Managing Mobile Costs

Operational excellence in the mobile communications industry

Market saturation, fierce competition and investors’ expectations are

putting intense pressure on mobile operators. Margins for the mobile
industry are flattening in nearly all regions of the world—for Western
European and some Asian mobile operators, margins have dropped by
nearly 3 percent in recent years. Operators in other regions are experienc-
ing similar decreases. Combine this with price wars in several markets,
and it is clear why operators are shifting their focus to cost management.

In 2002, A.T. Kearney developed be converted into savings realized A three-phased,

the Global Cost Benchmarking (GCB)
framework to help European mobile
operators create cost transparency and
benchmark their costs against industry
competitors. Today, GCB compares
the costs of more than 80 operators
on a yearly basis and has turned into
an industry standard—used by nearly
130 mobile operators during the past
five years. The global operator panel
has expanded with participants from
Asia, Africa and the Americas and
several operators have used GCB to
reduce indirect costs by 20 percent
or more.
Global Cost Benchmarking is
the first part of a larger Operational
Excellence (OPEX)—a three-phased,
integrated cost-management approach
for telecom operators. Results in recent
years demonstrate that on average,
GCB and OPEX together can identify
a 15 to 20 percent efficiency gap in
operational costs. Typically, around 30
to 60 percent of these gaps can then
within two years.
This paper describes the three integrated cost
phases of Operational Excellence.
Each phase can be implemented as management
a stand-alone project or integrated
as part of an overall efficiency-
approach can
improvement program, and is appli- identify a 15
cable to both large multinational
operators and smaller operators. to 20 percent
Create Cost Transparency efficiency gap
The first phase of OPEX is to create
cost transparency by benchmarking in operational
operators from different countries on
a global scale. We use GCB to measure
costs; 30 to 60
the operational efficiency of process- percent savings
related indirect costs that an operator
can influence—including personnel, can be realized
external labor and outsourced activi-
ties. For a complete picture, we also within two years.
analyze revenue figures, direct costs,
capital expenditures and a variety of
key performance indicators. The fol-
lowing offers a brief description of
each step:
 Segment costs. GCB uses an ers, such as gross adds for sales pro- includes detailed cost analyses for
activity-based costing approach to cesses or traffic for network processes. each process and key-performance
guarantee maximum comparisons of A detailed correlation analysis con- indicators for operational efficiency.
operators, allocating each operator’s stantly evaluates and confirms the In addition to the final report, detailed
raw cost data into predefined cost relevance of these cost drivers. “area books” provide sources of infor-
“buckets.” These are described in a Cluster and compare costs. mation for functional managers. All
matrix of more than 140 activities Each operator is benchmarked against operator-specific requirements are
and 16 indirect cost types. 50 to 60 peers. Within a given analy- accommodated in additional individ-
Harmonize costs. To allow for sis, however, the operator’s perfor- ual analyses which provide further
proper comparisons, cost data is mance will only be measured against perspective by using different cost
adjusted for country-specific differ- a “cluster,” or subset of operators that drivers and clusters.
ences (personnel, rental and energy, are the most suitable for comparison. Throughout this process, we
purchasing-power parity, among Clusters will vary depending on the ensure the highest level of confidenti-
others). We use “harmonization” indi- focus. In network analyses, for exam- ality. Every operator receives an anon-
ces calculated based on annual pub- ple, operators are clustered based on ymized report with only its own data
licly available statistical records. For a similar network profile, while in undisguised. Groups in agreement
selected countries, the GCB carries sales and marketing analyses, opera- with their subsidiaries may decide to
out a line-by-line harmonization of tors are clustered based on similar size disclose specifics to all group subsidiar-
external services costs that takes into and market characteristics. ies, permitting best-practice sharing.
account country-specific supplier Document results. Benchmark-
market conditions. ing results are documented in a com- Case study: Creating cost trans-
Normalize costs. Different prehensive final report that includes parency in emerging markets. A large
benchmarking indicators are obtained a one-page overview that highlights mobile operator in an emerging market
by setting the harmonized process critical areas via “traffic light” color rolled out GCB in several of its sub-
costs in proportion to select cost driv- codes (see figure 1). The final report sidiaries. Joint operator–A.T. Kearney

FIGURE 1: Performance gaps by activity (indirect costs)

1.61 0.79 5.58 0.46 9.55 1.66 1.40 0.83 5.77 0.98 10.67 4.56 1.79 0.46 0.53 0.00 0.11 0.04 0.08 N/A 4.35 2.26
Network
(please also Access layer Access layer Access layer Access layer Network Leased lines Microwave Own trans- Network
consider Core layer Value-added
depreciation (engineer) (deploy) (operate) (optimize) services monitoring management links mission lines overhead
dashboard)
0.53 0.04 0.00 0.07 0.77 3.68 0.37 0.00 0.00 0.00 1.56

