80/20 Rules Apply for Service Provider Capital Investment

For large telcos making capital investments, the "80/20" rule holds, a study suggests. Some 80 percent of the attention goes to decisions that produce less than 20 percent of operating results. 

Conversely, decisions that drive 80 percent to 90 percent of operating results tend to get 10 percent to 20 percent of attention, when capital investment choices are to be made.

Firms that earn more from their capex expenditures typically have proposals justified on the basis of improving performance metrics from existing services or territories, a PwC study has found.

Most of the telecoms executives in the survey distinguish between ‘business-as-usual’ capex and ‘project’ capex (also known as ‘innovation’ or ‘growth’ capex).

But though project capex typically represents just 20 percent to 30 percent of an operator’s total capex, it receives 80 percent to 90 percent of the capex committee’s attention. That is not to say innovation and revenue growth is unimportant. It is to note that capital allocation is failing to pay attention to the 20 percent of decisions that drive at least 80 percent of the financial impact (the “80/20 rule”).

That might seem to run counter to the notion that tier-one telcos must find new revenue sources. It isn’t. It means that the emphasis for capital investment has to be related to actual impact on revenue generation.

The logic is simple enough. A $5 a month swing in revenue has huge impact when the revenue-generating units involved number in the scores of millions, compared to a $5 a month revenue swing on a revenue-generating service involving a hundred thousand units.

In other words, $5 a month incremental revenue on a base of 30 million units generates $150 million a month, or $1.8 billion a year. A $5 a month incremental increase in revenue on a service with 100,000 units generates $500,000 a month, or $6 million a year.

PwC analysed the financial performance of 78 fixed-line, mobile and cable telecoms operators around the world and then surveyed 22 senior telecoms executives from a representative cross-section of companies in terms of size, services, location and financial performance.

“The telecoms industry is at an inflection point ,” a PwC report argues. It’s spending lots

of money on new infrastructure, but it’s not optimizing financial returns. PwC claims “most

telecoms executives admit as much.”