Telecommunications

RECALL No9

Operational Transformation

RECALL No 9 Operational Transformation

Welcome ...
to the 9th issue of Recall, a publication for leaders in the telecommunications industry. We were pleased to discover that the perspectives on networks presented in the previous issue triggered a lively debate on McKinseys Telecoms Extranet. Our hope is that the insights on operational transformation discussed in the following articles will be equally stimulating. While many operators have already seen great progress through operational improvements, most are still far away from the standards set by operational leaders in other industries. In this issue, our authors share perspectives on operational transformation gained from their work with leading industry players across Europe, the Americas, and Southeast Asia. We begin by exploring the ways operators can reduce operational complexity to boost and sustain their performance. Next, we discuss how an operator can revamp a specific function, in this case, transforming mobile networks. Our third article addresses transformation in the context of a specific employee function and offers a perspective on developing operators field forces. We move on to discuss the relevance of transformation even in new or growing business areas with a look at optimizing ICT operations. We then reflect on the bigger picture of designing a transformation program highlighting elements that distinguish successful programs from the multitude that unfortunately fail. Lastly, we hear from Carlos Calvo, COO of Telefnica Spain, as he shares the details of his companys transformation journey in an interview with us. We would like to thank Jasper van Ouwerkerk for helping shape the theme of operational transformation as this issues contributing editor. Our hope as always is that these insights spark ideas or discussions around the challenges and opportunities you face. We look forward to your feedback on the articles in this issue and to your thoughts on topics you would like to see covered in the future.

Jrgen Meffert Leader of McKinseys EMEA Telecommunications Practice

Tomas Calleja Co-leader of McKinseys Operations and Technology in Telecommunications Practice

Klemens Hjartar Co-leader of McKinseys Operations and Technology in Telecommunications Practice

Fabian Blank Leader of McKinseys EMEA Mobile Operations Service Line and O&T RECALL Editor

RECALL No 9 Operational Transformation

Contents
01 02 03 04 05 06 Successful Simplicity: Reducing Complexity and Boosting Performance The Networks Net Worth: Value through Transformation From the Ground Up: Building the Field Force of the Future Smooth Operator: Becoming a Lean ICT Machine The Devil is in the Design: The Telecoms Operational Transformation Program The Art of Operational Transformation 7 13 19 27 33 39 43

Appendix

RECALL No 9 Operational Transformation Successful Simplicity: Reducing Complexity and Boosting Performance

01 Successful Simplicity: Reducing

Complexity and Boosting Performance

Superfluous details are counterproductive for a telecoms operator. Telcos can greatly (and quickly) improve performance by applying a standardized and systematic approach to improve operations. Toyota has spent the past 60 years perfecting and finetuning its Toyota Production System (TPS). So, where is the widely-recognized operational reference champion the telecommunications industry can aspire to match? Nowhere! Telecoms operators, unlike automotive manufacturers, have yet to embrace operational excellence as a key way to create value. Toyota-like performance characteristics in telecoms could include lead times counted in minutes and hours, not days and weeks; first time right performance measured in parts per million, not percentages; customer service satisfaction levels greater than 95 percent, not 70 to 85 percent; and annual productivity gains in excess of 15 percent. A key step on this path to superb operation and service performance focuses on simplifying the elements of the delivery systems. Unnecessary complexity can rob a company of revenues, diminish its service quality, and erode its time-to-market performance. But managers often have trouble separating it from the types of complexity that add real value and make an operator more competitive.

need to be simple, ensuring that all activities are aligned, orders flow smoothly through the value chain, and customers are integrated as much as possible. Telecoms operating systems generate complexity across two dimensions: what we do and how we do it. The complexity of what we do includes complicated network technology, multiple equipment types and vendors, numerous platforms and configurations, and an explosion of additional new products and offers. How we do it involves either too great a variety, unbalanced end-to-end process flows, nonstandard productivity tools, or multiple subprocesses. McKinsey has devised the Successful Simplicity approach as a means for operators to detect and eliminate complexity that adds little value for customers, while working to enhance their abilities to accommodate complexity that creates real value. Our research suggests this approach can enable a typical fixed-line incumbent to optimize roughly 28 to 40 percent of its total addressable opex, while boosting service and quality levels (Exhibit 1).

Transforming what we do
The first part of the Successful Simplicity approach, what we do, seeks to optimize complexity in three areas: Commercial simplification. To eliminate unnecessary commercial complexity, teams streamline product lines to ensure modularity, simplicity, consistency, and the trackability of the operators main offers and product

Rationalizing complexity
To reduce costs and increase customer satisfaction and quality, operators need to rationalize complexity levels, which continue to grow in terms of network technologies, the number of new service platforms and handset models, as well as commercial variants. Similarly, processes

01

Simplifying the what and how of operations boosts performance and optimizes costs

families. Managers also identify products that can be dropped based on six criteria: revenue, gross margin, penetration, presence in combinations, lock-in factor, and growth. As an example, many operators have identified that up to 85 percent of their revenues come from less than 15 percent of their product portfolio. They further need to design a migration plan for customers who use the to-be-eliminated products. Simplifying a telecoms commercial offerings will directly affect customer-facing complexity issues, but will also help reduce internal complexity. Platform simplification. Telecoms players engage in product streamlining and analyze platforms to determine which can be switched off in the short term. They assess the potential incremental savings they can capture in the short term from switching off legacy platforms such as SDH (Synchronous Digital Hierarchy) or ATM (Asynchronous Transfer Mode), design migration plans for customers who use the products being eliminated, and capture savings by cancelling maintenance contracts related to the platforms and by optimizing associated processes. Efforts to simplify an operators platforms will enable both customer-facing and internal complexity optimization. Network-driven transformation. A telecoms operator should also work to reduce the cost of network operations, which is the biggest cost bucket of its overall operating

model. Based on a thorough analysis of the many domains, an operator might identify the access network as the most prominent opportunity based on its share of the networks total cost (to read more about how to go about such efforts, please refer to Networks Net Worth on page 17). An integrated operator might even take the extreme measures of eliminating its copper network and replacing it with mobile or fiber solutions or closing central offices following consolidation. Working to simplify network-related issues will mainly address the operators internal complexity challenges. These three levers affect different cost elements of a telcos operating model. For example, a commercial simplification initiative might not trigger any changes in the network and uncover only limited savings. Simplifying the network on a company-wide basis, on the other hand, could require radical transformations across a number of domains, from the network to customer service to support service. While it is the significantly more difficult challenge, network simplification can generate outsized returns for an operator.

Transforming how we do it
Accounting for a major share of operator cost optimization potential, how we do it involves the work practices,

RECALL No 9 Operational Transformation Successful Simplicity: Reducing Complexity and Boosting Performance

policies, procedures, rules, and ways of getting things done that an operator uses to accomplish the range of activities it performs every single day. Two key improvement tools comprise this phase of the Successful Simplicity approach: Next Lean Wave and Radical Moves. Next Lean Wave typically delivers the largest share of the cost optimization potential available in this transformation, which can equal 12 to 18 percent of a fixed-line incumbents total cost base. Among other things, this particular tool can reveal superfluous subprocesses and unbalanced flows. Similar end-to-end lean analyses can unearth significant savings potential for mobile incumbents as well. Our assessment of one mobile operator showed that many of its radio field engineers activities (representing 40 percent of the total time spend) were either completely or partially avoidable. This identification meant that low value-added and lowerskilled activities could be outsourced or migrated to cheaper labor, freeing engineer capacity for more appropriate tasks. Our observations have shown that within the global telecoms community, most operators have approached lean transformations on a piecemeal basis, with as few as 20 to 40 percent of employees (primarily from the access network or call center organization) being immersed in the process. In addition, companies rarely incorporate outsourcers into their lean models, even though these players can account for up to 60 percent of the operations staff. In contrast, a world-class lean practitioner such as Toyota makes all employees from all functions and processes part of their lean model and mandates that all suppliers become integral parts of the TPS. Next Lean Wave also assumes an end-to-end perspective within the value streams. Many telecoms operators suffer from poor cooperation between their commercial and network organizations and deliver weak performance at key customer touch points (e.g., keeping promises or first-call resolution) due to ineffective communications between marketing and operations. World-class lean companies, on the other hand, derive work times from demand projections and achieve quality and reliable performance that generates sub-one percent customer complaints. Next Lean Wave also requires operators to embrace and nurture a continuous improvement (CI) culture. Instead of viewing each improvement as a stand-alone event, CI builds on it on an ongoing basis, which over time delivers competitively devastating productivity increases. Establishing a CI culture goes

beyond the common mindset. It requires the belief that complexity reduction is a must and it relies on a strong commitment from the top, the continuous involvement of the management, and aggressive initiatives throughout the organization that focus on training, problem solving, coaching, and performance management. Radical Moves is an out-of-the-box way of thinking that complements the Next Lean Wave methodology. The combination of incremental CI and disruptive actions managed in an integrated fashion can kick-start an improvement dynamo within an operator that electrifies the entire organization. While telecoms players often have what might be considered classic radical ideas such as one-stop shopping or remote provisioning and activation, world-class radical practices tend to challenge, even demolish current operating paradigms, changing the game for everyone. For example, the instant credit scoring performed by some banks or the remote hardware and software repair by some high-tech companies show how to aggressively eliminate steps in the value chain. Radical Moves can deliver 6 to 8 percent cost optimization by leveraging existing radical ideas and identifying truly paradigm-changing alternatives.

