Consultant Value Added

Following my previous post related to how to improve EBITDA through a cost reduction program, I would like to share our thoughts on what’s maybe one of the sub-topic where most of the cost reduction measures come from: Network operation and maintenance.

Due to prevailing IP networking trend and urgent demand and growth in mobile data services in mature markets, network maintenance has become increasingly complicated. As a result, operators have been forced to shift their operation and maintenance (O&M) focus from equipment to services. This is the case of a Central European operator, source of this business case that is presented in the presentation bellow.

Previously mobile networks transported services via a single medium, which made maintenance more straightforward and simplified. However, due to the gradual transition to broadband networking, more access means have now become available and base station coverage requirements have also become increasingly varied.

Tightening regulatory policies, growing coverage, rising costs, and increasingly varied terminal applications have all contributed to cause greater diversity in regards to access means at the base station level. Given the current trend in the mature markets, the door is now wide open for other possibilities (such as fiber,  microwave, copper wires or the Ethernet) to be used to deliver mobile bearer capabilities. In this case, the operators face the daunting challenge of maintaining and managing various types of bearer media.

On top, varied frequencies and data service requirements of different commercial districts have contributed to the density of base station coverage. As a result, the number of 3G base stations may be twice the number of currently operating 2G base stations in the near future. In the initial stage of 3G construction, 80% of all 3G base stations will be able to share sites with 2G base stations.

Another key learning of the case unveils how the maintenance mechanism should also be able to support both 3G and 2G service bearers. O&M systems are now required to be able to support more complex, but flexible configuration and control of multiple service types, as the OPEX is reduced.

Network O&M cost is generally believed to be 3 to 4 times as high as network building cost. Consequently, the need continually arises for mobile operators to reduce O&M costs. Their first reaction is generally to minimize their O&M workforce through automation and information technologies. However, most operators are hesitant to accept substantial O&M transformation in order to protect their investment and control costs.

Those operators accepting that the network O&M evolution is a progressive process and being able to adapt its processes and tools will gain significant financial upsides. Enjoy the reading.

Best regards, CVA

We recently concluded an interesting and challenging assignment: reducing costs in a mobile telecom operator to improve EBITDA levels in more than 5 percentage points in a 6 months period. As said, extremelly challenging. Why? After more than 6 months of crisis, the most obvious operational inefficiencies in telecom operators have already been wrung out of the system recently. The low-hanging fruit has been picked, and yet more cost savings must be found. There was, in other words, a need for a new, more comprehensive approach to cost containment that looked beyond the obvious and delved deeper into the organization.

mmC Group used a pragmatic -quick-wins driven- unit cost reduction method based on extensive internal and external benchmarks to optimize costs. The methodology ensured ‘dedicated’ client participation and sign-offs on implementable ideas at all senior levels in the client organization. A robust tracking and monitoring mechanism was instituted to ensure systematic implementation and savings accruals to the client.

Savings worth a significant per cent of the addressable cost base were syndicated. Currently, we are assisting the client to implement and institutionalize an ‘internal’ continuous improvement program. Eventually revenue will get a boost as 3G services are adopted by consumers, but for the present and next years, cost optimization will be the way for operators to stay ahead of their game and to sustain long-term innovation capability. Please find next the cost reduction case slides we have prepared for this post. Feel free to ask for additional detail if required.

Enjoy the reading. CVA

Starting the new year, I wanted to look back to my clients’ performance during 2008. As posted before, the financial markets took the telecom markets on a wild ride in the last quarter of 2008 and that clearly affected some of the operators’ performance for which we actually work.

It is hard to avoid the conclusion that size matters in telecom. It is an expensive business (specially in emerging regions such as Africa, Middle east or Asia Pacific); contenders need to be large enough and produce sufficient cash flow to absorb the costs of expanding networks and services that become obsolete seemingly overnight. Transmission systems need to be replaced as frequently as every two years. Big companies that own extensive networks are less reliant on interconnecting with other companies to get calls and data to their final destinations. By contrast, smaller players must pay for interconnection more often in order to finish the job. For little operators hoping to grow big some day, the financial challenges of keeping up with rapid technological change and depreciation can be monumental.

Earnings can be a tricky issue when analyzing telecom companies. Many companies have little or no earnings to speak of. Analysts, as a result, are often forced to turn to measures besides price-earnings ratio to gauge valuation.

Price-to-sales ratio (price/sales) is the probably simplest of the valuation approaches: take the market capitalization of a company and divide it by sales over the past 12 months. No estimates are involved. The lower the ratio, the better. Price/sales is a reasonably effective alternative when evaluating telecom companies that have no earnings; it is also useful in evaluating mature companies.
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As posted in one of my previous posts, the current environment is showing a clear downturn for telecommunication service providers and operators that are currently reporting a relevant deceleration in their client’s average revenues per minute as a result of the significant decrease of the minutes of use of consumption.

How are these operators handling this downturn? One of our clients has recently asked us to support them on improving their EBITDA levels through cost improvement. It has a difficult starting point position: EBITDA margin accounted for 18% of the revenues. The undergoing study is focusing in evaluating EBITDA improvement opportunities based on actionable OPEX reduction, therefore not taking into consideration neither potential revenues enhancement (mix or volume) nor ICX optimization opportunities.

After an initial assessment of four weeks, we found that the actionable OPEX accounted from €130 – 150 Millions in 2009, and EBITDA margin amounted €30 – 40 Millions

• The estimated stand-alone cost-adjustment opportunity would account for an increase of +4% to +8% of the EBITDA margin (€+15M to €+28M)
• An initial +4% to +6% increase from large buckets of opportunities and a further improve of +1% to +2% from the fine-tuning of the operations and detailed stream-lining of the organization

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