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Welcome ...
to the 6th edition of Marketing RECALL, McKinseys regular telecoms publication for senior executives. This edition is exclusively dedicated to B2B marketing. The B2B segment already comprises about one third of many telecoms operators revenues, and growth rates are still positive (even in mature markets). This segment is not only of current importance, but it represents key opportunities for the future as well. B2B services have the potential to protect operators (core TC) margins and at the same time trigger innovation. Because of its attractiveness, a diverse group of players is entering the B2B scene, with not only alternative carriers moving into this space, but also many IT players expanding their offers into telco-related services as well. As a result of this newly competitive landscape, many telcos have significantly changed the way they address the segment. In fixed as well as in mobile, they have grown their services well beyond the network, added various types of managed IT, TC, and ICT services, and evolved to the full-fledged outsourcing of certain customer applications. In this edition we will explore key telecoms B2B learnings. Well first look at how to capture the growth opportunity, outlining the ways in which telcos might think about embarking on the ICT transformation of their business models to successfully move into this realm. To complement the more medium-term focus of this article, well then discuss the relatively quick wins of pragmatically boosting near-term ICT margins while working on the longer-term industrialization of B2B operations. Moving beyond ICT services, we turn toward the mobile space and examine how delivering managed mobile services to business customers can offer operators in maturing markets a potential path toward their revenue aspirations. As these mobile B2B customers represent twice the value of their consumer counterparts, we then shift our attention to the mobile channel strategy most appropriate to reaching them. Next, we shine the spotlight on the small and medium business (SMB) end of this segment. In particular, we outline how delivering ICT services to SMBs a major challenge for many operators can be done successfully. The importance of a B2B focus is not confined to mature markets. Our next article describes the development of one operators emerging market strategy as an example of how local telcos can shape their own markets by leveraging the experience of more developed ones. There are many opportunities in B2B, but achieving even the most realistic aspirations requires the right set of key performance indicators. Our final article takes a look at the fundamentals of B2B performance management as a means of helping to ensure optimal value creation. We conclude this round of insights by giving the final word to Joachim A. Langmack of T-Systems. He shares his views on the advantages and challenges of a telecoms operator offering end-to-end ICT services and his prediction of the future trends in the ICT market. The editors would like to thank Rene Langen and Katrin Suder from the leadership of our global B2B Telco Initiative for shaping the content of this issue. Our hope as always is that you will find these insights useful for your work. Your comments on this issue as well as your ideas regarding topics you would like to see covered in issues to come are very much welcome.

Jrgen Meffert European Leader of McKinseys Telecommunications Practice

Pedro Mendona Leader of McKinseys Marketing in Telecommunications Practice

Boris Maurer Leader of McKinseys Telecommunications Extranet

Thomas Barta Leader of European Telecoms Branding / ROI, Editor Recall


01 02 03 04 05 06 07 08 The ICT Transformation: Delivering a Unique B2B Value Proposition Getting the Basics Right: Rapidly Boosting ICT Margins Managed Mobile Services: The Path to B2B Growth Myth Busting: A New Mobile Channel Strategy for Business Customers Overlooked and Overshadowed: Growth in ICT Services for SMBs Emerging Market ICT Strategies: One Local Telcos Journey Maintaining Course: B2B Performance Management The One-Stop Shop Meeting More of Your Customers Needs 9 15 21 27 33 39 45 51 55


RECALL No 6 B2B The ICT Transformation: Delivering a Unique B2B Value Proposition

01 The ICT Transformation: Delivering

a Unique B2B Value Proposition

ICT is the biggest growth opportunity for telcos in the corporate segment. The value proposition is compelling, and it is well aligned with demonstrated customer needs. To successfully deliver on the ICT promise, telcos are embarking on complete transformations of their business models. Telco revenues in mature markets are suffering from severe erosion in many areas, and the enterprise segment is no exception. The expected decline rate of 3 to 4 percent (CAGR) is attributed to price slumps and market share erosion. As a result of this trend, some telecoms operators are in the midst of experimenting with expansion into IT space, seeking revenue growth (CAGR until 2011 projected between 7 and 11 percent worldwide) and trying to benefit from reasonable margins (gross profit of 15 to 30 percent, depending on type of service). As evidenced by a number of European telcos, the IT share of revenue growth in the enterprise segment has already become the key driver: 150 percent in the case of BT Global Services, 145 percent for T-Systems, and 80 percent for Telefnica in 2006 over the previous year. However, a simple bundling of TC with IT services does not seem to be a sustainable model for telcos because they have to compete with established, IT-exclusive players. At the same time, they need to maintain their focus on efficiency, while developing expertise within their core telecoms business. Moreover, simply bundling TC with IT does not fully meet enterprise customers increasingly demanding expectations. As a consequence, customers perceive only limited value in these service bundles.

Tap into growth, defend the core

McKinseys observations of these journeys into ICT show that telcos are best served when they seek growth opportunities in-between the TC and IT spaces and explore the real ICT model. Real ICT comprises an end-to-end information and communication technology solution with at least one single output-oriented SLA (service level agreement), as opposed to solely bundling TC and IT components or marketing ICT. This means sophisticated solutions with benefits for customers and providers: End-to-end managed ICT solutions ensure simplicity i.e., no need for customers to manage multiple providers, technologies, and SLAs; all services from one (secure) source and improved incident recovery and security. Technically integrated ICT solutions generate cost savings and facilitate flexible price models (utility computing). New ICT industry solutions open up access to new markets, segments, and business opportunities. The two first benefits are clearly a value proposition for all customers, making real ICT the perfect value-selling approach to corporate customers. Beyond growth stemming from pure IT revenues, ICT services also have the ability to pull through connectivity revenues. Additionally, integrating IT services with communication products enables telcos to expand pricing flexibility and protect TC margins by avoiding further commoditization.



High time for telcos to move into ICT

The telcos unrivaled ICT advantage

Telcos are well positioned to make successful gains into the ICT space. Technological capabilities, customer expectations, the competitive landscape, and the telcos own core functions are all critical elements of success working in their favor. Technological capabilities. TC and IT technologies are converging, with networks becoming more and more critical for guaranteeing the delivery of end-toend SLAs. Telcos already have naturally strong network management capabilities. Beyond this, many telcos have significantly developed IT capabilities as well. The latter is due to the fact that telecoms is an IT-heavy industry and, historically, operators have needed to build up significant internal IT capabilities. Customer expectations. Over half of large and medium business customers always (or at least almost always) buy TC and IT services from a single provider. Of this group, over one third currently receives these services from telcos or NSPs (network service providers), and more than 40 percent state that they will be even more likely to buy IT services from telecoms companies in the future (Exhibit 1).

Competitive landscape. Although over half of the customers buy TC and IT services from one IT provider, the information technology market is highly fragmented. Furthermore, IT players are struggling with problems of their own (e.g., significant operating margin drops). This predicament allows telcos to leverage their own current customer relationships and step up their business to move into the ICT playing field. Seizing the chance to build a new model around ICT, telcos can achieve margins that are higher than those from merely bundling IT services with their current TC services.

Industrializing ICT
ICT is an innovative integration of TC and IT services and is based on a business model that lies at the interface of both industries. It requires a consistent design of products, processes, organization, and go-to-market approach. The journey toward ICT industrialization one that some telcos have already embarked on (see text box) means that telcos will have to transform their current delivery and operations from a highly-customized delivery to an industrialized approach. The three pillars of this transformation portfolio standardizing, service factory industrializing, and organization restructuring are largely independent of concrete strategic positioning.

RECALL No 6 B2B The ICT Transformation: Delivering a Unique B2B Value Proposition



Three models for integrating TC and IT organizations

Pillar 1: Developing a standardized ICT portfolio. It means that telcos will move away from customized solutions with unique, customer-specific SLAs, terms, and conditions toward product-like services created from common building blocks, which are the unit pieces or atoms managed in the factory. For telcos whose core voice and data business is highly standardized and yields more than 30 percent in gross profit margins, this shift is even more critical, as it allows them to better address customer needs and protect their margins. A detailed analysis of all delivery activities for a Western European telco showed that almost 65 percent of its activities could be standardized (e.g., contact centers, desktop management, managed security). The remaining, highly customer-specific activities consisted of consultancy-type projects such as BPO (business process outsourcing) services and system integration. Pillar 2: Building an industrialized service factory. To capture the benefits of a standardized portfolio, telcos will migrate from customer-specific processes and delivery models and move toward centralized platforms for service delivery, replication factory (i.e., a continuous industrialization process, which ensures ongoing identification and replication of best practices in the delivery of building blocks and solutions), and global sourcing.