Helping operators in the journey

To help operators seamlessly slide into Successful Simplicity, McKinsey has developed a methodology that can transform their operations regardless of their starting point (incumbent vs. attacker) or environment (mature vs. emerging market). An initial performance diagnostic helps managers assess their current performance against best practices in the industry and identify areas of opportunity. Our proprietary research allows companies to assess themselves in a few days time against below-average, average, and best-in-class telco performance on all of the dimensions mentioned above. In the cases where there is already a common understanding of the need to change, managers might choose to undergo a review with the help of a SWAT (structured way of working assessment) team, which provides an accelerated, on-the-ground expert diagnosis of the companys end-to-end operations by experts with deep expertise in telecoms operations. The team helps operators assess their improvement potential thoroughly and identify and prioritize root causes and improvement opportunities based on impact.

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*** Successful Simplicity provides operators with the tools to see through the fog of unneeded complexity that prevents them from achieving world-class operational performance. Various IT tools can complement the measures set forth by this approach as key facilitators of change throughout the process. Far from blind simplification, Successful Simplicity focuses on improving the operating machine, bringing cost optimization while enhancing the customer value proposition.

Fabian Blank is an Associate Principal in McKinseys Berlin office. fabian_blank@mckinsey.com

Vito Caradonio is a Principal in McKinseys London office. vito_caradonio@mckinsey.com

Pablo Echart is an Associate Principal in McKinseys Madrid office. pablo_echart@mckinsey.com

Antonios Kyrkos is a Principal in McKinseys Athens office. antonios_kyrkos@mckinsey.com

RECALL No 9 Operational Transformation The Networks Net Worth: Value through Transformation

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02 The Networks Net Worth:

Value through Transformation

Todays mobile operators face unprecedented network cost, quality, and revenue challenges. A comprehensive transformation is the key to unearthing their networks hidden value. Mobile chief technology officers (CTOs) are in pursuit of three major objectives that may at times seem contradictory: managing network costs while improving quality and supporting their companies growth ambitions. We believe a structured approach one that combines insights with analytics, integrates commercial and technical perspectives, and drives operational adjustments along core processes offers CTOs a way to strike that difficult balance. To capture the value hidden in their networks, mobile operators need to systematically engage key levers to improve mobile network performance thereby addressing the entire network value system: Network perception management tailor network investments to address customer perceptions. Needs-based network build-out optimize the rollout based on commercial objectives and customer needs. Lean network transformation streamline operations to improve revenues, costs, and quality. Lean network procurement improve the definition of specifications and the management of vendors to minimize capex.

Together, these actions can deliver a short-term improvement in total network expenses of 10 to 17 percent (Exhibit 1). In addition, a transformation like this can help operators establish an efficient baseline that managers can use to assess the value from moves such as network sharing or outsourcing, effectively doubling the improvement in the longer term to 20 to 35 percent.

Network perception management

Despite their continued large-scale investments in performance, mobile operator networks typically receive lukewarm ratings from customers. This view contrasts sharply with the industrys high-tech image and the perception of superior network performance enjoyed by mobile virtual network operators that use the same underlying infrastructure. Mobile operators can close this gap between actual and perceived performance thus optimizing the portion of spend that customer perception represents through a three-step approach. Measure network performance, actual and perceived. While operators conduct market research to capture customer views on the network, they should in parallel collect technical performance data from existing sources (e.g., performance reports) and conduct drive tests to reveal, for example, call setup times. Consistency is essential, so they should compile market research and network data for the same geographic regions. To place this information in the context of the competitive landscape, operators should also assess the performance of their peers networks.

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01

Internal improvements and external baselines are key to network cost optimization

Set target values for the network dimensions that really matter from a customers point of view. Managers should single out parameters that the customer truly values in order to understand the minimum acceptable network quality levels needed to deliver them. At the same time, they would relax the performance targets for less relevant parameters to reduce costs. When mapping customer ratings against technical performance parameters, managers will likely find nonlinear relationships between perception and actual technical performance. Those nonlinear relationships typically contain what we call satisfaction cliffs: performance points where customer satisfaction levels reach recognizable thresholds. Operators should fully exploit this effect by identifying the threshold and then rigidly target the threshold value (i.e., avoid over-shooting). For example, one company found that once its call setup success rate hit 96 percent, it experienced an outsized surge in customer ability to call satisfaction an essential ingredient in the perceived network quality in this market. Thus, reaching the satisfaction cliff threshold became a key focus; but almost as important, the company found that improvement beyond this level did nothing to further elevate customer perception. Manage priorities across the entire footprint. Across all regions, perception issues need to be separated from

real network issues. An Excel-based network priority cockpit can help managers apply the common methodology locally. It also enables them to use uniform language, tools, and timing across local operations and assists them in interpreting results and setting priorities. Experience shows that by optimizing the elements that influence perception and by rigorously managing key threshold values, managers can balance their capex needs against marketing measures to achieve the greatest return on their investments. With this approach, one operator was able to selectively calibrate its network to allow 1 percent higher congestion rates, yielding a cumulative radio capex reduction of 6 percent.

Needs-based network build-out

The concept of a needs-based network build-out means considering commercial objectives and needs but avoiding overspending. Mobile operators already tend to follow these principles in their network planning and deployment efforts (e.g., through their annual business plans). However, we notice fundamentally different approaches when it comes to integrating the revenue and cost areas of their plans. They typically break down revenue from aspiration-led, high-level numbers, while they aggregate network costs from the bottom up. Commercial guidance regarding the network function

RECALL No 9 Operational Transformation The Networks Net Worth: Value through Transformation

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02

A lean transformation adresses issues along the network value chain

tends to remain at an aggregate level (i.e., revenue and subscriber forecasts exist only at the regional levels), whereas network teams deal with concrete local requirements (e.g., costing projects at individual district and street levels). By linking financial targets and network deployment requirements at a granular level, an operator can better prioritize its investments and pursue an optimal rollout sequence. We recommend that operators adopt the following principles to create a needs-based network build-out: Plan projects from the bottom up in both the network and commercial functions. In striving for higher levels of input granularity, managers will have to compromise between the highest aggregation level the network can handle and the lowest aggregation level marketers can provide. In planning their network coverage, one Western European operator succeeded in breaking its revenue (market share) targets all the way down to the ZIP code level. This degree of granularity provided a remarkably high level of planning clarity for the network team. Address customers mobility needs when planning network coverage. The unique mobility patterns of target

customers need to be understood so that coverage plans not only focus on where these customers live, but also on where they work and play. Mobility patterns can be discovered from subscribers minutes-of-use distribution by location, focusing on where users call relative to where they live. Using this technique, one operator discovered visible target customer mobility patterns in its prioritized coverage areas (e.g., to certain work or select recreational destinations). By linking these data points directly to its initial priorities, the revised plan allowed managers to more comprehensively address the customer usage potential. Develop prioritized, needs-based build-out waves. After adjusting initial ZIP code level network coverage projects using insights gained from mobility matrix analyses, an operator should determine project value using return on investment or net present value criteria. The resulting prioritized list of projects provides managers with a fact-based ranking that should enjoy full buy-in from marketers and technicians alike. By ranking individual projects and prioritizing both investment decisions and the rollout sequence, operators can ensure maximum return on their investments. For example, in the course of a three-year program, a mobile operator in Western Europe found

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it could increase its share of net subscriber additions (adds) by 4 percent while simultaneously reducing capex by 4 percent.

