In Competitive Markets, Lowest-Cost Provider Wins

In a competitive market, the provider with the lowest operating costs wins, one might argue. And if there is one statement that virtually all contestants might agree upon, it is that, as a rule, the tier one telecom service providers have the highest costs.

Cable companies virtually always have lower overall costs, in both capital and operating areas. Contestants that base their businesses on wholesale access, either mobile or fixed, tend to have lower costs than the companies from which they buy that wholesale access.

Internet-only firms have lower costs than all the above. Of course, that is the easy part. Telecom executives are anything but dumb. They know their cost structures, and those of their competitors.

The practical issues are how to continue wringing costs out of their operations. And that means identifying cost drivers.

European service providers have, for example, been attacking operating costs since at least 1996. And though you might think converting increasingly to IP-based services would wring out cost, in some cases, it might increase operating costs, at least in the customer service area, contrary to expectations.

So where can telcos look for savings? According to researchers at Deloitte, telco operating costs can be classified into three categories. As a figure of merit, “non-process costs” account for 25 to 30 percent of the cost base (35 to 40 percent for wireless carriers).

That includes interconnection fees, taxes, customer premises equipment and uncollectible items. Deloitte researchers think it will be difficult to cut those costs very significantly.

Support processes typically account for 20 to 25 percent of the cost base (15 to 25 percent for wireless carriers), and include marketing, HR, IT, finance and other administrative costs. While savings opportunities may exist in support process areas, most telcos have done a better job of controlling these costs, so far.

Operational processes typically represent about 50 to 55 percent of the cost base (40 to 45 percent for wireless carriers). Those  process costs include customer service, sales, billing, and network-related processes.

It is these costs that carriers are challenged to control as the market changes, and this is where carriers should first focus on finding efficiencies and savings, Deloitte argues.

Network-related process costs (installation and repair, operations, and design) can typically account for 60 to 75 percent of operating expenses. Deloitte argues that 18 percent to 29 percent in savings in two main areas, including reducing dispatches and improving productivity of installation and repair technicians.

Reducing dispatches can save five to eight percent of total network operating expense,
achieved through better screening of tickets to reduce “no-trouble-found” dispatches, improved scheduling to reduce “no-access” dispatches, better management policies to reduce “non-demand” dispatches, and an increase in fi rst-pass resolution of tickets.

Deloitte also has  seen savings of 12 to 18 percent of total network operating expense achieved by increasing the use of “Good Jobs in Eight” (a metric that measures the number of good jobs in eight hours per technician), and moving to a pay-for-performance model.

But it is non-network operations which  can account for 35 to 45 percent of operating expense,
and Deloitte has seen changes in those areas yield 28 to 44 percent in costs. Telcos should focus on non-network operational process areas, such as call centers, field sales, retail stores, and the “order to cash” processes to get savings in those areas.