OPEX improvement: Making the best of a slowdown

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

This initial +4% to +6% (+€15M to +€22M) improvement opportunity would come mostly from four different sources:

1. Overhead adjustments: mostly elimination of redundancies and review / adjustment of existing inflationated organization. Estimated opportunity +€ 9M to +€ 11.5M
2. Commissions optimization, with an estimated opportunity of +€ 3M to +€ 5M, which would assume a 9% to 15% improvement of the commissions paid
3. Customer Care stream-lining and adjustments, with an opportunity of approximately +€ 2M to +€ 3M
4. IT & Network optimization of operations, head-count and review of outsourcing methods

The large buckets of overhead optimization would have two different natures, despite partially related:

1. Redundancies in activities performed by several departments: controlling & reporting and marketing as the most significant ones
2. Overcrowded departments or areas, if compared with other operators and/or if evaluating their outputs.
3. Commercial (Direct & Indirect sales), IT & Billing, and support-staff areas as the most significant ones

Further head-count optimization would probably appear with the stream-lining of the organization and the identification of areas partially outsourced or with potential for outsourcing. Regarding Commissions, the short-term potential large buckets of optimization would come from the optimization of current commissioning system and conditions (currently under-going study):

1. Adjustment of claw-back policies and rigorous application of conditions
2. Re-adjustment of commissioning policies: product based – channel based – etc.
3. Review of commissions to specific segments (e.g SoHo)
4. Commissions improvement based on amounts reduction would probably require agreement with competitors, as current market conditions drive commission levels to current status. Further opportunities based on commissions optimization would require a detailed study and review of the commissions strategy and policies

Customer Service optimization opportunity would mostly come from:

1. Automation of service to low value customers (under-going effort)
2. Enhancement of processes and operations lowering manual activities
3. Improvement in systems, with the goals of lowering back-office activities and operations
4. Automation of activation / provisioning related processes (under-going effort, but systems restrictions faced)

The IT related opportunities are currently under-study, however preliminary hypothesis would locate the major sources of cost reduction in:

1. Head-count optimization
2. Operations and activities optimization, such as, improvement of current outsourcing policies / practices
3. Other, still under-study

Hope it helps. Case any of you need a higher level of detail of this case, don’t hesitate to contact me. Nice reading.
CVA