Lean network transformation

With the network contributing nearly a third to combined capex and opex spending, CTOs find themselves particularly exposed to growing industry pressures on revenues, costs, and quality. As a result, prices decline further, while new and complex products, services, and technologies drive costs. A lean network operations transformation allows an operator to address both of these issues (Exhibit 2). In one case, an operator employed lean network methods to reduce new site implementation times by more than 50 percent. By simplifying internal processes, revising policies, and employing structured solutions to common bottlenecks, the company reduced costs and improved quality. Furthermore, by ensuring accelerated site ramp-up, it also captured market demand earlier, thus increasing the annual revenues generated by its capex investments. Our approach to transforming lean network operations builds on three principles: Transform all aspects of the business system. Lean projects focus on the operating system, where they seek to devise technical solutions (to processes, systems, or resources) to target sources of waste, inflexibility, and variability. While this is the core of any lean operation, it is only one of three dimensions that operators must cover to ensure lasting impact: management systems and mindsets and behaviors must be similarly modified to effect sustained change. The first aspect involves organizational adjustments and measurement systems that truly embed technical solutions in the organization and that measure and monitor their impact. The second ensures that everyone dealing with technical solutions does what the plan intends. Think about and analyze processes, not functions. Companies often attempt to optimize a function or network domain only leaving aside huge improvement potential within the processes that cut across functions and domains. We suggest that companies consider three principles when undergoing such optimization. First, take an end-to-end perspective by analyzing the start-to-finish performance of processes (e.g., full site deployment from planning release to the site switching online) and investigate interdependencies among

subprocesses (such as those linked to finance, procurement, or supply chain/warehouses). These functional handover points can lead to a lack of coordination (and therefore waste) and cause the end-to-end view to become lost in day-to-day, target-based activities. Next, we recommend that managers formulate crisp, experiencebased hypotheses so as to fast-track issue identification and to prioritize impact quantification. Lastly, managers in charge of identifying and addressing improvement opportunities should visit the floors, field teams, and warehouse operations to observe employees in typical business settings. Besides revealing how the company really does things, the visits allow the managers to benefit from the ideas of the operating and field staff. Measure and manage for impact. For mobile operators to realize the full benefits of any lean improvement analysis, a rigorous tracking process needs to be in place. Operators need to confirm milestones and end dates for various activities and understand the organizations baseline performance in terms of the identified KPIs. Assigning dedicated resources to track performance over time will lead to lasting measures. To drive transparency and focus, the company needs to establish an ongoing review at various organizational levels. By following the lean operations methodology, an operator can capture tangible short- to medium-term savings of 3 to 5 percent in network expenditures and see revenue gains in a similar range. We believe many mature and emerging market operators underestimate and thus underutilize this powerful approach in their operations.

Lean network procurement

McKinsey research reveals significant variation in mobile operator capital performance differences rooted in individual company procurement effectiveness. For example, the capex-per-subscriber ratios of Western Europes mobile operators differ by more than 100 percent from best to worst performer. Our experience demonstrates that systematically reviewing and revising the approach to network procurement (from vendor management to choosing the best specification, also known as right specing) provides a major opportunity for an operator to reduce its mobile network capex. Successful capex optimization efforts typically include three elements:

RECALL No 9 Operational Transformation The Networks Net Worth: Value through Transformation

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Set a target. Capex reduction efforts are often one part of a broader company transformation or cost-saving initiatives. This means that the reduction is pursued with very specific targets in mind. In other instances, CTOs drive capex cuts from within their own agendas. In both cases, leadership defines an ambition backed by a top-down savings target (e.g., reduce capex by 20 percent). This process frequently goes hand in hand with a high-level comparison of internal or other operator site costs. Identify savings measures. A process to identify, evaluate, and implement savings ideas should support the topdown target. The use of a value-driver tree to orchestrate this process will ensure that managers touch on all improvement levers systematically. For example, to reduce the average capex per site, they might consider reducing costs associated with civil works, equipment, transmission, or site acquisitions. The first lever might include sub-levers such as right specing requirements, optimizing supplier management, or enhancing process efficiency. By conducting a series

of cross-functional workshops, an operator can explore, detail, quantify, test, and prioritize potential measures. Owners are assigned to individual ideas, using savings measure sheets to track the status through each stage. Execute and control measures. To ensure the faithful execution of measures and their lasting effect, managers should establish tight implementation controls for all committed savings measures. Regular meetings between top management and owners will help keep performance on course toward the savings target. *** Yesterdays solutions, which focused largely on meeting demand or optimizing business areas in isolation, are no longer applicable to todays network revenue, cost, and quality challenges. A structured mobile network transformation gives mobile operator CTOs a way to confidently address these issues in an atmosphere of intensifying competition.

Fabian Blank is an Associate Principal in McKinseys Berlin office. fabian_blank@mckinsey.com

Marco Ferber is an Associate Principal in McKinseys Stuttgart office. marco_ferber@mckinsey.com

Katrin Suder is a Principal in McKinseys Berlin office. katrin_suder@mckinsey.com

RECALL No 9 Operational Transformation From the Ground Up: Building the Field Force of the Future

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03 From the Ground Up: Building

the Field Force of the Future

In todays world of shifting strategic imperatives and growing customer expectations, an operators field force can be its greatest strength as well as its Achilles heel. A well-orchestrated transformation can put the field force in a position to bring the best of what an operator has to offer. A telcos field force can improve its customer experience, but the challenges this group faces can also amplify any performance shortcomings, lowering a companys competitive position and causing reverberations throughout the organization. The field force is often an area of significant operational leverage for many telcos, given the historical challenges of managing a distributed organization efficiently and the lack of rigorous performance management. Issues include expanding cost pressures, especially in cases such as fiber optic cable rollouts where in-home installation represents a significant part of total cost and even more complex installations, such as those for Internet protocol television (IPTV). A number of forces are putting new pressure on the field force. Operators are deploying fiber further into the network, customers are demanding narrower service windows, video and IPTV are increasing field skill requirements, and supply chain issues are getting more complex with the advent of more expensive video and data equipment. Furthermore, intensifying competition has reduced the number of fixed-line customers and caused higher customer rotation rates, which has in turn intensified field force pressure to make new installations in spite of greater subscriber churn levels. Operators also face challenges in their attempts to

rejuvenate workforces due to the heavy unionization level within the industry and cost pressures that make it challenging to hire people with new world skills. Telcos are relying more and more on their field forces as sales tools, especially regarding Next Generation Network (NGN) installations. As a result, the field force increasingly finds itself present at a key customer interaction moment of truth that operators hope to exploit in an effort to capture additional sales leads and reinforce customer experience and loyalty. An increasing number of field force opportunities continues to emerge that could help operators generate competitive advantages from superior customer experience. Anecdotal evidence suggests that operators are in a position to capture a share of interesting adjacent markets such as consumer IT support. Examples include Geek Squad, Best Buys consumer tech troubleshooting division, and British Telecoms (BT) home IT offering, which provides customers with troubleshooting assistance for applications and hardware. BT offer this service through agents across the country who are the same technicians that deliver the operators small and medium business IT services. An operator hoping to capture such opportunities, however, must revamp the management of its field force and significantly broaden the scope of the service its field force provides to the organization. This transformation means not only achieving greater efficiency in the field forces current activities, but infusing them with the sales, customer relations, and technology know-how the new competitive environment requires. An effective field force transformation typically includes four specific steps: first, managers gain control of the

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organization; next, they actively move work to the lowestcost channels; third, they find ways to leverage the field force to gain competitive advantages; and finally, telcos redefine their governance models to accommodate new field force responsibilities.