This will mean investing in platforms for centralized delivery, while capturing economies of scale and, thus, improving margins. Balancing horizontal activities (to gain scale and drive standardization) and vertical activities (to time-efficiently serve and satisfy customers) is a delicate undertaking that requires skill and dexterity. Telcos that have succeeded in striking this balance, however, have enjoyed EBIT margin improvement of 10 to 25 percent with capital investments of up to 10 percent of revenues. Pillar 3: Restructuring the organization. Making the transformation from a patchwork of IT-like services and TC legacy structures to integrated ICT requires telcos to leverage technology expertise and integrate TC and IT in sales and delivery and then establish an appropriate organizational steering of the new model. Such an integrated organization is crucial to facilitating the creation of a standardized portfolio, enabling industrialization of the service factory and developing a unified commercial interface. Our experience with clients shows that ICT organizations can be shaped along three different models (Exhibit 2), characterized by the integration level in functions like sales, presales/engineering, marketing, and operations/ factory. Integrating the commercial functions enables


The Road to True Service Integration

ITC transformations of some European players We took a closer look at several European ICT players T-Systems, Orange Business Services, Telefnica, and BT Global Services to better understand what approach they took while transforming their business models. What was common to each players ICT transformation was the fundamental shift from a customized to an industrialized approach along three specific levers: portfolio standardizing, service factory industrializing, and IT-TC organizational integration (especially at the customer interface level). The main differences in their approaches are a function of their individual starting positions and their particular service offerings. The two forerunners in entering the IT space are T-Systems and BT Global Services. T-Systems, which already had significant IT capabilities in-house, acquired the service division Debis from DaimlerChrysler at the start of its ICT transformation in 2001. BT Global Services benefited from a head start by having already begun in the late 1990s. Orange Business Services grew by means of small and medium-sized acquisitions with ongoing transformations, while Telefnica mainly focused on internal transformation programs. When it comes to service offerings, all players have pursued a network-centric model, focusing on infrastructure services and solutions. Nevertheless, T-Systems has differentiated itself by moving toward application services, including application provisioning, management services, and system integration. BT Global Services, in contrast, has developed a relatively strong position in network-centric services and leverages partnerships to cover the broader ICT/service integration portfolio.

bundling and cross-selling opportunities, increases commercial efficiency, and coordinates the go-to-market approach. It also supports the portfolio discipline within the organization and distances it from a pull model, where the factory is asked to deliver whatever the client ordered, to a push model, where factory areas serve to proactively drive horizontal solutions. By integrating TC and IT operations, companies can also leverage additional synergies and economies of scale in the factory.

*** ICT is no longer a fluffy buzzword with a vague value proposition. It is a set of sophisticated and valuable client solutions with very clear benefits. The telcos transformation is not just a project, but a fundamental redefinition of the business model whose success depends on the development of a standardized ICT portfolio, the building of an industrialized service factory, and a restructuring of the organization. A successful transformation can yield gross profit increases of 15 to 30 percent depending on the type of service, so there is no wonder that major players from the TC and IT spaces are joining the battle.

RECALL No 6 B2B The ICT Transformation: Delivering a Unique B2B Value Proposition


Iris Kornacker is an Associate Principal in McKinseys Vienna office. iris_kornacker@mckinsey.com

Luis Miguel Santos is an Associate Principal in McKinseys Madrid office. luis_miguel_santos@mckinsey.com

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

RECALL No 6 B2B Getting the Basics Right: Rapidly Boosting ICT Margins


02 Getting the Basics Right:

Rapidly Boosting ICT Margins

Even as telcos work toward longer-term industrialization, they can quickly boost their near-term B2B ICT margins through a number of simple and pragmatic levers. A variety of factors is driving the telecoms industrys interest in expanding into ICT. These range from falling revenues in their core corporate telecoms service domain to the blurring of formerly clear boundaries between traditional IT and TC solutions exemplified by the rise of VoIP offerings. Further, sophisticated corporate customers increasingly combine their IT and TC requests for proposals, searching for one main provider across the two domains. A recent B2B example involves the Dutch telecoms company KPN, which bought regional IT player Getronics in an attempt to further bolster its ICT offering. However, while an increasing number of telecoms operators have positioned themselves as ICT players, few have done so profitably to date. This is often due to heavy customization for almost all customers, insufficiently defined standards and SLAs (service level agreements), as well as the lack of financial discipline in managing suppliers and customers. In addition, many telcos focus their sales and presales activities almost exclusively on large accounts, which require significant presales investments. To prevent this profitability drain, most telcos are seeking to industrialize their approaches, focusing on standardization and introducing the concept of a low-cost service factory delivery model. While this move away from customization is clearly the right direction, it involves a lengthy process that easily takes several years to implement fully.

McKinsey research indicates that, while getting the longer-term factors in place, telcos should also focus on getting the basics right with a simple set of levers. By bolstering presales activity performance through higher individual staff effectiveness, managing product delivery and product mix more tightly, and redesigning back-office and field force processes that deliver customized services directly to customers, these companies can improve EBITDA by as much as 10 percent within a year.

Bolstering presales activities

Telcos sometimes under-manage their ICT presales activities with the misperception that it is impossible to objectively compare the performance of knowledge workers. We observed that employee assignments were not of similar size and sometimes not in the companys interest. For instance, we found that a group of program managers and business consultants at one particular telco was supporting a revenue stream 10 to 20 times below an acceptable ambition level. Experience reveals that companies can achieve productivity increases of 20 percent or more for each presales group (e.g., program managers, business consultants, project managers), generating an additional EBITDA percentage point. Managers can steer individual presales staff performance using a number of measurement techniques. For example, management can rank the performance of their program managers tasked to coordinate a project from the start of implementation through contract completion by revenues under management. Business consultants, who support the sales force in making the business case, can be incentivized to minimize their involvement in the



Simple profit improvement levers can reduce cost of product delivery

initial sales phase (i.e., qualification and lead) and focus more on the total value of prospective projects per year. Furthermore, project managers can increase revenues by establishing more effective billing processes, especially for project changes that lead to rework and out-of-scope work. They can increase the projects speed by applying a process blueprint with timelines specifically for the requirement/design phase that includes making clear agreements with suppliers to reduce overall waiting times. Achieving this goal is relatively simple, requiring no more than periodic reviews of the individuals in question, with management taking action to improve their performance.

their revenue opportunities. This approach alone can deliver an EBITDA improvement of up to 5 percentage points. Managers can work to improve the profitability of their deals through a three-stage process. The first stage of the process focuses on making sure the program managers of all accounts leave no money on the table (Exhibit 1). One part of this managerial mandate is holding suppliers to the negotiated terms and not paying for cancelled services. They should also consider charging customers fully for services. For example, when telcos fail to charge for additional work caused by errors from another vendor or the client company itself, an opportunity is missed. Known as outside domain work, up to 50 percent of all incidents on some programs fit this description and thus can have a major cost impact on an organization. Specifically speaking, one customer had about 2,500 outside domain incidents per year on which the back office averaged one hour of work. This amounted to EUR 250,000 in non-billed activities. Companies can also increase their margins by up-selling additional products and services. This requires a rigorous review of the full customer base during which managers determine where opportunities exist to upgrade the product portfolio they are delivering. Exhibit 2 describes the outcome of such a review, highlighting the up-sell opportunities of

Better contract and product mix management

ICT players often deliver a product mix determined purely by customer requests rather than one that is proactively shaped. Often, when delivering the product, the telco receives higher than expected charges from the supplier. We have observed cases where the telco paid the supplier 10 to 20 percentage points of EBITDA per customer program more than initially agreed upon. Furthermore, the telco often has a number of incorrectly structured, money-losing contracts. To improve product delivery performance, managers must tightly control their internal and external suppliers and work to optimize

RECALL No 6 B2B Getting the Basics Right: Rapidly Boosting ICT Margins



Increase margin by up-selling through a rigorous review of full client base

specific accounts and the corresponding revenue potential. During the second stage, if the program remains unprofitable, the company should work to renegotiate poorly-structured contracts. If this proves unsuccessful, then the final stage requires managers to make a decisive judgment: if an account cannot be made profitable on a company level, then consider terminating the contract. To achieve this overall impact, a company needs to invest in the financial discipline of its presales department, specifically the program managers responsible for coordinating the process.