3.82 0.00 5.42 0.00 0.94 0.70 0.02 0.00 0.26 0.00 3.59 0.76 0.00 N/A 1.30 0.52

Sales Direct Own Sales call Online Manage indirect Manage Wholesale Sales
sales force shops centers channel business channel retail sales overhead
0.09 0.27 0.00 0.00 0.00 0.00 0.00 0.53
Remaining indirect costs1
10.42 3.81 4.92 0.52 0.24 N/A 0.24 0.06 0.12 0.01 1.70 0.74 23.73 12.58 14.08 4.01 3.50 0.00
Marketing
and product Product and Product Wholesale Roaming Inter- M&PD Network LL&MW fees Rental Power
development brand market development marketing connection overhead and depreciation and lease
(MP&D)
1.23 1.78 0.17 0.11 0.00 0.08 0.00 0.00 0.00

0.58 0.00 3.66 0.18 2.78 0.00 10.90 0.00 1.15 0.31 0.50 0.13 19.66 0.00
Customer Marketing/
management Activation Billing Credit and Manage troubles CRM and CM sales/CRM Advertising and
(CM) collection and requests retention overhead advertisements trade marketing
0.00 0.00 0.00 0.00 0.00 0.00 3.11

11.13 0.00 8.93 0.00 4.13 1.19 1.13 0.00 0.98 0.18 3.69 0.34 6.15 0.00
IT
(please also Develop IT Maintain/operate Enterprise IT Internal IT Customer Support and Building
consider IT overhead Bad debt
depreciation applications IT applications infrastructure infrastructure management overhead rental
dashboard)
0.00 1.18 0.95 0.00 0.00 0.00 0.00

1.20 0.39 9.17 2.29 4.28 1.63 1.51 0.38 1.69 0.00 1.97 0.11 0.17 0.00 0.74 0.08 0.77 0.00 1.96 1.00 0.44 0.08 3.13 N/A
Support and
overhead Purchasing Handset Finance and Controlling Facility Human Regulatory Legal Strategy Corporate Internal S&O
(S&O) supply chain accounting management resources communication communication overhead
0.50 0.06 1.16 0.50 0.00 0.62 0.05 0.12 0.43 0.58 0.00 0.71

Deviations 35%–50+% against reference (sliding scale based on volume) Activities with cost performance better than or close to benchmark Total # # Total
spending gap
Deviations 20%–50% against reference (sliding scale based on volume) No performance gap has been calculated
Group share of #
Deviations 5%–30% against benchmark (sliding scale based on volume) total spending

