Tags Posts tagged with "capex optimisation"

capex optimisation

“A lot of people have been talking about how capex is going to come down with SDN and I’ve said, ‘No, it’s going to stay the same for Verizon’  – Fran Shammo, CFO, Verizon. May 2016

This comment right from the head honcho of one of the largest Telcos in US cannot be taken lightly. Despite lot of talk in the industry about SDN / NFV CAPEX reduction benefits, we’re seeing skeptical questions around smooth transition to virtualization. But I will keep SDN /NFV discussion for some other day. Let us focus on the topic – CAPEX spends. Verizon’s CFO has confirmed its CAPEX spend going to stay, despite network virtualization!

The CAPEX focus could be different for different Telcos. For some Telcos like Verizon, their CAPEX spend mainly focused on future technologies, leading the market, greater customer experience etc. For some other Telcos, their budget constraints force them to think hard and do delicate trade-off between strategical “revenue-growth” projects and tactical maintenance projects to keep up with network growth, retain customers, improve quality of experience etc. With this hard balancing at hand, what if Telcos are equipped with smart tools & methodologies that could help in optimizing their on-going CAPEX? But, is such thing exist? I will get there in a moment. Please bear with me.

First, let us go through few industry trends.  In our recent study from Gartner, we got few interesting insights.

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Here is short summary on the insights:

  • On an average Telco spends 15% – 20% of annual revenue on yearly Capital Expenditure
  • Increase in Capex spends w.r.t revenue (CAPEX Intensity = Capex / Revenue) is not translating into equivalent increase in revenue growth
  • Correlation between CAPEX Intensity and Revenue growth is a weak factor for Telcos mentioned in the regions. This means revenue growth is not linearly correlated with CAPEX spends
  • 5-year flat growth in revenues across geographies is not encouraging. Max 20% 5-year top-line growth in North America region and deep negative for Europe region (-11%)
  • Cost of capital over last decade is higher than RoI on an average across the industry
  • Notable positive point is the margins are maintained in 25 – 35% range across geographies. And it is imperative to maintain this margins to generate free cash to fund next CAPEX cycle but if not completely.

The above stats where CAPEX spends are not reaping substantial revenue growth indicates two major viewpoints:

  1. Strategic capital investments have a slightly long gestation period but not comparable to capital cycles of traditional industries like manufacturing industry.
  2. Bulk of CAPEX go into maintenance projects. That is, to keep-up with current network demand juggernaut, customer retention, quality of service etc.

For instance, a good chunk of leading Tier 1 North American operator’s CAPEX goes into wireless network for densification and getting future ready for 5G deployments. This could be a case for many big Telcos – investing on future technologies. On the contrary, we have also seen majority of Telcos’ CAPEX going in for second type of investment – meeting current network data growth. This is nothing wrong as such and very much required to keep customers happy.

However, if one looks at this fact in light of recent market research findings from one of the big four audit firms, it gives a different perspective. The research reveals that majority of the Telcos not equipped with enough tools or industry best practices to assess the CAPEX spends on projects, evaluate ROI for each such investment and perform sustainable capital allocation. This is a surprising revelation. It simply means that many Telcos are servicing on-going CAPEX without rigorous assessment on actual RoI vs planned RoI, are not taking forward lessons learned from previous CAPEX cycle. Even the Telcos who do have rigorous processes, right incentive structure, accountability of results etc. actually misses a critical point.

What Telcos underestimate?

The critical point is – generally the assets, especially the network assets are viewed from monetary value perspective only in this whole CAPEX scheme of things. The value that can be derived from un-lit or under-used network asset capacities for the CAPEX planned is not given deserved thought or action. This is because of the fundamental reason that financial and network data of assets are lying in silos. This data is never used together to gather useful insights to put the network assets to sweat to furthest possible aligning with ever growing network demand and broader strategic CAPEX – RoI goals. Telcos can do more with their data. It would require collaborative efforts with right partner to unleash the power residing underneath the siloed systems.

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Customer Journey Mapping can provide great insights on how customers see a company from their perspective. Insights that can lead to an improved customer experience, trust and loyalty

In the first blog in this series on customer analytics, the technique of Customer Journey Mapping (CJM) was discussed as a way to follow how customers move from one touch point to the next, and track their emotional well-being during those interactions. In the last blog I described how using a persona to represent a group of customers would allow marketing to get a better understanding of customers. In this blog I will explore how Customer Journey maps can be created for persona to visualize an idealized journey for the group represented. This is now becoming a well-accepted technique for not only improving user experience in software design, but also in the design of products, digital and conventional marketing channels, architecture and many other areas.