varied between 2 and 18 minutes. Another observation was that employees were spending lots of time tracking supplier orders. Within the back-office activities for data request fulfillment, this amounted to 25 percent of total working time. Improving productivity in these departments can lift EBITDA by up to 5 additional percentage points. To capture these additional margins, companies should work to ingrain individual performance management in the organization, eliminate reserved overcapacity, improve planning practices, and institutionalize mechanisms to identify and eliminate bottlenecks at the shop floor level on a continuous basis: Achieve better operational management by defining standard times for activities, creating transparency on the team and individual performance levels relative to these standards, and setting up regular reviews (weekly for teams and daily for individuals) to coach employees toward reaching these targets. Eliminate structurally-reserved overcapacity and more closely match the current capacity to the actual need for field force and back-office activities. This can be achieved through using team capacity more dynamically for activities in other teams and putting in place a systematic

Optimized back-office processes

A third area we investigated is the departments that provide customized back-office services for simple and complex data and voice products (e.g., installation, change requests, and incident handling) and that act as an interface between the customer and the supplier. There was a strong belief in these departments that this work could not be standardized among customers and that a service factory model would not be feasible. When measuring activities among customer programs, we found that activities between customers are actually very comparable but that there was a large difference in employee performance. For instance, for similar mobile phone installs, the average employee installation time


and fact-based long- and short-term capacity planning process that creates transparency on over- and undercapacity. Improve planning by creating distinct groups of activities, e.g., installations vs. service for the field force and simple vs. complex orders for the back office. It is also necessary to outline very explicit planning rules and practices, establish weekly reviews, and create transparency on efficiency through operational metrics. Pursue the ongoing identification and elimination of bottlenecks at the projects lowest level to ensure focused and sustainable process improvements, as this is key to maximizing the effectiveness of all resources involved in the end-to-end service and delivery chain. Obtaining clear request order forms from customers, improving the logistics chain for overnight delivery of materials and spare parts, and reducing the time spent on tracking are examples of how telcos might address these bottlenecks. Procurement can also reduce external spend by approximately 5 to 10 percent by consolidating/renegotiating contracts.

To achieve this impact, however, managers must clearly establish an operational management mindset within the back-office and field force departments. Spending significant time on the work floor closely coaching their employees can help them become leaders instead of merely managers. *** ICT players in the business-to-business market can realize a 10-percentage-point EBITDA increase in roughly a year by engaging simple levers. We call this getting the basics right, and ICT players should focus on these elements of performance improvement parallel to their industrialization pursuits, which represent a more time-consuming but highly beneficial longer-term goal.

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

Joris Hppener is an Engagement Manager in McKinseys Amsterdam office. joris_hoppener@mckinsey.com

Suraj Moraje is a Principal in McKinseys Johannesburg office. suraj_moraje@mckinsey.com

Matthias Winter is a Principal in McKinseys Zurich office. matthias_winter@mckinsey.com

RECALL No 6 B2B Managed Mobile Services: The Path to B2B Growth


03 Managed Mobile Services:

The Path to B2B Growth

As shifting market conditions depress mobile network operators growth prospects, actively broadening the service portfolio to business customers into managed services and the ICT territory could provide a muchneeded revenue boost. After years of gravity-defying, double-digit growth, mobile network operators (MNOs) face a much more modest future where revenue growth either stagnates or well undershoots GDP growth levels. The quest to offer new mobile services to consumers continually makes headlines, but until very recently, relatively little attention has been paid to how to boost mobile revenues from enterprises i.e., B2B revenues even though they account for up to one third of MNO revenues and 40 percent of their profits. This neglect of business customers is remarkably uniform across most developed and developing markets but is potentially risky, as increased competitive dynamics and a lack of killer applications beyond voice push e-mail and erode MNOs enterprise revenues and margins even faster than they affect consumer segment revenues. Even in countries where the outlook for B2B growth is better than it is for consumer segments (such as the Americas and the developed areas of Asia), MNOs are facing a paradox: the faster mobile broadband access speeds catch up to fixed broadband, the easier it is to dismiss such access as just another commodity alternative thereby allowing fixed-line operators and system integrators to tighten their grip on enterprise customers through their ICT portfolios. To maintain relevance in the B2B market, MNOs worldwide should proactively embrace enterprise mobility (EM) and explore innovative ways to capture value, including managed services and selected forays into ICT.

One such opportunity involves expanding the set of managed services provided on top of the existing mobile voice and data products. So far, most MNOs have focused on peripheral mobility services, including valueadded services (VAS) such as consulting, design, and integration solutions. Some operators, however, have finally begun to set their sights even farther and target large multinational corporations by offering globallymanaged telecoms services. In this case, the value proposition hinges on reducing the total cost of ownership while augmenting services such as expense management, customer and service procurement, and network and security services. Other operators have chosen to pursue the local small and medium business (SMB) segment with integrated solutions. Typical SMB service offerings might include remote access service bundling that provides multiple access technologies (e.g., 3G, WiFi, and DSL) or an integrated offering that includes broadband delivered by multiple access technologies, an integrated suite of security, authentication, administrative and reporting tools, as well as global support for IT managers and employees.

MNOs worldwide enter the ICT fray

A recent scan of MNOs initiatives worldwide shows an emerging flurry of activity in wireless ICT and enterprise mobility applications. Operators have begun the process of introducing wireless ICT applications. Specifically, in North America, these have taken the form of sales, field, and fleet management solutions. Between 40 and 55 percent of the enterprises that participated in a recent survey indicated that they were engaging in some form ofexperimentation beyond personalized contacts/ calendars and wireless e-mail/Blackberry, thus



Value pricing is an opportunity for exponential growth

revealing a growing demand for more sophisticated ICT services. In Asia, mobile players have begun to develop industryspecific mobility solutions for large enterprises. One Chinese MNO, in particular, is providing a global shipping company with the ability to transfer shipment information to its central system using PDA scanners equipped with GSM-/GPRS-capable cell phones, bar code scanners, and pagers. As a result, the companys pickup times dropped by a third, while its business volume climbed over 50 percent. Somewhat counter-intuitively, given the countrys leading-edge mobile reputation, Japanese enterprises have yet to embrace most aspects of enterprise mobility. Mobile applications focused on office work productivity, such as instant messaging and videoconferencing, have high potential but remain outside of the mainstream. For example, another recent survey indicated that only 3 percent of companies have deployed instant messaging and just a third make use of mobile videoconferencing. These initiatives underscore the difficulty in finding the path to success in enterprise mobility. While EM has been described as the next growth wave ever since GPRS data services made their appearance, it has failed so far to create a significant upside for MNOs. The bottlenecks have been numerous: the lack of reliable

and widespread wireless data connectivity, security concerns, the absence of a clear business case for adoption that could justify resources at the customer side, limited customer understanding of mobile technology, and the poor reputation of MNOs for the development of complex solutions. Another reason for many enterprises unsteady mobility footing comes from the fragmentation of platform suppliers, which prevents participating vendors from gaining the scale-driven market insights they need to serve their corporate customers effectively. For example, in 2006, the mobile middleware vendor with the largest worldwide market share controlled less than a quarter of the market, while the second largest had only 10 percent.

