right behaviors and identify further improvement opportunities. Visible and active support of senior leadership along with fast, decisive action to set the tone and direction for the rest of the organization. In addition, a change in culture may be required so that staff understand that admitting there is room for improvement is not considered to be a failure, but instead is encouraged. Feedback and pilot mechanisms should be established to help ensure that a problem is addressed with a viable solution instead of one that creates additional, unexpected problems. For example, one company launched and promoted a call blocking feature for all calls without a Caller ID. While the intentions were good, this had the unfortunate result of blocking

many calls from wireless devices, leading to a very high volume of trouble calls and a lot of service cancellations. To keep the organization motivated, savings targets have to be credible and defensible, and all parts of the business should contribute. Finally, telcos should consider other strategic objectives such as desired customer experience and competitive positioning to help ensure that they are not undermined by the imperative for cost reduction. Contacts Mic Locker Director Deloitte Consulting LLP Tel.: +1 212 618 4973 Email: miclocker@deloitte.com Lisa Glover Senior Manager Deloitte Consulting LLP Tel.: +1 212 618 4505 Email: lglover@deloitte.com Phil Asmundson Philip L. Asmundson Vice Chairman and U.S. Technology, Media & Telecommunications Leader Deloitte LLP Tel.: +1 203 708 4860 Email: pasmundson@deloitte.com Marketing Contact Kathy Dorr Marketing Manager Technology, Media, & Telecommunications Deloitte Services LP Tel.: +1 615 313 4341 Email: kdorr@deloitte.com

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