There are two basic approaches for creating persona. One is to base the persona on in-depth research of the customers within a market segment, and the other is to base the persona on intuition, sometimes referred to as a provisional persona. In reality, it makes most sense to use a combination of research and intuition, and then verify the persona with those who have front line contact with customers. Generally customers belonging to a company’s biggest market segment would be targeted first and a primary persona is created to represent them. If the team creating the persona do not have direct knowledge of the customers in that segment then they will need to conduct research to understand the values and motivations of the group.

Once a persona has been defined then it’s possible to look at how the company would engage that persona in a sale, and the hope is that the persona would follow each engagement at every touchpoint, even long after they’ve made the purchase and are using the product. The framework for this is known as the Customer Lifecycle. There are many versions of this but they all share some basic stages, as described by Jim Sterne and Matt Cutler in a paper called “E-metrics, business metrics for the new economy

  • Reach: Trying to get the attention of the people we want to reach.
  • Acquisition: Attracting and bringing the reached person into the influence sphere of our organization. 
  • Conversion: When the people we reach or have a more established relationship with, decide to buy something from us.
  • Retention: Trying to keep the customers and trying to sell them more (cross-selling, up-selling).
  • Loyalty: We would like the customer to become more than a customer: a loyal partner and even a ‘brand advocate’ Moments of truth

This can be represented either horizontally or in a circular lifecycle type chart

The Customer Life Cycle – Source: E-Metrics Business Metrics for the New Economy by Jim Sterne and Matt Cutler

The persona journey describes how it’s anticipated that a particular persona would move through the lifecycle. It would describe the channels through which it’s expected they are made aware of a product, how it’s expected they would research the product and what would motivate them to make a decision to buy. Key points in the journey where customers decide whether to continue or abandon the process are known as ‘Moments of Truth’, a term coined by Jan Carlzon, the well-known CEO of SAS Airlines who turned the company around in just a couple of years.

Walking in the customers shoes in this way is not easy, and would normally be done as a workshop with representatives from across an organisation, but it’s an exercise that can provide many useful insights. Service quality gaps, cross channel alignment, ways to better engage customers and align internal teams are just a few of the many benefits that come from journey mapping. When idealised journey maps are compared with the actual journeys that customers take then many preconceived ideas about how customers see and engage with the company may get thrown out and fresh ways to engage, retain and acquire new customers be discovered.

In the next part of this customer analytics based series of blogs I will be looking at the security implications of big data and advanced customer profiling, and how regulators around the world are trying to protect an individual’s right to be treated equally by large corporations.

In my last blog I discussed how different generations are challenging marketing departments to meet them on their own ground. For one key demographic, the Millennials, that ground is the mobile and highly social world in which these digital natives live. For another, the more cost conscious middle aged parents with teenage kids, the battleground is through more conventional channels. However it’s not enough to just choose the right channel for marketing a product. The products, product branding, and marketing language itself needs to be appropriate for those customers as well. Different customers have not only different expectations of the products they use, but also different expectations of the way they like to be told about those products.

The one thing all customers have in common is that they like to be treated as individuals. Individualism is a relatively recent phenomenon in human history, although it could be said to have first really been expressed by Jean-Jacques Rousseau (1712-1778), as Angus Jenkinson identified in his paper ‘Beyond Segmentation’. Rousseau says that truth is subjective, and that traditions and customs must pass the individual’s test ‘can they be authentic for me’. That is a test that consumers increasingly appraise every product with. Can it be authentic for me?

It may seem an impossible challenge to treat every customer in a way which is appropriate to them alone, but there is another approach which can help product designers and marketing departments have a much better understanding of customers, and that is through the use of persona.

The concept of archetypes and persona was formalized early in the 20th century by the Swiss psychologist Carl Jung, but it was the Angus Jenkinson who more recently defined the meaning in a marketing context. Jenkinson suggested that marketing needed to move beyond the top down reductionist approach of segmentation and take a more bottom up approach of grouping customers with similar attitudes and behaviors.

‘segmentation, as normally understood, represents only the first stage in response to the market (individualism) phenomena. It is the first breakdown of the monolithic market into smaller units. It is possible to go further.’

There are definitely strong similarities between the concepts of segmentation and grouping, but there is a fundamental, if subtle difference. It is the difference between gathering individuals into groups, as opposed to dividing the group into segments. As Jenkinson says,

It is much easier to think of developing a relationship with a group (of people) than a segment. How many segments do you personally have a relationship with? Do you want to be part of one? A group connotes…a community of individuals.

Consumers, as individuals tend to gravitate and have loyalty towards something. To change the corporate perception of customers from being part of a segment to being individuals in a group is a fundamental paradigm shift in building customer relationships, and it requires marketers to develop a much more personal understanding of their customers. Marketers have to understand customer goals and frustrations, their values and behaviors. It is with this new understanding of the importance of the individual that the marketing concept of the ‘persona’ has arrived. Personas are ‘model’ characters created to represent all the members of a group. The term persona as used in this context was actually coined in 1999 by Alan Cooper in his seminal book ‘The Inmates Are Running the Asylum’, in which he says that persona, among other benefits,

Provide a human “face” so as to create empathy for the persons represented by the demographics.