Chasing a USD 30 billion global market

McKinsey analysis shows that the latent or uncaptured portion of the B2B mobility market for MNOs could reach USD 30 billion worldwide by 2011. The largest opportunity will likely emerge in the managed services and mobile IT VAS spaces, which together are expected to grow to over USD 11 billion by 2011. At first glance, entering the wireless ICT market may seem of questionable value to an MNO, given the limited

RECALL No 6 B2B Managed Mobile Services: The Path to B2B Growth



Investment and capability building needs to increase as growth options move farther away from the core

potential compared to the total mobile market. On closer examination, however, participating in wireless ICT has two important value multipliers. It can help an operator retain its existing customer base because it both locks in corporate customers and provides superior service compared to the traditional voice and data services. Using Western Europe as an example, the incremental revenue from mobile ICT will only directly add about 5 to 10 percent in terms of customer lifetime value (CLV), but ICT will likely lower churn by more than 10 percent due to the higher cost of switching, which itself generates an additional 35 to 40 percent CLV increase. As a result, the ICT play could deliver a CLV boost of 40 to 50 percent. Secondly, it can position MNOs as credible one-stop shops for bundled fixed and mobile services for the SMB segments that do not require sophisticated, tailored solutions. Furthermore, we believe that the market for VAS may be underestimated in two ways: by potentially failing to accurately identify the catalysts of growth and by ignoring the potential impact of innovative new pricing models. Growth catalysts. Smartphones in the North American enterprise environment are an example of the potential underestimation of drivers of growth. Specifically, in

the context of smartphones capabilities nearing those of PCs, current hardware and VAS spending ratios appear to be misaligned against historical trends. When compared to the corporate evolution of the PC market, it becomes apparent that VAS spend could be underestimated by as much as 25 to 40 percent for a number of reasons. For example, industry analysts could be underrating the present amount of smartphone integration service spend driven by rapid device proliferation and the democratization of enterprise smartphone usage (i.e., the rapidly increasing deployment of consumer-like personal applications on corporate devices supported by a central IT function), which will generate increased support needs. Other reasons that the market could be larger include the need to manage multiple applications, which will likely expand network security and quality of service demands, thus increasing costs. Future pricing models. In addition to gaining a more accurate outlook on growth drivers, MNOs also have an opportunity to increase value by shifting the focus of their pricing models from cost to value creation (Exhibit 1). Many operators use pricing models that are only slightly better than traditional cost-plus pricing schemes. Using the deployment of a US MNO as an example, we found that shifting from typical metered pricing to a solutions contract that considered the annual customer



The relative importance of the options varies across regions

benefit could lift carrier revenues for the same service nearly eightfold. With innovative solutions pricing, the North American mobility services market could be substantially larger than current analyst estimates.

Navigating the enterprise mobility path

Our experience has shown that MNOs can pursue four B2B growth options of increasing complexity and investment: Option 1: Capture the maximum value possible from the core business. Penetration of corporate contracts and basic data services is still low in many countries, especially in the US and in emerging markets. Tactics to deepen the reach include working to maximize both market penetration and average revenue per user. Option 2: Expand managed mobile services. This is the most promising opportunity in the short term. Operators can expand into ancillary services these may include expense management or network and security services and provide basic bundles with fixed broadband (especially for SMBs). Option 3: Partner with system integrators and equipment manufacturers to push the mobile application space.

The bottlenecks that have plagued enterprise mobility so far are on their way to presenting less of a problem thanks to technology strides and new market dynamics. Now more than ever MNOs and manufacturers can provide the platform to develop an independent software vendor (ISV) ecosystem. Option 4: Address the integrated ICT space. Investments in wireless ICT can be effectively leveraged into the broader ICT market. If an operator decides to invest in systems integration capabilities, entering fixed-line ICT becomes an additional option, especially for integrated providers. The required capabilities increase in complexity the deeper MNOs expand into ICT (Exhibit 2). The risk-return proposition is highly dependent on the type of operator (integrated or pure mobile), the degree of sophistication of the business customers, and the competitive dynamic in the country. At the highest level, three country clusters can be identified (Exhibit 3). Operators in Western Europe, North America, and the Asia-Pacific region would all benefit from following the first strategic option of maximizing core business value. After this, the impact varies by region: for operators in Western Europe, pursuing managed services and applications partnerships are no regrets actions because maximizing core business will do little more than reduce the rate of

RECALL No 6 B2B Managed Mobile Services: The Path to B2B Growth


revenue loss going forward. For North American operators, maximizing core business could probably deliver over half of the potentially available revenue, but the fact that all major players are integrated will make the pursuit of partnerships and entering the ICT space a natural evolution of their current offering. Asia-Pacific MNOs (excluding Japan), on the other hand, should postpone investments in anything beyond their core business, as they still have a lot to do in the way of covering the basics.

*** With core B2B markets tightening, MNOs need to find new sources of profitable growth. Managed services and mobile ICT are a unique opportunity to ensure that expansion. The ICT play amplifies revenue growth by effectively locking in corporate customers due to improved customer satisfaction rates and higher switching costs.

Pascal Aguirre is a Principal in McKinseys Boston office. pascal_aguirre@mckinsey.com.

Giorgio Migliarina is a Principal in McKinseys Beijing office. giorgio_migliarina@mckinsey.com

Janet Tang is an Engagement Manager in McKinseys Beijing office. janet_tang@mckinsey.com

RECALL No 6 B2B Myth Busting: A New Mobile Channel Strategy for Business Customers


04 Myth Busting: A New Mobile Channel

Strategy for Business Customers

Mobile business customers represent twice the value of their consumer counterparts. Successful operators must develop channel strategies with this value in mind. As mobile markets have reached adulthood in Western Europe, industry players must contend with slower growth, increasingly competitive pricing, and pinched operating margins. To succeed in this newly pressurized market environment, mobile network operators (MNOs) should focus simultaneously on optimizing their operating structures and on extracting value from their existing customer bases. Many of them will find the business segment to be of particular importance since it represents, on average, 30 percent of the overall revenue base, and customers in this segment are twice as valuable in terms of their average customer lifetime value (CLV) than consumers. However, to capture this prize, MNOs must rethink their approach to sales, more carefully considering the unique needs of the corporate, SMB (small and medium business), and SOHO (small office/ home office) segments. This revamped sales and channel strategy must focus on maximizing revenue upside across the customer life cycle while optimizing the sales and channel costs.

Myth 1: Indirect channels are cost-efficient. Indirect channels actually tend to represent a disproportionately large share of cost relative to their revenue contribution; a result of higher commission and acquisition costs. In a typical situation, while indirect channels might generate 40 percent of the total revenue, their associated acquisition and retention (A&R) costs would likely exceed 50 percent of total A&R spending. Myth 2: Indirect channels are value contributors. On the contrary, operators have historically employed indirect channels to drive mass-scale acquisitions and volume levels by offering dealers and retailers incentives (Exhibit 1), leading to high acquisition costs. Furthermore, as markets saturate, indirect channels have a tendency to churn the customer base in order to capture commissions. Our analysis of one mobile player revealed that while indirect dealers and distributors did add to revenue volume, the true value contributors tended to be the direct corporate and business sales forces. Myth 3: Indirect channels are efficient modes of customer acquisition. Not true. In mature markets, the net acquisition cost of a customer (i.e., gross additions minus disconnects/churners) can be 6 to 35 times higher through indirect channels due to the high-churn levels these channels experience. In addition, traditional indirect channels are not effective at pushing data products and solutions for three reasons: indirect dealers and distributors typically only make limited investments in the data and solutions markets; they offer little control over the quality of training; and they represent traditional voice/ SIM-driven businesses with little incentive to sell data.

Channel management paradigm shift

Operators hoping to capture the most value possible from the business segment have to undertake a paradigm shift in their sales and channel management strategies. This means moving away from three misconceptions, which have traditionally guided their approaches:



Indirect channels are volume and not value contributors

Three cornerstones of the new channel model

The new sales and channel model that operators use when it comes to their business customers must simultaneously deliver the maximum value while satisfying customer needs (Exhibit 2). Reflecting these mandates, the model is based on the following three cornerstones: 1. Building capabilities in direct channels. Two potential initiatives emerge in this category. The first involves refining corporate and SMB sales forces, while the second recommends that operators aggressively invest in boosting their telesales capabilities. Operators that pursue these initiatives can generate an uplift in EBITDA of 7 to 9 percent. Operators focused on refining their corporate and medium business sales forces likely need to change their coverage models in terms of how they deploy their corporate account managers. Many players loosely base their estimates of potential revenue per account manager on the size of current accounts. Doing so can cause MNOs to overpopulate some less promising corporate segments with account managers, while starving other accounts that have greater growth potential. Instead, operators should refine their strategies regarding account coverage, making sure customer segments that

represent high current revenues and high incremental growth potential receive a sufficient number of account managers to proactively drive opportunity identification and support. Meanwhile, less dynamic segments might feature low day-to-day account manager involvement and focus on retaining current customers. Another option for MNOs is to aggressively invest in building telesales capabilities in order to reach the small business and SOHO segments. Developing an integrated telesales model enables an operator to cover smaller accounts cost-effectively while focusing the direct sales team on large, high-potential accounts. Our experience shows that a dedicated telesales model works well up to the SMB segment, where a typical company might require about 50 handsets. Furthermore, operators should develop in-store and telesales capabilities aimed at identifying high-potential customers in this segment who can be handed over to a higher-touch channel. For SOHO customers, telesales should develop the customer base proactively and focus on up-selling. This will allow them to either capture a greater share of a customers wallet or move that customer to a new product platform. To accomplish this effectively, the telesales agents must be properly trained in lead generation and conversion, and the operator must develop appropriate handover rules for moving high-value customers to the most effective channel.