Gain control
Unlike employees in manufacturing plants, who tend to work in a specific space and thus remain trackable throughout their work cycles, field personnel are invisible employees. Managers have little or no visibility into their field employees work practices and schedules, and as a result, time and motion studies show that job times can be padded by over 25 percent. Furthermore, McKinsey research indicates that many field technicians would resist greater, imposed structuring: Fully 92 percent have stated the primary reason they like their jobs is the freedom to plan my own day. The reality for many operators is a field force that wastes vast amounts of time (e.g., average lunch breaks of almost 1.5 hours and time losses at the beginning and end of shift up to 1 hour) and performs poorly (e.g., late for jobs, unable to answer customer questions, and long wait times for service). Managers can employ a number of approaches to bring the field force into tighter control. Focus areas include forecasting, capacity management, dispatching, performance management, and the use of workforce automation technologies that enable effective real-time control. Robust forecasting enables managers to get out ahead of the field force work schedule so they can better understand the expected workload building demand forecasts at the service area level that ensure sufficient granularity in terms of time span, job type, product, and customer segment or service level. Operators must also make sure that there are frequent and proactive feedback loops between the commercial organization and the field operations e.g., such as on commercial campaigns and major projects in the business segment to ensure greater commercial forecast reliability over time and tight coordination on marketing/planning (e.g., ensuring timing and scale of marketing plans is executable, given the ability to ramp field capacity up or down). Developing a dynamic capacity management process enables operators to schedule the field force more efficiently and effectively. Without one, operators can

find up to 30 percent of their targeted field force productivity stranded. Effective capacity managers develop multi-skilled workforces to reduce the number of specialized technician pools. Instead of separate pools for installation and repair organized by product or for proactive and reactive maintenance operators should move toward fewer, multi-trained pools. They maintain a high volume mass market pool as well as more specialized business pools and certify the field forces skill levels in order to obtain transparency into the activities they can and cannot execute. Other levers include overbooking workforce capacity to ensure high levels of utilization and ensuring the flexibility of capacity by leveraging freelance or temporary labor. Operators can transform their field force planning and dispatching functions into strong control-focused elements. Best practices include integrating service level agreements (SLAs) into planning methodologies and tools, using slot booking features to differentiate customer and product segments (e.g., weekend slots cost more or are reserved for priority customers) and providing customers with hours of intervention to choose from instead of day or half-day slots. Operators centralize planning geographically to improve efficiency, leverage planning synergies between regions, dispatch standardized tasks automatically, and use track-and-trace technologies to ensure field force activity visibility. In addition, introducing a dynamic dispatching system can significantly speed up field response times by actively adjusting the schedules to eliminate technician idle time (Exhibits 1 and 2). By developing an effective performance management system, complete with the required tools and support, telcos can reduce wasted time and communicate the notion of a performance mindset throughout the field force. Best-in-class companies focus on reducing three types of waste: a) time wasted due to employee behavior (such as late starts or unauthorized breaks), b) time wasted as a result of insufficient training or coaching (e.g., long task times), and c) time wasted because of systemic/ process issues (i.e., things that require company-wide process/policy changes to fix). Effective performance management focuses manager efforts on employee behavior and skill issues, while also escalating systemic or process issues to continuous improvement programs. An effective scorecard looks at overall productivity and disaggregates skill issues as well as behavioral drivers of wasted time, enabling managers to drive individual performance improvement through a combination of

RECALL No 9 Operational Transformation From the Ground Up: Building the Field Force of the Future

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01

Traditional dispatch does not respond in real time to schedule variations

policing behavior and providing on-the-job and formal coaching to reduce task time variances (by specific task type) between more- and less-skilled technicians. Strong performance managers also incentivize the field force and field force managers to improve productivity, introduce weekly performance management discussions, and work with the field force to adopt a performance mindset. In order to support this performance culture, regional field force coaches should train and support the field force. The final critical factor in gaining control is technology, as it enables effective real-time management processes such as dynamic dispatch, dynamic capacity management, and real-time performance management. GPS can be a critical enabler of real-time processes because telcos face high task-time variability (driven by systemic variances in jobs and limitations of remote diagnosis), making it difficult for a dynamic dispatcher to separate long task times from unauthorized breaks. GPS in tandem with an automated dynamic dispatch system can significantly enhance real-time management processes and reduce dispatch headcount by enabling full automation of the allocation process and giving real-time alerts to dispatchers/managers when performance issues arise (e.g., instant GPS alerts on late starts, unauthorized stops). In addition, telcos often benefit

from just-in-time inventory management systems, navigation tools, and handheld knowledge management solutions.

Move work to the lowest-cost channels

Once an operator takes substantial control of its field force, the focus then moves to finding effective ways to shift work to the lowest-cost channels. We have identified four potential opportunities: improve end-to-end processes and coordination; introduce remote services, including diagnostics; consider outsourcing noncritical noncustomer activities; and position the customer for self-installation and self-repair. Operator attempts to improve end-to-end processes and coordination focus on the adoption of lean techniques, which offer tested methods for creating change in an organization. Best practices include optimizing the quality of order information (i.e., ensuring clean orders) to reduce waste, standardizing the work of planners and automating it as much as possible, and introducing pre-calls (i.e., SMS to notify customers of field force visits). Operators can also concentrate their planning activities geographically to increase efficiency and optimize the organizations planner-totechnician ratio.

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Another effective way to funnel work to the lowest-cost channels builds on the rollout of remote services for large-volume and standardized products and services. Best practices also include establishing clear tradeoffs and guidelines regarding the definition and routing of service tickets (e.g., sending a new modem with self-installation instructions is less expensive than sending a technician to do a diagnostic on the modem). Operators also rely on advanced diagnostic tools at the service desk to ensure that they route interventions through remote tickets instead of transferring them to the workforce and move service tickets online as much as possible to avoid call center operator costs. Managers should also consider outsourcing noncritical activities that do not touch the customer (e.g., street cabinet cabling, welding), promote self-installation of customer premises equipment, and introduce self-repair procedures to reduce the demand on field force resources.

In a number of markets, operators such as Cox and Comcast have begun to offer home theater installation and PC support services as a premium service to customers. While these efforts do open up additional profit streams, they have also facilitated increased customer satisfaction and the up-sale of premium video and broadband services. As competition intensifies and convergence drives more complex and sophisticated customer needs, the expansion of the service value proposition will become an even greater competitive advantage for telecoms operators.

Redefine field force governance

The new demands on the field force outlined here will require operators to adopt a new governance model. Field organizations often face two challenges to achieving operational excellence and alignment with strategic goals. First, field organizations have historically been highly localized, which results in an ability to respond quickly to local preferences, but also means a lack of consistent execution, service levels, and efficiency across the company. Second, telcos need to be able to structure the role of the field force and its relationship to customer-facing units in a way that fosters investment to improve margins (e.g., trading efficiency for differentiated service levels that increase lifetime value). Four core principles are often adopted by organizations that have been building a lean field force as a competitive advantage: Clear central ownership of processes and strategic control functions. The best field organizations have clear centralized ownership of operating processes and service procedures to ensure consistent execution and coordinated improvement efforts. In addition, strategic control functions such as dispatching and capacity management are centralized. The security monitoring company ADT, for example, has a national dispatch center for the US under corporate control to ensure consistent execution of complex SLAs. This ensures frontline efficiency and rapid replication of best practices and innovations. Operational roles cascade at every level of an organization. Leading field forces have operational leaders at the local, regional, and corporate levels to ensure cascading responsibility for operational metrics and ensure strong accountability for performance. While many field

Leverage the field force to gain competitive advantage

Instead of simply relying on the field force to service customers, some operators have explored opportunities to deliver differentiated service levels to high-value segments, focus on internal up-selling opportunities, and expand into ancillary service spaces. A number of operators have begun delivering differentiated or tiered service levels to offer more specific appointment times, more skilled engineers, or white-glove service to the more valuable double- and triple-play segments as a way of reducing churn and improving customer loyalty. Some service providers have leveraged service levels as a vehicle for capturing revenue from the customers who are willing to pay for weekend or evening appointments or faster service. In the US, cable operators have had significant success with service-to-sales programs, where technicians play a sales role that includes cross-selling additional services, upgrading existing services, and acting as sales lead generators by screening customers during visits as to their equipment, needs, and profiles. This has proven to dramatically improve customer satisfaction (as engineers engage customers more effectively) as well as drive uptake in Video on Demand (VoD) and premium subscription services. It also has the effect of improving engineer satisfaction by offering new challenges and rewards.