Not only do persona models give a detailed account of the emotional needs and values of that group, they often even include a picture of what a typical individual in that group may look like. This is not to say that segmentation is dead. Far from it. Segmentation is still an important tool to help identify the key groups of ideal buyers, but once those groups have been identified then persona need to be created for the segments to give them emotional characteristics and values that they can be identified with. Only by understanding what really motivates customers and providing products that fit in with customer’s lives can marketers grow brand loyalty and trust in a world where the customer is truly king.

In the fourth in this series of customer analytics blogs, Walking in the Customers Shoes, I will be looking at combining the concept of persona with customer journey mapping to understand how to deliver a better customer experience.

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Telecom companies across the board often crisscross their blades with OTT players. While it’s true that Telcos are trying to find sustainable new avenues – few are succeeding, their current-state CAPEX keeps growing at an ever faster clip. This is mainly due to exponential data demand from customers resulting in increasing investments into network to keep up quality customer services. With ubiquitous mobile connectivity and video traffic demand spiraling-out, it puts enormous amount of stress on the networks. Telcos need to continue investing in this consumer trend [current-state CAPEX] and at the same time figure out alternative growth areas [growth CAPEX].

To invest in new avenues with better ROIs, Telcos need to keep close tabs on their CAPEX that goes into network for present growing customer demand. And follow the traditional mantra – keep the current cash flow as cushion and invest for future. But for many Telcos, the worrying part is large chunk of the cash flow generated is ploughed back into network to meet current demands. This leaves little room to focus on new growth areas. Telcos are forced to raise money via debt or other means, resulting in further stress on balance sheet and reduced returns to investors.

Let’s take a look at a snapshot of financial summary of a public listed global telecom major:

[Figures are normalized]

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On a closer inspection of this summary one could observe,

  • The CAPEX has increased significantly (50%), but contributed only marginal increase in operating income (2%) and revenues (10%) over a year.
  • At the end of three year period, the CAPEX investment grew nearly to 20% of annual revenue but the corresponding incremental revenues seen marginal uptick only.
  • Return on Assets came down to single digit despite spending cumulative CAPEX of nearly half of average yearly revenue for this period.

Without undue speculation and with publicly available data, one could do an educated guess: during this period, most of the CAPEX went into supporting & enhancing existing network infrastructure to keep-up quality services.

This picture is not much different from any other typical Telco in the developed or emerging markets. While Telcos try to figure out the next wave of growth, it is equally important to keep a check on the current-state CAPEX.

Telcos have no dearth of information in their siloed systems. It is just that few of these system’s data need to be unleashed to discover insights that can help in reducing CAPEX. For instance, reusing stranded assets in the network, warehouse and spare stores during purchase decisions would reduce CAPEX drastically. This would require deeper analytical insights generation, with collaboration among operation teams within the Telco towards achieving a common goal.

Telecom operators with better equipped analytical tools to gather operational insights and actionable work flows can reduce their on-going CAPEX, draw more mileage from the pan-network assets and derive better return on assets in the network.

Now that’s something that we’ve all heard at our workplace at some point..and believe it or not, its not entirely incorrect.

Traditionally most organizations have been created with a vertical structure having clear demarcation of responsibilities and identified handoff points for communication and information interchange between verticals. This was thought to be the most optimum way of assigning limited resources within the organization while allowing for specialization within verticals. Think of this organization as an architectural structure with three key layers:

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  • Apex of the structure represented by executive management and strategy layer of the organization
  • Pillars represented by different verticals within the organization
  • Strong base represented by organizational infrastructure which acts as a common foundation

While efforts are made by every organization to eliminate ‘silos’ in functioning, the inherent nature of this structure results in unidentified hand-offs, ineffective information sharing during hand-offs and compartmentalized view of processes leading to challenges in measuring, improving and most importantly identifying ownership of cross-functional processes. In many instances, different verticals end up shifting accountability of such cross-functional processes at the expense of progression. The pace at which technology, markets and customer demands are changing in present times demand a level of agility within the organizations to respond and keep pace with the market and competition. This places an enormous stress on the organizational structure, particularly on the handoffs between verticals.

Managing millions of dollars’ worth of Network Capex within a Telco is a cross-functional process which experiences similar issues of ownership, handoffs between verticals and lack of a common, centralized view leading to ineffectual Capex tracking much less calculating effectiveness of these Capex investments or return on investments. Typically, Finance is the identified owner of Capex investments in a Telco but most Finance teams struggle with deployment of Capex in the network and more importantly tracking and calculating the return on network Capex investments as they are heavily reliant on Operations team for this information.