RECALL No 6 B2B Myth Busting: A New Mobile Channel Strategy for Business Customers



Operators would then realign channel strategies to focus on value, not volume

2. Managing indirect channels for value. MNOs can pursue two initiatives in the indirect channel area as well. Rationalizing their portfolio of indirect dealers and minimizing their dependency on distributors can help operators to capture a 1 to 2 percent uplift in EBITDA. Operators rationalize their portfolios of indirect dealers by creating a tiered accreditation model. Such a model can enable operators to increase their control over this channel while simultaneously lowering costs. The operators objective is to align the commission and incentive systems to the dealers value contribution, rewarding high performers while encouraging improvement or exit for lower performers. By quantitatively ranking dealers based on their value contribution (ARPU, churn, and size of the base) and net subscriber additions, operators can ultimately tier the dealer base by region, balancing geographic coverage and performance. In the second initiative, regarding the management of indirect sales channels for value, operators can minimize their dependency on distributors by shifting the base toward higher-value channels. In this scenario, the operator ends up directly managing a greater number of sub-dealers (made possible by the fact that the MNO technically owns the customer through the billing relationship). This task requires MNOs to undertake a series of steps with two goals in mind. First, operators

need to identify attractive sub-dealers and develop a workable engagement model. They begin this process by building a knowledge base regarding the relationships between sub-dealers and distributors, assessing the risks of approaching this relatively removed group directly (e.g., legal issues and revenue loss) and identifying a preliminary, high-potential set to begin engaging as direct dealers. This is followed by an approach to working with the sub-dealers that focuses on value leveraging the accreditation program, which is piloted with a few sub-dealers. Operators would then target a larger set of priority sub-dealers. Next, they need to retain high CLV customers within the distributor base, systematically tracking service and disconnect requests through their customer care centers and redirecting certain requests to the telesales capabilities. 3. Developing an integrated channel strategy with handover capabilities. Here, operators create an integrated model that guides the telesales, retail, and direct sales forces as to how they should hand over customer leads to the most relevant channel. The criteria for this model are based on existing revenues, incremental potential, and customer needs (e.g., face-to-face interaction, data needs). Done right, this phase can deliver EBITDA uplift in the 3 to 4 percent range.


*** Faced with heightened competition and wavering margins, mobile operators need to exploit every available channel to capture the maximum value possible. The three levers and the respective channel initiatives discussed here can help MNOs identify, attract, and cost-effectively serve the most valuable business customers in their markets.

Nay Ghorayeb is an alumna of McKinseys London office.

Conor Jones is an Engagement Manager in McKinseys Dublin office. conor_jones@mckinsey.com

Philipp Nattermann is a Principal in McKinseys London office. philipp_nattermann@mckinsey.com

Julien Pestiaux is an Associate in McKinseys Brussels office. julien_j_pestiaux@mckinsey.com

RECALL No 6 B2B Overlooked and Overshadowed: Growth in ICT Services for SMBs


05 Overlooked and Overshadowed:

Growth in ICT Services for SMBs

ICT services targeting small and medium businesses (SMBs) represent a growing and largely untapped opportunity. Communicating a compelling value proposition, launching the right go-to-market strategy, and deploying an appropriate service delivery model are the keys to catering to the needs of this highly diverse segment. Over the last several years, largely in response to price pressure on legacy services and new competition from IT companies, most telcos have expanded their scope of operations to include infrastructure-centric ICT services, such as LAN, integration, security, data center, or call center services. So far, such inroads into the ICT world have been mainly geared toward large enterprise customers and have focused on highlycustomized offers. In this equation, SMBs have been largely ignored when it comes to end-to-end ICT value propositions. Yet, SOHOs (small offices/home offices) and SMBs can represent depending on the country in question more than 50 percent of the market in value and are expected to significantly outpace their large enterprise counterparts in the coming years. Based on recent McKinsey research across Europe, the value opportunities for telcos in this new ICT wave will initially remain within the communications services realm in particular, further mobile voice and data uptake, VoIP, and Web conferencing solutions. Looking at the medium-term horizon, however, data center and applications (Software as a Service SaaS), desktop provision, configuration and maintenance, as well as call center solutions will be attractive areas of opportunity.

At first sight, telcos would seem to be well positioned to capture this opportunity, as over 60 percent of SMBs prefer one-stop shopping and recognize telcos specific advantages, such as the ability to provide integrated offers and higher quality of service. The reality, however, is that incumbent telco players tend to struggle to successfully grow this segment. Relying on a customer segmentation mainly based on size, their service offerings to SMBs often resemble scaled-down large enterprise offers or upgraded residential offers. Attackers, on the other hand, have developed more SMB-specific, shrink-wrapped packaged offers, though with a more limited breadth and lacking the required reach and/or quality of service to optimally address the demand. To successfully deliver the ICT services the SMB market demands, telcos might look to the following four-step approach: conduct a needs-based customer segmentation, design a segment-specific value proposition, develop a go-to-market model, and create a communication strategy.

1. Building a needs-based SMB customer segmentation

Reliability of products and after-sales service quality are the key buying criteria for SMBs who want to focus on their core business and not have to deal with the complex ICT environment. However, one size does not fit all, and McKinseys in-depth survey of 1,000 European SMBs needs and behaviors reveals five distinct segments no frills, cautious relationship seekers, service seekers, trust seekers, and best-technology seekers with fundamentally different expectations of ICT services (Exhibit 1).



Five SMB segments have markedly different purchasing priorities

No-frills SMBs have a small ICT appetite and limited or no concern for product performance and after-sales services. This segment mainly seeks basic solutions at the cheapest price. Cautious relationship seekers exhibit average ICT penetration and a moderate appetite for new services/technologies. Their priority is a quality, face-to-face relationship with expert ICT sales reps, and price/operating cost is not a primary concern for them. Service seekers, with their average concern for operating cost, show a healthy appetite for life-simplifying ICT services (e.g., converged/unified communications, collaboration tools) and have very high standards for product reliability, quality, and speed of service support. Trust seekers with an average ICT appetite but higher than average interest in outsourced solutions, e.g., SaaS base their buying on brand/external advice, with a limited concern for operating cost. Best-technology seekers also have a healthy ICT appetite and seek product performance, reliability, and scalability.

2. Designing a compelling segment-specific value proposition

With such a deep understanding of ICT service requirements and key decision drivers for different SMB customers, telcos can build truly differentiated, packaged value propositions for each segment, each one a combination of 10 to 15 ICT building blocks. The communications in a box package for the no-frills SMB segment, for instance, should include basic connectivity services. This package might consist of an IP gateway with WLAN and embedded firewall, 8 Mb/s ADSL Internet access, VoIP calls together with a voice/ data mobility pack and 9 to 5 service support. The ICT key account package for cautious relationship seekers might be similar in connectivity to the communications in a box package for the no-frills segment. It would, however, use SDSL instead of ADSL and IP VPN service and be complemented by server/company portal hosting and network equipment maintenance service. The ICT service plus package including fiber optic access, managed PBX/centrex, and premium service level agreements (e.g., four-hour repair, seven days a week) would constitute a best-in-class offer for service seekers.