RECALL No 9 Operational Transformation From the Ground Up: Building the Field Force of the Future

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02

Dynamic dispatch minimizes idle time and waste

organizations often move to GM responsibility at the local level, this can often weaken operational focus. Create P&L structures that integrate frontline resources into customer-centric business units. By moving to a customer-centric organization, BUs begin to view service as a strategic lever rather than a cost center, while the centralization of strategic operational functions facilitates organized innovation in the service model. Explore leveraged operating models. The realities of heavy unionization and high-wage conditions at many telco incumbents require them to consider models such as outsourced, franchised field technicians. These technicians become part of the field force, but the telco continues to manage all customer relations and billing processes. Alternatively, the franchisee pays a fee to the telco for leads and appointments and manages all service delivery, inventory, and billing. The key to

success in these arrangements is to think creatively about who should provide the resources, while ensuring the organization maintains an effective management infrastructure (e.g., dispatching, capacity planning, training) to enable both vendor efficiency and service experience. *** Building the field force of the future is a challenging endeavor, as it requires operators to take a completely new perspective on the role of this part of the organization. But, the rewards both in terms of revenues and customer satisfaction can elevate a companys performance beyond the competition in difficult-to-replicate ways. Doing so can also open additional opportunities to leverage the field force, from generating business segment leads to capturing value in fast-growing markets adjacent to the telecoms space.

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Kurt Cohen is an Associate Principal in McKinseys Stamford office. kurt_cohen@mckinsey.com

Ferry Grijpink is an Associate Principal in McKinseys Amsterdam office. ferry_grijpink@mckinsey.com

Steven Pattheeuws is an Associate Principal in McKinseys Brussels office. steven_pattheeuws@mckinsey.com

Mitesh Prema is an Associate Principal in McKinseys Miami office. mitesh_prema@mckinsey.com

Peter Verboven is an Engagement Manager in McKinseys Brussels office. peter_verboven@mckinsey.com

RECALL No 9 Operational Transformation Smooth Operator: Becoming a Lean ICT Machine

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04 Smooth Operator:

Becoming a Lean ICT Machine

Entering the ICT space can heighten growth prospects, but success will likely require telcos to transform their operations into lean service factories. Telcos have by and large embraced the ICT segment as a revenue growth opportunity in the enterprise space. While a number of telcos have penetrated the market, many are also struggling to be profitable in this new space. In addition, telcos are working tirelessly to match (let alone beat) the cycle times that other players such as systems integrators or specialized providers deliver in many of the ICT product categories. The ICT market has a few particular characteristics that make it challenging to achieve operational excellence, relative to the more traditional telecoms business. The typical ICT RFP embeds data and voice components, but can also include hosting, security, video-/Web conferencing, and other advanced products as well as a much heavier systems integration and service layer than many TC-only solutions. These ICT characteristics mean unique operational challenges for telcos, which include overly customized customer solutions (IP allows enormous configurability), lack of account level cost/ profitability transparency (a catalyst for misaligned behaviors from account and service managers), multiple points of customer contact (despite many single-pointof-contact programs), and re-invention of the wheel in every new deal (from proposal process to delivery). Telcos are facing these challenges in a fiercely competitive market, where every large deal is worth millions and attracts multiple bidders and the speed of technologys evolution forces new service introductions at a rapid pace.

McKinseys observations in the field have shown that telcos can achieve a step-change improvement in customer service levels and the economics of ICT solutions by transforming their delivery operations into lean service factories. In such a lean machine, the techniques and transformation mindsets typically found in factory operations are transferred to ICT delivery operations. Many telcos have applied lean principles to their consumer (wireless and wireline) as well as their network operations divisions, typically achieving a 25 to 35 percent improvement in costs and cycle time improvements of more than 50 percent. In recent years, we have helped many clients through these transformations with their ICT businesses as well, and many have achieved productivity improvements beyond 30 percent and cycle time improvements in excess of 60 percent. The lean methodology, originally developed by Toyota for its car factories, focuses on minimizing three main sources of productivity loss: Waste includes everything from overproduction to rework. Lean practitioners view unnecessary motion, poor scheduling, waiting time, and inventory itself as waste that must be eliminated. Variability spans the lack of process standardization to the absence of methods and procedures in, for example, field force work. Some types of variability add value and provide competitive appeal (e.g., meaningful variety in products or services), but others simply complicate already complex processes and have to be eliminated (e.g., uneven scheduling of field jobs).

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Inflexibility results from a companys culture, customs, organization, and practices and often leads to bottlenecks in the process (e.g., incomplete sales requests caused by the mindset that Since I am a sales person, once the customer says yes, someone else needs to spend the time getting customer data).

The lean ICT service factory

Although the overarching ideas are preserved, this tried and tested lean methodology has to be adapted to the unique characteristics of ICT services to be effective. First, ICT services are often built over large numbers of complex, product-specific processes, typically developed over a number of years. Second, they require a high degree of IT dependency and patchwork IT systems that make implementation more complex. They also involve a high proportion of shared costs (e.g., network, IT), which makes target setting both difficult and contentious. And finally, operators may have difficulty balancing supply and demand considerations due to lumpy capacity additions (e.g., in networks or in data centers). We have found that the successful transformation of an ICT delivery organization works along three dimensions. The operating system involves the ways teams configure and optimize physical assets and resources to create customer value and minimize losses. The management infrastructure encompasses the formal structures, metrics, and systems through which the company delivers on its business objectives. Finally, mindsets, capabilities, and behaviors represent the way people think and feel about their jobs. Our lean ICT service transformation addresses all three dimensions in parallel.

In our work with one client in particular, we were able to improve handle time by 40 percent and reduce rework by 50 percent through better work allocation. We found that approximately 200 PBX orders per month were spread across 100 agents, so each only handled an order twice a month. This infrequency made it difficult for them to remember the proper sequence and led to a very high average handling time of 50 minutes per order. The same issue was true for several other products. By specializing the order flows within groups of agents, while maintaining a small set of cross-trained agents, this company was able to cut handle time to 30 minutes and virtually eliminate rework while making performance management much easier thanks to a much more standard mix of orders per agent. We also regularly observe nonstandard methods and procedures (with each employee following his/her own processes), very few mistake-proofing mechanisms (e.g., decades-old due dates, which could have been easily avoided through simple field validation), and unclear guidelines for handling exceptions, which are common in ICT solutions. Another telco employed lean techniques to help eliminate a significant number of non-valueadding activities in its contracting process. It found that 11 of the 15 days needed to move orders from sales to order entry occurred in the contract loop, which involved at least six handoffs that generated little or no value. The company eliminated the contracting steps, adopted a standard order entry tool that eliminated rework cycles, and thus increased productivity by 30 percent while reducing cycle time by more than 60 percent. To develop a lean ICT operating system and avoid the program turning into a disjointed set of initiatives we found that a rigorous approach is necessary. We typically start with a highly structured set of site visits and process observations to carefully map all sources of waste, variability, and inflexibility in the delivery process, followed by a number of joint working sessions and problem-solving events. Next, we carefully select a pilot location and pilot participants. Since lean transformations require extensive rethinking of the established processes and pilot results often provide solution proof points for the rest of the organization, selecting and training pilot participants with the right profiles and mindset is essential. Once targeted pilots have fine-tuned and proven the new mode of operation and developed the capability to execute within small cells, the solution and all associated learnings are packaged in a replicable way to support a broader rollout.

Operating system
There are several areas for improvement related to a telcos operating system. These include unclear or inconsistently applied volume management strategies (e.g., no proactive pricing to manage volumes in legacy platforms), uneven and nonstandard sales force interfaces that cause significant rework and cycle time delays, and suboptimal work allocation and order flows. In particular for ICT, given the more complex, chunky, and variable nature of orders, it is critical to apply lean variability management techniques, such as segregating simple from complex transactions, as well as rigorously eliminate unnecessary handoffs across groups, for example, combining private branch exchange (PBX) specification definition and configuration.

RECALL No 9 Operational Transformation Smooth Operator: Becoming a Lean ICT Machine

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Management infrastructure
We often identify several management infrastructure opportunities, including creating transparency into individual agent performance in several functions (differences of 200 to 300 percent between the top performance decile and the average are common), eliminating small, specialized centers, and creating rigor in load management for both order and call volumes. We have found that the management systems many ICT players have in place are only moderately effective, particularly when it comes to capacity management, so the work volumes required to achieve a rhythm in line with takt time are often unknown across the value stream. Not knowing whether a specific group should have a cadence of 100 or 300 orders per week, managing and setting targets for individual rep performance becomes much harder. We also find that supervisors spend 50 to 70 percent of their time firefighting and working on escalations, in addition to performing administrative tasks, so coaching time for the front line is very limited. The little coaching that does take place is often done based on infrequent and biased quality audits rather than on targeting behaviors and associated key performance indicators (KPIs). An effective starting point for an ICT-related management infrastructure transformation is typically the design of the KPI system itself. Experience shows that introducing a comprehensive, manageable set of cascading KPIs can be a key enabler for a transformation. The comprehensive and cascading nature of a good KPI system allows managers to quickly identify problem areas and drill down to the specific frontline issues that need to be addressed.