1 Analyzed other indirect costs excluding various small positions, please note Source: A.T. Kearney ‘s Global Cost Benchmarking for Mobile Operators, 2008
that bad debts are shown on the dashboard but not considered as costs
teams worked together to segment
costs, while also holding regular con-
ference calls with people on-site to
guarantee maximum alignment on
segmentation issues. Unlike cases
involving European operators, where
structured cost data is readily available,
operators in many emerging markets
do not yet have such structured data.
Thus, the team had to create alterna-
tives to ensure proper comparisons.
The final results pointed out the cost
inefficiencies, which were resolved by
best-practice sharing as the operator
and its subsidiaries disclosed the results
across the group.
Identify Savings Potential
In the second phase of OPEX, we
analyze cost gaps to identify areas
and activities with the largest savings
potential. Savings can range from
40 to 70 percent of the initial cost-
performance gaps, depending on the
operator and country. Of course, gaps
cannot be translated into savings until
external and strategic factors are also
considered. External factors might
include country- or company-specific
areas that cannot be changed by the
operator, such as payment morale that
affects revenue-assurance and fraud-
management activities. Strategic fac-
tors are typically conscious decisions
that should not be changed, such as
focusing on innovation leadership that
results in higher costs and revenues
for product development and IT.
The process begins with a root-
cause analysis. Workshops are held
with representatives from various
functions to review GCB results and
develop initial hypotheses concerning
performance gaps. These are followed
by more in-depth workshops to iden-
tify the root causes of these gaps and
quantify the savings potential. Figure
2 illustrates typical hypothesis “trees”
used in this phase.
Together, the teams distinguish
addressable from non-addressable
root causes, quantify key deliverables,
develop business models for chosen
initiatives, and interview experts to
assess implementation details. The
initiatives are then prioritized accord-
ing to their business impact and ease
of implementation within a given
timeframe. The sidebar on the follow-
ing page, Managing Results: Local
versus Central, discusses management
options for larger operators.
Case study: Improving profits in
mature markets. A wireless telecom-
services provider in Latin America,
positioned in the premium segment,
was facing increased handset- and
technology-based competition and
higher subsidies requirements, which
together were affecting profit margins.
In a mature market, the company was
forced to cut prices, thus attracting
lower-value customers and further
deteriorating margins. This wireless
FIGURE 2: Hypothesis tree for root-cause analysis (example)
Activity Cost drivers
Third
generation
rollout (3G)
Core layer Network
architecture
consolidations
Deployment
of interprocess
communications
Dark fiber
infrastructure
Sourcing
deployment
Possible reason for high cost identified
company was still in a growth mindset,
ignoring market realities and sticking
with its existing go-to-market model.
Following global cost benchmark-
ing, we developed cost-driver trees,
conducted interviews and workshops
with the executive team and performed
an outside-in expert assessment. The
team identified improvement areas,
quantified the savings potential and
defined key initiatives, which were
supported by a detailed business plan
and implementation “roadmap.”
Overall, the team identified $150
million in savings in operational expen-
ditures across the entire organization.
We developed, validated and agreed
to 10 strategic initiatives that included
26 detailed improvement measures,
and successfully implemented the ini-
tiatives within 10 months.
Design and Implement an
Efficiency-Improvement
Program
In the final phase, OPEX is used
to design and implement a detailed
efficiency-improvement program.
Hypothesis Operator
Number of mobile • Four MSCs with very high capacity
switching centers (MSC)
Higher performance/availability • Targeted quality of operator X, but
exceeding operator Y
of network versus competitors
Utilization of • Utilizing global system for mobile
communications is acceptable
overall network • 3G utilization far under expectations
Higher percentage • No peak traffic issue because of low
of business traffic gives proportion of business customers in
a more pronounced peak subscriber base
Multiple network technologies • Only Alcatel equipment for 2G and 3G
and networks/non-consolidated — Homogeneous network architecture
network architecture
• Engineering in-house, implementation
Use of contractors versus outsourced
in-house resources • MSC operation includes Internet protocol
group in-house
Use of multiple • Only Alcatel
equipment vendors
Source: A.T. Kearney
 getting firm-wide buy-in. Usually,
a cross-functional team, including
Managing Results: Central versus Local
people from strategy and finance, and
Depending on a company’s operating model, the second phase of the OPEX line managers from all functional
approach can be managed either centrally within the group or locally within areas, outlines the savings potential,
the various country-to-country operations. In general, there are three ways and plans and monitors the imple-
multinational operator groups can use the benchmark results to improve their mentation. Regular status meetings
operational efficiency. should be held with the program
Identify gap areas. Results for individual country operations can be aggre-
leader, the steering committee and
gated into a group perspective to identify individual areas where efficiencies are
below industry standards. This creates transparency into group-wide problems,
the board.
allowing for a centralized, consistent approach to closing performance gaps.
Share best practices. Best practices, such as spotting “green” areas or Develop a Cost-Conscious
capabilities in country operations, can be identified, verified and rolled out Culture
to subsidiaries on a global basis. The longer term goal of any opera-
Improve group leverage. Groups can use the relationship between cost tional excellence program is to set the
gaps and cost sharing to evaluate their effectiveness. Activities with a high stage for sustaining cost reductions
group-cost ratio (those pooled in group functions) should have fewer perfor-
over time. This is accomplished by
mance gaps, thanks largely to cost-sharing and economies of scale.
creating a cost-conscious culture,
Case study: Realigning business processes in a competitive market. changing the mindset of sharehold-
To remain competitive in a tough market, a large mobile operator group had to ers, managers and employees. For
cut costs, alter its organizational structure and realign business processes. A GCB example, in our work implement-
analysis prioritized cost-reduction opportunities and generated about 40 hypotheses ing OPEX for a Central European
to improve performance throughout the group and its subsidiaries. The hypotheses operator, a dedicated controller in
ranged from improving marketing and communications cost management to updat- each area was assigned to monitor
ing network transmission technology. Armed with the GCB data, the operator made
implementation and promote cost-
a quick transition from performance gaps to cost savings.
In just four months, we identified hundreds of millions of dollars in potential
consciousness. Simultaneously, the
savings and initiated realignments of key functions, including networks, marketing, company set up a communications
logistics and human resources. network that included all employees,
shareholders and even financial mar-
kets. Companies that underestimate
Here the savings initiatives prioritized is placed on an appropriate communi- the importance of communications
in the second phase are translated cations plan aimed at raising employ- will have a difficult time achieving
into action plans. A strong emphasis ees’ awareness of cost efficiency and true operational excellence.

Authors
Soeren Grabowski is a principal in the Berlin office and can be reached at soeren.grabowski@atkearney.com.
Stefan Detscher is a consultant in the Munich office and can be reached at stefan.detscher@atkearney.com.
Conrad von Lilien-Waldau is a consultant in the Berlin office and can be reached at conrad.von.lilien-waldau@atkearney.com.
Moritz Tybus is a consultant in the Berlin office and can be reached at moritz.tybus@atkearney.com.

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