RECALL No 6 B2B Overlooked and Overshadowed: Growth in ICT Services for SMBs



Offers need to be designed around segment appetite for ITC sample for trust seekers

The comprehensive ICT package, offering complete ICT services, would be appealing to trust seekers. It would include 20 Mb/s SDSL connectivity, security, fully-managed IP VPN, SaaS solutions for ERP/collaboration tools, and hosted servers. This pack age should also include the provision and maintenance of a desktop/ laptop equipped with office applications (Exhibit 2). The high-end ICT package would be the offer of choice for best-technology seekers, as it provides the fiber access, managed IP VPN with Web conferencing services and remote access solution, server hosting, and disaster recovery solutions that are important to this segment.

online. Call centers, while still important in the information gathering phase, fall to the bottom of the channel list when it comes to actual sales. For 48 percent, most product categories are purchased through two to three channels. Another 22 percent prefer a distinct channel for each of their ICT product categories. Only 30 percent would rather purchase all of their ICT products and services through a single channel. This preference for a multichannel approach holds true for all SMBs, but the exact composition of this channel mix varies by needs-based segment (Exhibit 3). When engaging with field sales reps or visiting a retail store, SMBs are essentially seeking advice and expertise to help them select the ICT solution that best fits their needs. When looking for information or purchasing online, they expect to find a simple Web site, offering a menu of possible ICT solutions and straightforward explanations. Unsurprisingly, cautious relationship seekers show the strongest desire for a single channel (47 percent) and prefer field sales. No-frills SMBs share this preference, expecting that reps would typically have more flexibility in pricing than a store manager would and that the online channel would afford them no flexibility at all. Meanwhile, service seekers and best-technology seekers

3. Developing a go-to-market model to ensure optimal reach

Having the appropriate standardized product solution is an important prerequisite but it alone is not a sufficient criterion for success in the SMB market. Finding the right interaction mode with customers providing reach at an affordable cost is equally important, since SMBs are geographically dispersed, thus costly to serve. The McKinsey customer survey also revealed that most SMBs prefer purchasing their services via multiple channels, especially through field sales, in stores, and



70% of SMBs prefer multichannel shopping, but mix varies by segment

often perceive field sales reps to be deceptive and unable to deliver the expertise and quality they require. To adequately serve SMBs, telcos should not only apply an integrated multichannel approach (field, store, online, and even call center for information sharing and lead generation), but also ensure that each channel fulfills the customers channel-specific needs. In order to cater to SMB customers most interested in face-to-face interactions, it is important for telcos to ensure that the sales force a) has sufficient ICT expertise to interact with decision makers and b) can adequately cover local markets across a given territory. Building a partnership with one or several local partners (typically value-added resellers or independent medium-sized IT integrators) will complement core telco knowledge with IT capabilities and increase reach with limited fixed cost. For instance, a European telco developed an approach that transformed its own sales force into a network of local partners, each with an exclusive area, within a distribution, commission-based business model. Similarly, to support the sale and delivery of its puesto de trabajo (workspace) offer, Telefnica signed agreements with several partners, including nationwide players such as HP as well as local IT shops (which signed on to a Telefnica-drafted service quality charter).

SMB customers with a preference for online ICT sourcing solutions consistently list very specific requirements for a providers Web site: straightforward, well-structured information and an ICT solution a self-configuration tool where they can specify their IT environment (e.g., number of sites, number of desktops, type of usage, mobility needs) and select different options/packages from a menu. To meet such demand, incumbent telcos should revamp their Web sites, reducing complexity to make the information as self-explanatory as it is comprehensive and staying away from either long lists of features or lengthy and highly technical explanations. Celeste, an attacker focused on the SMB market in France, has such a Web site where customers can choose la carte configurations based on predefined building blocks.

4. Developing an effective communication strategy

Finally, an SMB-targeted ICT strategy requires a significant communication/credibility-building effort. SMBs are often unaware that a telecoms operator might actually have the requisite capability set and expertise to take care of all of their ICT service needs. Consequently, they generally perceive that telcos do not fully understand their unique needs. Telefnicas initiative in Spain is a good example of how a packaged offer (mainly targeted

RECALL No 6 B2B Overlooked and Overshadowed: Growth in ICT Services for SMBs


at SMBs with simple needs), selected local partnerships to ensure local sales and service reach, and an aggressive campaign to create awareness can result in a significant increase in SMBs ICT appetite and openness to a telco as provider, ultimately yielding high revenue growth. In particular, Telefnica launched a series of TV ads consisting of mini real-life work situations that demonstrated how the range of their ICT value propositions could be adapted to the specific context of each SMB (for example, size, type of activity performed by each group of employees, and ICT usage). As a result, when surveyed on their openness to sourcing ICT services from a telco, the percentage of SMBs responding positively is significantly higher in Spain than it is, for example, in France or Germany.

*** ICT services are a clear growth opportunity for telcos. Successful telcos are focusing their efforts on offering these services to SMBs, as this segment is expected to grow faster than its large enterprise counterpart over the next several years. A careful SMB segmentation, segment-specific value propositions, an optimized go-to-market model, and a compelling communication strategy will put telcos on the path to profitably serving this rapidly growing group.

Pierre Gatta is an Associate Principal in McKinseys Paris office. pierre_gatta@mckinsey.com

Rene Langen is a Principal in McKinseys Athens office. rene_langen@mckinsey.com

Giovanni Romero is a Customer Insights Specialist/Marketing in McKinseys London office. giovanni_romero@mckinsey.com

Maximilian Scherr is an Associate Principal in McKinseys Vienna office. maximilian_scherr@mckinsey.com

RECALL No 6 B2B Emerging Market ICT Strategies: One Local Telcos Journey


06 Emerging Market ICT Strategies:

One Local Telcos Journey

Despite their focus on basic services, operators in emerging countries may still realize significant ICT growth and profit margins. Local telco incumbents can shape the markets in these countries by leveraging the experience of players in more developed markets. In an emerging country with average growth rates of 10 percent in ICT (with individual segments growing at rates of approximately 15 percent) and EBIT margins of around 20 percent in areas like data centers, Emerging Market ICT Telco the fictionalized name of an actual local telco incumbent set the aspiration to become a leading ICT player in its home market. To achieve this, it defined a very concrete revenue aspiration for 2010, based on three goals. Goal 1: Capture a 5 percent market share in its focus service areas. Based on the market share that other incumbents have achieved in more developed markets (e.g., 15 percent for T-Systems in Germany, 8 percent for BT Global Services in the UK, 5 to 6 percent each for Telefnica in Spain and France Telecom in France), it became clear that 5 percent was a challenging but also realistic goal. Goal 2: Become the largest domestic telco in the ICT business. Emerging Market ICT Telcos second aspiration was to outpace the 10-percentage-points-above-market growth rates that it anticipated its counterparts would achieve for their ICT businesses. Goal 3: Become the largest domestic IT infrastructure player. Also an ambitious vision, Emerging Market ICT

Telco sought to leverage its current IT infrastructure orientation in pursuit of taking the top domestic infrastructure position.

Staged approach to achieve the aspiration

To analyze market opportunities and select its focus areas, Emerging Market ICT Telco grouped its ICT services into three major areas, based on its own competitive advantages as well as on overall market attractiveness (defined as a mix of market size, growth rates, and profit margins): Natural telco territory, which includes WAN, LAN, and security, is the area that was closest to Emerging Market ICT Telcos DNA and where it was already well positioned in the market, especially in WAN. IT infrastructure ICT, which includes data centers and desktops, was not Emerging Market ICT Telcos home turf, but this area was close enough to its core competencies, as telcos typically need to run heavy IT infrastructurecentric operations to support their own administrative activities (e.g., IT-intensive billing processes). Natural IT provider territory, which includes application management and development as well as business process outsourcing (BPO) though very attractive in terms of growth rates and margins was an area where Emerging Market ICT Telco had a clear disadvantage vs. IT services providers, especially in the most people-intensive areas like application development and system integration.



The defined ICT growth strategy has been validated by the results of a market survey

Drawing lessons from the approach taken by other large telcos to enter the ICT market in developed countries (e.g., Bell Canadas gradual building of leading positions in selected ICT areas from 2000 to 2005), the decision was made to first enter those areas closest to its core capabilities and then move into other areas. Dominate the natural telco territory by offering LAN services and climbing up the value chain toward higher value-added services, typically with managed WAN and end-to-end security offers. Address the IT infrastructure ICT market by focusing on data centers and offering desktop outsourcing as part of larger deals. Desktops were not a focus area, but avoiding this area was not an option, as large outsourcing deals typically include desktops. Expand into selected topics within the IT provider territory by offering basic application operations and application management and looking for a handful of cherry-picked opportunities in BPO. The viability of this three-staged approach was confirmed by research showing that IT managers from some of the largest corporations in the country would turn to

telcos to provide ICT services mainly in WAN, LAN, call centers, and data centers (Exhibit 1).