(e.g., As long as I have not signed in a job as complete, I can do whatever I want, and my manager has no way of knowing if this is a 10-minute or a 60-minute job) and frontline training overly focused on new systems/ products as opposed to the fundamentals of the job also hinder productivity. Although broad announcements, training events, and communication materials provide great starting points, real mindset transformation happens through frontline efforts. In ICT environments, that will happen at the work center level, and given the specialized nature of these centers, we have found simple things, such as frontline center supervisor capability building as well as daily team meetings to review the prior days KPIs and problem-solve to be the most effective levers to change frontline mindsets. Our experience along these three dimensions shows that telcos can gain significant benefits by identifying and capturing these opportunities in ICT environments. For example, one company cut its provisioning costs for enterprise data products (excluding COGS) nearly in half, while reducing its end-to-end cycle time nearly fivefold. It tackled all three levers simultaneously, by changing its operating system (e.g., consolidating roles to reduce handoffs, simplifying its contract terms, consolidating shipping, receiving, and configuration within one group), management infrastructure (e.g., creating end-toend accountability and end-to-end KPIs to focus on reducing rework levels, introducing cross-trained resources), and mindsets and behaviors (e.g., making end customer experience transparent for all groups, enforcing pricing on moves, adds, changes by eliminating the notion that these should be free).

Mindsets, capabilities, and behaviors

Common opportunities we find in this area include supervisors who view their roles as escalation and workload managers, not coaches, which is especially problematic in ICT, given the complex nature of orders (i.e., there is room to escalate everything). Also lacking is accountability regarding the end customers experience (e.g., Ive already done my part), which is a critical ICT issue since there are many steps to complete and the only person to have a real end-to-end perspective is often the customer. Field reps who take advantage of managements lack of transparency into their jobs

Broader changes required for ICT service factory success

As they start to transform their delivery organizations into lean ICT service factories, telcos especially those with more sophisticated value-added services (VAS) in their product mix will need to take specific actions beyond the service factories to ensure that their transformations really succeed.

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Speed up decision making. The pace in ICT services is faster than what most telcos are used to. Comprehensive ICT solutions evolve on the back of fast-paced technology evolution and require a speed of internal decision making that can keep up with this faster external pace. Most telcos will have to expedite decision making processes regarding solution-specific investments, new service requirements, special deals, and assessment of external assets (e.g., customers equipment and technical resources) to be successful. Integrate all relevant aspects of the customer experience by, for instance, integrating voice, data, and ICT/VAS offers. Telcos have historically had distinct product groups, and there are instances where a telcos P&L for legacy voice and the one for VoIP are separate. This division can lead to conflicts and confusion at the customer level on the economics and timing of migration. Telcos also need to increase their relevance on the CIO agenda, developing and nurturing the CIO level relationships with enterprise customers. Historically, connectivity-oriented telcos have not had the relatively high level of access enjoyed by systems integrators.

Enhance accountability and control at the account level so that account managers (AMs) make the right trade-offs between profitability and revenue by seeing both the revenues and the costs/investments required to get there. Time-tracking mechanisms for RFPs as well as improved product profitability models have to be tied to AM performance measurement and compensation, even if using simple proxies and partial solutions. Productize specific ICT offerings by standardizing the building blocks for each ICT solution (e.g., fewer router configurations, access options, service packages) and, at the same time, maintaining the flexibility to manage complete solutions. *** Now that a majority of telcos have claimed their space in the ICT market, it is time to make it a more profitable portion of the business. In this highly competitive market, most telcos need a step improvement in cycle times and economics. We find the lean ICT service factory to be key to optimizing this productivity-loss equation.

Harold Brink is an Associate Principal in McKinseys Boston office. harold_brink@mckinsey.com

Bart Delmulle is an Associate Principal in McKinseys Brussels office. bart_delmulle@mckinsey.com

Eric Monteiro is a Principal in McKinseys Toronto office. eric_monteiro@mckinsey.com

Katrin Suder is a Principal in McKinseys Berlin office. katrin_suder@mckinsey.com

RECALL No 9 Operational Transformation The Devil is in the Design: The Telecoms Operational Transformation Program

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05 The Devil is in the Design: The Telecoms

Operational Transformation Program

There is significant value at stake in getting operational transformation programs right. Many telcos launch such programs, but few achieve the desired results. While all telcos contend with their own operational complexity drivers, successful programs consistently share six key characteristics. McKinsey research shows that about 70 percent of operational transformation programs (OTPs) fail to achieve the desired results, and the results within the telecoms industry are likely even worse. While the industry has spent massive resources on operational programs over the last few years to cope with the new realities of wireline decline, increased IP product complexity, and ever increasing competition, few programs deliver the desired outcomes. The potential, however, is great, as truly successful operators achieve major cost position improvements, better customer experience, and enhanced employee engagement. One European telecoms operator, for example, delivered a 124 percent field force productivity improvement over five years (25 to 30 percent in the first two years; 10 to 15 thereafter). Another operator achieved not only significant improvements in customer experience and productivity, but the 10,000 FTE frontline workforce became the most satisfied group in the company after decades of scoring the lowest satisfaction levels. To better understand the OTP challenges the industry faces and how best to address them, McKinsey analyzed several telcos, studying the success elements of their programs and interviewing their leaders. We looked for companies that had sustained or surpassed their initial targets, had visible results down to the bottom line,

had measurably improved customer experience, and had demonstrated the emergence of a new frontline and middle management culture.

A comprehensive transformation
After interviewing the leaders of these organizations, we found that their programs were designed consciously from the very beginning, anchored on ambitious aspirations, and had real top-management commitment. Within the program designs themselves, six key steps emerged: 1) planning for success, 2) up-front design of a consistent approach, 3) resource development focused on building sustained capabilities, 4) knowledge management supporting the program, 5) holistic organizational engagement, and 6) making the change part of daily business (Exhibit 1).

1. Planning for success

We found that successful OTPs were anchored in a forceful exercise to architect the program along several key actions: Conducting an up-front macro-diagnostic. Operators initially applied benchmarks to size the opportunity, but also realized they had to complement benchmarks with quick up-front diagnostics. These assessments across the three most representative value streams are necessary to better size the opportunity in terms of quality, delivery, productivity, and cost. Working backwards from a results deadline. Successful operators also defined a set of clear operational baselines and objectives that extend across quality, delivery,

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01

Successful OTPs are comprehensive along 6 clear dimensions

productivity, and cost targets. Equally challenging but just as critical is the tracking and monitoring of results (e.g., through quarterly senior financial reviews) to ensure barriers to progress are identified and quickly addressed. Make a risk assessment. Effective programs identify and manage six key risks: a) program seen as just another corporate initiative vs. a transformational journey; b) headcount-reduction-only banner; c) pilots not designed to scale; d) rollout loses steam; e) staffing program with B players; and f) loss of core team talent due to, for example, intensive traveling or demanding work. Create a performance culture. COOs at the helm of successful OTPs publicly and repeatedly supported their programs, not just with words, but also with changes to success metrics. They left no room for underperformance and set strict milestones and operational targets for each value stream.

found that in order to engage the broader set of employees, they needed to develop a more comprehensive yet easyto-communicate methodology. Their revised approaches have four characteristics in common: a) they are holistic, proposing a new way of working not only across the technical operating system, but also across the companys management infrastructure and in terms of the organizations mindsets and behaviors; b) they redesign individual end-to-end value streams and touch all processes and employees that deliver a service (e.g., DSL restoration from call centers to field forces); c) they are replicable because each mini-transformation followed similar phases and timelines; and d) they were designed with capability building in mind. Sequence the rollout. We found that most operators sequenced their value streams based on the size of the opportunity, the number of employees involved, the quality level of delivered customer services, the degree of competition, the speed and quality needed to launch new products, and the ability of the pilot value stream to serve as a learning opportunity. As a result, the usual candidates for first pilots were projects such as DSL or POTS restoration schemes focused on the residential value stream, which included the technical call center, the help desk, the remote diagnosis center, the dispatching function, and field technicians.