Solving this Network Capex conundrum calls for a two-pronged approach, creating a cross-functional Network Capex Assurance team and enabling a supporting technological component to create a Network Capex Control framework. Lets have a closer look,

Network Capex Assurance Team

A cross-functional team which acts as the owner of Network Capex investments within the Telco – typically lead by the CFO or CTO. This team delivers critical insights and drives actions to enhance capital management practices in all phases of the business and comprises of representation from Finance, Planning, Procurement & SCM, Deployment, Operations and IT. The key responsibilities of this team would comprise of,

  • Custodians of Capex management processes
  • Capex planning and validation
  • Ensure data integrity across supporting systems
  • Capex tracking and analysis
  • Standardization & Reporting

Network Capex Control Framework

network capex frameworkAn enabling technological component which supports the Capex Assurance team in delivering their responsibilities by providing a centralized end-to-end view enabled by Network intelligence. Key insights from the framework would cover,

  • Centralized view
  • Standardized processes
  • Utilization and effectiveness
  • Capex & Opex optimization
  • Insights & Analytics

Enabling strong capital management practices is much more than operational or process changes in the organization; it is a fundamental change in the outlook of an organization. Embracing this change will enable agility, data integrity and measures for optimization, better equipping Telcos to respond to the rate of change in the industry..and that should be everyone’s responsibility!

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The battle is heating up and speeding up in virtually every market. Customers want the newest, latest, greatest handsets, products, and services.  But how long has this battle been heating up, really?  The answer is simple:  Since the 1980’s.  All that has continued to change are the tools used by the operators in the battle.  Let’s examine the latest tools being used in the Americas and understand how that impacts Capex.  The results may be surprising:

In what is arguably the start of the latest rounds of “artillery”, T-Mobile launched free roaming to over 100 countries in 2013, and started attracting customers by the millions away from the likes of AT&T and Verizon.  After the immediate dust settled and the program was seen to actually be viable, AT&T responded with paying the early termination fees for converting subscribers from T-Mobile.  In the process, flat rate plans with expanded data benefited all of us, as T-Mobile and AT&T both offered non-contract based data allotment increases, for no cost (and in many cases, lower costs) to existing subscribers, to shore up their retention numbers.

Verizon has taken a more conservative approach, saying they have the largest 4G network, which has caused AT&T to counter with having the fastest 4G network.  Not to be left behind, T-Mobile responded with offering to roll over unused data, and to unleash attractive unlimited plans via their recently acquired MetroPCS brand.

All the while, Sprint, the last major national carrier in the mix, has been losing market share while “sprinting” to greatly expand their 4G network.  In the recent weeks they have jumped into the market with a very viable message, aimed directly at AT&T and Verizon, to cut subscriber bills in half…literally.  They even took out an ad in the most expensive slot in the world:  The American Super Bowl.  This ad was designed to “apologize” to AT&T and Verizon.  The results of the campaign, however, are not making Sprint apologetic at all:

And now the latest, and perhaps most interesting move, has been the international expansion of some operators into Latin American markets.  The model is simple:  Buy a Latin operator network.  Re-brand it to your internationally known name.  Offer local services that extend all the way into North America.  No roaming or interconnect, and all local calling.  This is a major threat to long-time incumbents in the Latin market, and it’s already happening. Three years ago I was asked what I thought the impact of 4G/LTE would be to the markets.  I made a quite possibly crazy prediction that 4G was going to upset the way we understand roaming and interconnect, simply due to the fact that data, VoIP, and the new products that were going to ride on femtocells and wifi / wimax were going to totally change the playing field.  Could it be that something similar is gathering momentum today?

What is the common thread in all of these battles in the Americas market(s)?  Quite simply, the operator revenues are not growing, or are not growing at the pace to keep up with Capex spend.  Networks are being extended and evolved not to add revenue, but instead to sustain revenue.  Here’s an example:  In the last 24 months I have moved my entire family to 4G.  My bill decreased.  More data was added to my plan.  My bill again decreased.  I then expanded my home DSL to a 30x increase in speed.  My bill stayed flat.  All of this involved more network capacity and expansion in products and services.  But I was not further monetized…I was just retained.

Capex optimization, if pursued for growth, could be considered a great goal and something to strive toward.  However, if Capex optimization is pursued to simply maintain your revenues (and market share), this should no longer be considered a goal, but instead a critical strategy for longer term survival.

So ultimately, how do operators monetize networks?  Perhaps the question needs to be focused on monetizing customers – by turning attention toward strategies that get more share of wallet.  Operators should invest Capex into supporting behavioural shifts in their customers.   Mobile wallet, xBanking, xCommerce, etc, need to be provided as revenue-generating services by the operators, for those customers.  It’s no longer about getting money for network services…it’s now about getting money from supporting a behaviour facilitated by those network services.

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