Major gaps and the approach to overcoming them

While Emerging Market ICT Telco could obviously build on some of its core skills to deliver on its ICT expansion strategy, an in-depth capability assessment revealed a number of skill gaps on the way to achieving its revenue aspiration for 2010. As shown in Exhibit 2, specific gaps existed in LAN, security, and data centers; in applications, it didnt have any relevant skills. First, Emerging Market ICT Telco brought key outsourced IT operations back in-house in order to build its skill set and to give credibility to the ICT business as well. It also focused on selected accounts (i.e., leveraging existing client relationships from the traditional TC business) to further grow in WAN and data center services. Second, Emerging Market ICT Telco added selected capabilities and skills (e.g., through recruiting) as needed to provide more value-added services (VAS) to new and existing customers. The capture of a few large outsourcing contracts (again, leveraging existing customer

RECALL No 6 B2B Emerging Market ICT Strategies: One Local Telcos Journey



Assessing skills and exposing gaps is key to an ICT ambition

relationships from the traditional TC business) was needed to provide credible reference cases. Finally, the operator considered inorganic moves with the acquisitions of both small and medium-sized companies to achieve its growth aspiration. In selecting prospective target companies, Emerging Market ICT Telco employed a very rigorous, multistage filtering process that prioritized the targets based not only on their willingness to sell but also on their focus on the selected relevant service areas.

to large corporate customers more complex and potentially accelerating TC commoditization (as own ICT unit would typically adopt integrator posture). The latter choice which was eventually preferred by Emerging Market ICT Telcos management implied greater change to the existing organizational format and would require significant management attention to ensure that the new entity, where legacy TC was obviously dominant, would push ICT with the same effort and dedication. However, it would also allow them to design and deliver integrated end-to-end value propositions to corporate customers, leveraging existing relationships and yielding maximum long-term value from the ICT lines of business. Regardless of the organizational structure chosen, to successfully implement the ICT strategy, Emerging Market ICT Telco identified six important activities (Exhibit 3). The first involves its management and leadership, which required it to establish a strong position as an IT services expert. In terms of governance and organization issues, managers had to develop a detailed organization model and select service industry-adapted financial key performance indicators, namely the EBIT vs. EBITDA measures generally used in TC business. Regarding acquisitions, in order to quickly gain scale,

Organizing for success

In choosing the best organizational structure for the new ICT business, Emerging Market ICT Telcos managers had two viable options: either create separate business units for ICT and TC services or integrate them within a corporate client business unit. The former option would have the benefit of imposing minimal change on the existing structure and ensuring a stronger focus on ICT critical in the early business building phase. Following that path, however, the telco would run the risk of creating sales conflicts between TC and ICT sales forces, making integrated proposals



A diverse set of levers was identified to reach the 2010 revenue aspiration

Emerging Market ICT Telco needed to acquire one or more small or medium-sized companies and prepare to manage post-merger integration issues. It even had to develop new capabilities in project and risk management as well as specific technical skills and value-based sales expertise. Emerging Market ICT Telcos go-tomarket approach also changed, as it began to develop ICT-focused sales knowledge and relationships and evolves its sales model toward higher value-added services. Finally, operations, or the operational elements of an ICT factory, required a more agile and dynamic approach to delivering solutions, a focus on ensuring the profitable delivery of complex projects, and the need to identify and interact effectively with a network of partners. To successfully conduct this transformation, a dedicated structure was set up with a strong project management

office, ensuring rigorous progress monitoring, adequate pacing, and the staffing of key initiatives with the most talented people. Additionally, top management committed significant time to the transformation and led broad communication to ensure that the new ICT posture was well understood across all operational teams. *** Very attractive opportunities can be captured by telcos in emerging markets, as these companies are often in the advantageous position of being able to shape new ICT demand. Following a staged approach, identifying and addressing skills gaps, and designing an appropriate organizational structure can mean hefty growth and limited competition from large international players.

RECALL No 6 B2B Emerging Market ICT Strategies: One Local Telcos Journey


Rodrigo Diehl is an Engagement Manager in McKinseys Munich office. rodrigo_diehl@mckinsey.com

Paulo Fernandes is a Principal in McKinseys So Paulo office. paulo_fernandes@mckinsey.com

Pierre Gatta is an Associate Principal in McKinseys Paris office. pierre_gatta@mckinsey.com

RECALL No 6 B2B Maintaining Course: B2B Performance Management


07 Maintaining Course:

B2B Performance Management

You can only manage, what you can measure. Without the right set of key performance indicators (KPIs), even the most realistic aspirations are impossible to achieve. Five simple rules help to ensure that the telco maintains its path toward B2B value creation. In a recent survey, the University of St. Gallen asked top executives of the FT Europe Top 500 companies about their three priority projects to improve management capabilities. Only 20 percent answered that they had launched projects to further develop their management support systems with a focus not only on improving data quality within the systems, but also on aligning the reporting to the new strategic goals. Much too rarely do organizations find time to adjust KPIs and incentives based on their conformity with strategy and the most optimal way to support business goals. Aiming at ambitious revenue growth, for example, but holding on to the old, absolute expense targets simply does not work. Beyond these mismatches, other reasons for failure are overly complex targets that are difficult to understand and the presence of corrupt data in KPI calculations. Telecoms organizations that have their own sales and production units can apply five rules to manage their B2B performance and, ultimately, support value creation.

profitabilities. This has led to a unit/country/customer segment internal optimization that often contradicts the overall business goals. For example, incentivized with a profitability target, the delivery profit center aims at maximizing its charging on customer contracts for which it gets paid by the sales unit. With minimized delivery cost, this increases the individual delivery units profit. High charging on customer contracts on the other hand reduces the profit generated by the sales unit and thereby might lead to misguided business decisions. To foster a collaborative environment in which sales and delivery units work hand in hand, a centrally-managed, company-wide profit and loss statement (P&L) should be established. In this new framework, the sales and service units would then directly affect items such as revenues and selling expenses and indirectly impact the general and administrative (G&A) expenses. On the other side, the delivery units would directly impact the material and production cost and have an indirect influence on their part of the G&A expenses (Exhibit 1). This type of joint responsibility for profitability of the operator provides for a more integrated business management along two core dimensions: 1) the customer dimension, which allows steering the customer/contract via its profitability and 2) the product dimension, which among other things, helps to bring profitability issues along various product categories to the surface. Centrally-managed profitability makes sense even cross-country in the case of similar business mixes and global delivery, especially given the fact that more and more global customers are emerging. By looking into the

Establish a centrally-managed P&L

To focus the business on profitability, companies have often derived unit/country/customer segment-specific profitability calculations, i.e., designed the delivery unit as profit center or (in times of global delivery) continued to steer different country operations with individual



Sales and delivery share responsibility for overall profitability

steering logic of big telco/ICT players across Europe and Asia, we learned that most of them have established this type of joint profit responsibility. Depending on the customer segment served, there might be preferences for which steering dimension should be primary. The customer dimension is often used as the primary dimension for the enterprise segment, whereas SMB activity is often steered via the product dimension. Most valuable for all steering purposes is when the product dimension can be directly translated to the customer dimension, requiring high data transparency and quality.

profitabilities of the various services via an EBITDA measure would be unfair due to the relatively high capex portion of TC vs. ICT vs. IT services. By taking EBIT (and its margins) instead of EBITDA as the KPI of choice, depreciation effects would not be taken into account and the services can be more accurately compared (Exhibit 2). Fifty percent of the TC/ICT companies we studied have adjusted their measurements and are using EBIT for internal decision making. EBITDA, however, still remains their official, publically-reported KPI.

Switch from EBITDA to EBIT

Large investments into network infrastructure were the base for todays successful telco business. Due to the ensuing high depreciation, EBITDA has been established as a key measure in telecommunications. More recently, based on their heavy internal IT needs and capabilities, many telcos have started to enlarge their portfolio to offer IT services (leading to a convergence of IT and TC services into ICT services) whose investment needs are significantly lower. Based on these developments, the classical telco steering logic should be adjusted. Specifically, comparing the

Manage the operating business by focusing on gross profit margin

In general, it works best not to steer via absolute targets but rather according to relative margin targets. In sales, for example, it does not make sense to keep the sales force number constant (and therewith the selling expense cost) if an increase in numbers might mean the opportunity to achieve greater revenue growth and better profit margins. Assigning the sales unit a selling expense margin target allows them to achieve the desired revenues while still maintaining control of the selling expenses. Setting the gross profit margin as a KPI will ensure cooperation between the sales and delivery units and

RECALL No 6 B2B Maintaining Course: B2B Performance Management



In the ICT realm, EBIT is more indicative of performance than EBITDA

maximize value for the company (Exhibit 3). Whereas sales tries to optimize revenue and order entry, the delivery units will seek to optimize the cost of goods sold (including material and production cost) by, for example, optimizing their make or buy decisions or by considering global sourcing. Having the delivery units incentivized against a gross profit margin target would ensure that only those services would be offered that can be delivered at a cost that meets the gross profit target.