2. Designing the approach

Impactful OTPs had a comprehensive and rigorous approach to the transformation, centered on capability building. Develop an inclusive improvement method. Most of the operators we studied had previously engaged in programs such as Six Sigma or business process reengineering, but

RECALL No 9 Operational Transformation The Devil is in the Design: The Telecoms Operational Transformation Program

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02

Consistency checks reveal hidden conflicts between program elements

Enhance the programs rollout speed. While it is standard practice to expect a visible impact in the pilot areas in about four months, the real learning came when the operators had to meet the rapid rollout challenge. The principles that operators typically applied could be characterized as copy, adapt, and paste. Solutions in pilot areas were typically 85 percent transferable. Therefore, they coordinated several one-week on-the-job training sessions for regional managers, supervisors, and technicians, during which the operators transferred all new knowledge on a peer-to-peer basis to gain higher credibility. Launch cross-cutting initiatives. Successful OTPs typically featured cross-cutting support initiatives around communications (e.g., aligned message, updates to unions, top-management road shows), capability building, leadership and motivation, and performance management. Establish program governance. We identified two major characteristics operators need in order to successfully govern this type of program: the direct sponsorship and visible leadership of the COO and the use of a program office to monitor progress and track results. A senior VP with access to the COO typically led the office, which featured eight to twelve high-potential managers that acted as national change leaders (NCLs). The core transformation

team and employees involved in the pilot areas would typically update the COO on a biweekly basis, and the COO would usually visit the end-to-end value streams during the program.

3. Developing resources
A rigorous capability-building plan is a critical part of all successful OTPs, as it ensures sustainability and creates scale across the organization. Create capability profiles. NCLs were typically appointed as dedicated staff to the program office, selected from a national pool of rising stars. These change leaders committed to a two-year period and signed performance contracts. Dedicated local change agents supported the transformation at the process level (e.g., in call centers, field forces). Regional managers selected them and they made six- to nine-month commitments. Plan for mobility. NCLs were usually highly mobile within a country, traveling every Monday to the pilot or rollout areas and returning on Thursday or Friday to their regions. Local change agents were in most cases chosen from the pilot area or nearby, so mobility in this case was required only during the four-month rollout phase.

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Manage program size. Among the telcos we researched, NCLs typically organized teams of eight to twelve people to run three-year OTPs. Each value stream usually covered about five processes, and each process required two local change agents; thus, each value stream was made up of roughly ten local change agents. Establish career paths. After an initial two-year commitment, NCLs had acquired such wide exposure and earned such positive reputations within the organization that VP or senior VP roles in the regions were commonly offered to them. This trend definitively established the role as one with a clear, fast-track career progression, thus ensuring the ongoing attractiveness of the program. Introduce management tools. Some tools helped develop the change leaders, such as team barometers, regular feedback sessions, assigned coaching, on-the-job training, and regular individual assessments.

5. Engaging the organization

Successful OTPs spent considerable time in mobilizing and energizing the organization. Create pull from the regions. The project management and central practitioner roles are important, but most programs do not take off until there is pull from regional leadership. Success stories from pilots or early-win initiatives are critical to generate pull, as is the overall awareness of the program, its approach, and the visible support from top managers. Craft a communication strategy. Most of the operators we studied seemed to have carefully addressed and thoughtfully articulated the what (e.g., key questions, the change story and messages, timelines) and how (e.g., road shows, CEO letters, cascaded methods) of communications. We were also impressed by the manner in which they implemented three elements: the direct involvement of the COO; the depth of the motivational elements in the program; and the power and effectiveness of intensive yet informal peerto-peer communication.

4. Acquiring and spreading know-how

Successful operators employed a number of techniques to build and spread knowledge within the organization. Develop the required skills. NCLs were selected, trained, and coached to develop the communications, problem solving, and leadership skills needed to diagnose and design new operating models holistically. The aim was to enable them to design the change, conduct the pilot, coordinate the training for the regions, manage a successful rollout, and design the sustainability phase. Establish a learning program. Some leading telecoms operators established an academy concept featuring intensive up-front training with 20 to 30 standardized modules that covered technical and leadership topics. These were delivered weekly and synchronized with the needs of the work plan. Designated individual coaches reinforced the theory learned with daily on-thejob coaching. Develop sufficient levels of codified knowledge. Operators codified key tools and widely applied 20 to 30 standardized training modules that covered technical and leadership topics. They also developed a program reference guide that explained the approach (i.e., the replicable phases of the transformation) and created detailed best-practice sheets.

6. Making it part of daily business

Successful OTPs engage frontline management from the onset to ensure the work is fully integrated into daily business and not seen merely as initiative-based change. Two activities help in this institutionalization. Developing an improvement plan. At the end of the rollout, sustainability teams typically conducted process confirmation audits and communicated the results to local supervisors and regional managers. Since only the horizon one levers were implemented during the pilot phase, regional managers held responsibility for horizon two levers. Integrating savings into the annual planning/budget process. The final step of the program involves moving the savings captured into the annual budget. We found that leading telecoms operators were less reluctant to take this natural step. The program office took responsibility for monitoring operational performance, while the CFO remained solely accountable for reporting the financial figures. The bonuses of managers and change leaders were linked to the programs success.

RECALL No 9 Operational Transformation The Devil is in the Design: The Telecoms Operational Transformation Program

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Building in sustainability and long-term consistency

To ensure the consistency and coherence of these six elements, successful OTPs performed eight main checks of their design elements (Exhibit 2). The three most important of these are: Business objectives vs. the results and scope of the macro-diagnostic. A companys strategic aspirations must be coherent in terms of the findings of the initial macro-diagnostic, and the size of the overall opportunity must be larger than the business objectives. This exercise is critical, especially since OTPs are multiyear journeys that require continuous reenergizing activities. Obtaining a clear picture of the rewards from the beginning is a must. Time imperative vs. the speed of rollout. Most of the telecoms operators we interviewed envisioned OTPs that spanned roughly three years, with the major share of the impact (about 75 percent) achieved in the first two years. Companies typically designed the improvement process to transform a nationwide value stream within eight months, and the speed of rollout allowed them to launch two to three value streams every

four to six months. As a result, operators were able to cover about twelve value streams within two years, which was consistent with their time imperative. Speed of rollout vs. capability profiles. Most of the companies we investigated indicated they should have added more rising stars as NCLs at the beginning of their change programs. While most companies assigned many local change agents, the real hurdle they faced when launching a new value stream was the limited number of well-trained NCLs available. Successful companies staffed eight to twelve NCLs to achieve the required speed to roll out eight to ten value streams in two years. *** Our interviews and analyses focused on the success elements of various operational transformation programs and revealed that well-designed OTPs looked thoughtfully into six dimensions and performed eight consistency checks. Not surprisingly, the design of OTPs is the most important driver of the success achieved. While operators based the initial designs of their transformation programs on incomplete knowledge and assumptions, they revisited and tested it for consistency as they learned more about their organizations capabilities.

Javier del Pozo is an Expert Associate Principal in McKinseys Shanghai office. javier_del_pozo@mckinsey.com

Eric Monteiro is a Principal in McKinseys Toronto office. eric_monteiro@mckinsey.com

Jasper van Ouwerkerk is a Principal in McKinseys Amsterdam office. jasper_van_ouwerkerk@mckinsey.com

RECALL No 9 Operational Transformation The Art of Operational Transformation

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06 The Art of Operational Transformation

An interview with Carlos Calvo, COO of Telefnica Spain

Telefnica Spain started its lean operational transformation six years ago and today serves as a pioneering industry example in this area. The results have been impressive; for example, annual productivity improvements of 20 percent have been achieved since its start in 2002. This indicates that the transformation went beyond mere success of an initial isolated effort, but proved a sustainable improvement with well-established capabilities and high motivation across the entire company. Carlos Calvo, COO of Telefnica Spain, began implementation of the Optima improvement program in 2002. He later launched the Operational Excellence program in 2005 in the fixed and mobile areas (for which he is responsible) and is now planning the next wave of transformation. Mr. Calvo, a native of the Spanish territory of Ceuta in North Africa, joined the company in 1976 and over the years has worked in many areas within the company. McKINSEY: Whats your overall perspective on the transformations impact? CARLOS CALVO: Looking back at 2002, the year we launched our operational transformation, and comparing the effort to other improvement programs carried out in our company and related organizations, there has never been a program with such a strong economic impact and profound cultural consequences. I must confess that few in my senior management team believed that the cultural change, especially among our long-tenure employees, was possible. Not surprisingly, we have rolled out this methodology to other departments beyond

Fixed Operations and we are also starting to apply it in other businesses, such as Wireless. McKINSEY: And, your assessment of the main risks of failing in an effort like this? CARLOS CALVO: The main risk is the company itself the inertia of any huge organization. I would say that among the managers within the company, the more important they are, the greater the level of risk they can potentially generate. This is mainly because most human beings tend to be reluctant to change due to its uncertainty. So I think a companys culture is the greatest challenge for these projects. McKINSEY: Aside from the human factor, what else has to be taken into account? CARLOS CALVO: Another risk lies in being too conservative when setting the objectives. When we launched this program, my team proposed several initial targets. I recall saying at the time something like: If Im not going to lose any sleep over it, I cant see myself being bothered with this program. So I doubled the targets from the very beginning. Time has revealed that doing this was even too conservative of a move in setting the initial objectives. McKINSEY: What about leadership? CARLOS CALVO: Okay, I would say a third risk involves not choosing the right leaders. We need brave people leaders who can challenge the companys current situation and follow a barrier-free way of thinking. First and

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foremost, you need to lead from the front line. Leadership cannot be delegated. If the Managing Director or the COO of a company decides to implement a project such as this, he or she must be entirely committed to its success. The organization itself has to believe that the program is absolutely critical to the companys success. The best way to reach this mindset is for everyone to see the leader of the company rolling up his or her sleeves and getting involved in the field, explaining things, and being prepared to face any opposition or challenges. McKINSEY: How did you show your commitment? CARLOS CALVO: Every employee has heard from me directly that this is my program. I estimate that in the period from 2003 to 2005, I personally met with more than 12,000 employees. I met them in groups of hundreds, but I also visited them at their workplaces and spent time with them on the job so I could tell them about the transformation in more personal settings. If the program is important, the COO must be visible to everyone. McKINSEY: Does this make the difference? CARLOS CALVO: I know of other programs that have implemented very similar methodologies. Theoretically, they followed the same approach, but they were not as successful, mainly because the visibility of the top leaderships commitment was missing. If leadership fails in making its full support clear to the entire organization, I think you will see a low probability of success. McKINSEY: Which types of dedicated project leadership profiles did you select? CARLOS CALVO: The project leaders are very important to each aspect of the project and it is necessary to have people who are willing and able you could say brave and courageous enough to overcome any barriers. I frequently say that I dont like to have sad people as change leaders, and they need to have the freedom and courage to start thinking beyond any limitations. But having said this, the project should not be led by individuals from the headquarters. Rather, it should involve a mix of those who have a technical understanding of the field and those from within the company who will have to go through the pain of the transformation.

McKINSEY: Can you give us an example? CARLOS CALVO: Take the field of engineering as one example. The credibility of an engineer or field technician will be greater when it comes to explaining and rolling out the project to the different participants in their regions on a peer-to-peer basis as opposed to that of a corporate executive who may be perceived as being far removed from employee concerns. McKINSEY: Did you create clear career paths for the change leaders? CARLOS CALVO: Nothing in terms of career paths was set in stone for our change leaders. We were not aware in the beginning of the opportunity we were offering to them because we never before implemented a change that affected so many people. The program provided the project leaders very high visibility within the organization. Accompanied by the projects tremendous economic impact and radical cultural change, this resulted in many senior managers approaching the leaders to join their departments. Many of the senior directors and senior VPs we have in the company today started as change leaders. McKINSEY: How important was communication? CARLOS CALVO: In this type of project, leadership is one of the key elements. The other aspect is aligned and frequent communication. Whats crucial is that the communication plan is well structured and properly disseminated throughout the company and that people really believe and experience that change is occurring. Everyones direct involvement is fundamental. McKINSEY: How did you manage to speak with one voice? CARLOS CALVO: When we selected our change leaders, we interviewed many people internally and finally identified the right profiles. One of the roles of these leaders is to pass on the message to a lot of people. Their communication skills must be top-notch. I have spent many hours meeting with all the change leaders, managers, and supervisors to make sure that we all deliver the same message.

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McKINSEY: What would you do differently if you could start again? CARLOS CALVO: First, I would look for a stronger dedicated team to transform each value stream. Many employees who have worked for the company 20 or 30 years tell me that they have never seen a program with these characteristics. However, this success comes at the expense of most change leaders who worked on the project having to dedicate many hours to it probably too many hours. The teams should have had more support. Second, I think I broke the mold in terms of what the organization proposed, but if I were to start over again, Id be even more ambitious. McKINSEY: And what would you do the same way again? CARLOS CALVO: In terms of the lean methodology, communication, leadership, target setting, capability building, speed of rollout, and other elements, I think I would only make some minor changes. McKINSEY: Can you give a golden tip for companies embarking on this type of program? CARLOS CALVO: I need to say that I have more than one tip I have them written down. Whenever I speak on transfor mation at a conference or when other companies visit me, I always show them the same slide. McKINSEY: Could you share these thoughts with our readers? CARLOS CALVO: First and foremost, you need leadership. This is not about having your name on a paper, making a video, or giving a nice speech at the kickoff. The organization itself has to believe the program is important; people need to feel that the leadership is close to them. Second, you need a well-structured communication

plan, which must reach everyone within the organization. And the message must be well defined. Next, the choice of methodology is very important. I always recommend choosing a methodology that is easy to communicate. We chose the lean approach. Some methodologies are very good, but are difficult to get across. A fourth point is choosing the right consultant, which is very important if the organization is going to work with one. Fifth, you need to have people with high aspirations and values and you must make them feel like part of the transformation. Everyone needs to experience his or her own transformation. You also need to set unambiguous and ambitious objectives that are easy to communicate and link them to incentives. McKINSEY: How do you bind these aspects together and make the change strategy cohesive? CARLOS CALVO: The focus must be holistic and should be on transformation, highlighting the aspects of improving relationships both within and across departments. This provides greater motivation and recognizes the contribution of each person. Companies talk about how important their employees are, but very often their employees dont feel so. In this type of program, a great contributor to success and sustainability is placing value on the role of each employee. All projects that a company attempts to implement in terms of a technological transformation, capability building, or of any other nature need to be placed under the same umbrella so that they are one within the process of transformation. At Telefnica Spain, these umbrellas were the Optima and Operational Excellence programs. *** Mr. Calvo was interviewed by Tomas Calleja, a Director in McKinseys Madrid office, and Javier del Pozo, an Expert Associate Principal in McKinseys Shanghai office.

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McKinseys Telecommunications Extranet

McKinseys Telecommunications Extranet is the gateway to some of the best information and most influential people in the telecommunications industry. The Extranet offers selected McKinsey-generated information that is not available in the general Internet. Extranet users have access to selected McKinsey articles on subjects ranging from Industry & Regulation, Growth & Innovation, Sales & Marketing, Services & Operations, IT & Technology, Corporate Finance, Organization & HR, Corporate & Enterprise, and Equipment & Devices. Direct communication channels ensure that your questions and requests will be addressed swiftly. The site is updated weekly with new articles on current issues in the industry. Through McKinseys Telecoms Extranet you can: Obtain exclusive information free of charge and take advantage of an Internet portal specifically designed for the industry. Access cutting-edge business know-how, interact with other experts to gain new perspectives, and contact leading industry professionals. Stay well-informed with daily industry news from factiva that you can tailor to your needs and interests. General information about the site is available at: http://telecoms.mckinsey.com Contact: telecoms@mckinsey.com

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The Telecommunications Practice

McKinseys Telecommunications Practice serves clients around the world in virtually all areas of the telecommunications industry. Our staff consists of individuals who combine professional experience in telecommunications and related disciplines with broad training in business management. Industry areas served include network operators and service providers, equipment and device manufacturers, infrastructure and content providers, integrated wireline/wireless players, and other telecommunications-related businesses. As in its work in every industry, the goal is to help McKinseys industry clients make positive, lasting, and substantial improvements in their performance. The practice has achieved deep functional expertise in nearly every aspect of the value chain, e.g., in capability building and transformation, product development, operations, network technology, and IT (both in strong collaboration with our Business Technology Office BTO), purchasing and supply chain, as well as in customer lifetime management, pricing, branding, distribution, and sales. Furthermore, we have developed perspectives on how new business models and disruptive technologies may influence these industries.

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