Depending on the strategic focus of the company, it might make sense to promote certain business or service types. KPIs such as share of new business order entry will support the respective sales push objectives. McKinseys research into the efforts of several telcos also indicates that the number of KPIs for one function should be somewhere between five and ten. This ensures enough targets to keep the business on track but no more than can be realistically addressed.

Derive five to ten more KPIs from strategy/ business pain points
To optimize value generation, additional KPIs should be set to cover all key levers of value creation. For sales cost efficiency, setting the right sales cost margin target will encourage the sales units to deploy their forces in value-maximizing ways, reducing sales structures where possible, but not to an extent that risks losing revenue opportunities. Our observations of telcos point to the fact that defining sales cost margins on a sales segment level leads to productive discussions on determining the appropriate market segment/customer focus. Beyond financial indicators, nonfinancial KPIs (e.g., a win rate for deal-based business) should be set to further support pulling the revenue generation lever.

Adjust steering and communicate

The envisioned impact will, of course, only materialize if a consistent set of targets and metrics is used in all activities from strategic planning to budgeting to regular performance reviews. The KPIs should cover all necessary levers to steer the business toward value, and any changes to this set of indicators should be carefully considered. Once the steering logic has been defined, the KPIs should be clearly communicated either in specific performance reports or as part of the general communication of strategic goals. We have even seen examples of the CFO publishing a short letter in the internal newsletter detailing the key pillars of the new steering logic and explaining their necessity.



Gross profit margin becomes key KPI for project management

Finally, top management buy-in is key to establishing and living the described steering logic. The CFO has to be accountable for the overall steering logic definition, the execution process, and for fact-based and independent insights to drive the performance management system. The chief strategy officers responsibility is to drive the strategy discussion as well as to ensure its coupling to plans, budgets, and targets. Last but not least, the commitment of the CEO/management and willingness to role model are vital to this change.

*** The new strategies, transformation objectives, or growth ambitions that telcos embark upon will only materialize if incentives are set to support these goals and if KPIs are in place to keep performance on course. Industry observations have demonstrated that a well-defined steering logic is necessary to transmit goals into all corners of the organization and cause all involved to act in concert along a set of levers that leads to behavioral change.

Iris Kornacker is an Associate Principal in McKinseys Vienna office. iris_kornacker@mckinsey.com

RECALL No 6 B2B The One-Stop Shop Meeting More of Your Customers Needs


08 The One-Stop Shop

Meeting More of Your Customers Needs

An interview with Joachim A. Langmack, T-Systems Chief Sales & Service Officer

T-Systems is the business customer brand of Deutsche Telekom. With about 56,500 employees, this division offers integrated ICT solutions from a single source. Joachim A. Langmack began his career at IBM Germany and has since held a variety of management positions in business and consulting. He became T-Systems Chief Sales & Service Officer in February 2008 and is responsible for a EUR 9 billion enterprise business. McKINSEY: Deutsche Telekom is, at its heart, a telecommunications company. What are the advantages of providing IT services as well? JOACHIM A. LANGMACK: The advantage in offering IT applications maintenance and integration services in addition to network services is that we can provide end-to-end services. This lowers the total cost of ownership for our customers. The creation of our ICT factory integrated the TC, desktop, and computing services factories under a single, overarching monitoring and customer support process, improving the quality of our customer support. For a customer it is not important whether it is the WAN, the router, or the data center that causes the issue. What matters is that it gets resolved quickly end to end. McKINSEY: Does your ICT factory have implications beyond incident management and disaster recovery? JOACHIM A. LANGMACK: Certainly. T-Systems is also a global leader for SAP applications outsourcing, and we have a large systems integration business with strong SAP integration expertise. Combining our applications

integration with our operations know-how gives us the ability to help our customers design their entire applications landscape. Our combined applications-operations point of view saves costs for our customers. McKINSEY: There has been talk about how to improve the offshoring of Deutsche Telekoms/T-Systems systems integration business. How are you addressing this issue? JOACHIM A. LANGMACK: From our perspective, we have already addressed those questions via our partnership with Cognizant. The collaboration means that we are combining our relational network and process know-how especially in the automotive sector with Cognizants tools, processes, and Indian offshoring capabilities. This allows us to provide joint offerings for our customers. McKINSEY: T-Systems is still a company with a very apparent German foundation. How do you address internationalization? How do you serve large global accounts? JOACHIM A. LANGMACK: We are indeed an ICT service provider with deep roots in Europe, but our global footprint is quite large. T-Systems is among the top three leading global IT players in the automotive sector, and were number one in Western Europe. This is largely due to our Daimler and Volkswagen roots. One of our key growth areas is international ICT outsourcing deals. In fact, we recently won a global hosting deal with Shell. McKINSEY: Congratulations. What would you say were the key factors in the success of your bid with Shell?


JOACHIM A. LANGMACK: Actually, our global footprint strategy fit perfectly with Shells global delivery requirements. The end-to-end value proposition of our global ICT factory that I spoke about earlier was also very compelling. McKINSEY: Lets step back from T-Systems in particular and look at the developments in the enterprise telecommunications market in general. Telcos worldwide have begun moving into the IT and ICT area. Is this is a good idea across the board? JOACHIM A. LANGMACK: In many mature markets, TC revenues are flat and margins are going down, whereas the IT market is growing, making ICT an attractive growth area for telcos. But, growth rates and margins vary significantly between IT segments. For example, in platform-based IT services, margins are typically very attractive, whereas desktop field services in countries with high people costs are usually unattractive. Any telco considering this move needs to carefully select the segments it wants to enter. Also, some IT services, like ICT infrastructure services, are closer to the competences of a telecoms operator than others, like applications integration services. McKINSEY: From your perspective, what are the most important influences on the enterprise ICT market? JOACHIM A. LANGMACK: First of all, were observing the growing importance of the public sector as a buyer of ICT services. The public sector is one of our focus sectors for industry-specific applications right up there with the automotive, telco, and finance sectors. Another major influence is climate change, and here an ICT company has three levers to optimize greenhouse gas emissions. First, it can reduce its own footprint by reducing travel or optimizing its data centers for energy efficiency. Second, it can create greener ICT solutions for customers by, for example, increasing the utilization of data centers, using renewable energies, or optimizing applications that reduce operating costs and energy

consumption. Finally, it can help its customers industry and public sector to substantially reduce their greenhouse gas footprints. Toll collection/congestion charging, smart metering, and making greater use of telepresence facilities are just a few examples. McKINSEY: Are any advances in technology shaping trends in the market? JOACHIM A. LANGMACK: Yes, cloud computing. IT and telecommunications are developing into services that customers can access via networks on demand. For us, this means renting hardware and software as well as bandwidths to our customers at defined service levels. We can adjust these components on a daily basis according to demand. We call it Dynamic Services, and this has been a reality for us for three years now. McKINSEY: What lessons have you learned given T-Systems depth of experience in the ICT services arena? JOACHIM A. LANGMACK: From a telco point of view, it is important to determine whether you want to be primarily a consumer company (maybe with mid-market business) or a relevant player in the enterprise market. If you decide upon the latter you need to be fully aware of the implications. You need to understand and have experience in the ICT arena; you need people with a DNA different from your own; you need deal makers; and, you definitely need a different steering logic. This means a focus on EBIT as opposed to one on EBITDA. I foresee major consolidation moves ahead, especially in Europe where we have many local and regional players. Where a telco ends up in the M&A game will depend on how strategically sound its growth ambitions are and how well it manages its performance. *** Mr. Langmack was interviewed by Claudia Funke, a Director in McKinseys Munich office.

RECALL No 6 B2B Appendix


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

RECALL No 6 B2B Appendix


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.

Telecommunications Practice 2008 Copyright McKinsey & Company, Inc.