You Cannot Manage What You do not Measure

The adage that we cannot manage what we cannot measure is fair enough. So is the adage that "you get what you inspect, not what you expect."

Different eras in the connectivity business tend to bring distinct concepts and terms to the fore, and the changes in terminology reflect new business issues as much as efforts to measure progress in meaningful ways or enhance perceived firm value. 

Prior to the 1980s, a public company’s value might more often be stated in terms of equity valuation. Two decades later, “enterprise value” was more common--and useful--for startups and potential acquisition targets. Enterprise value is equity value plus debt, and provides a snapshot fo the price to acquire a firm. 

In the 1980s, “revenue per line” still  made good sense for consumer accounts. Most lines were producing revenue and revenue per account was still simple: voice only, and one line per house. Simply, consumer “revenue per line” and “revenue per account” were virtually identical. 

None of that makes sense in any market where serious facilities-based competition exists. 

Twenty years later, that metric was not useful. There was a significant difference between deployed assets and take rates: an active line passing a location might, or might not, have a paying customer. So “revenue per line” and “revenue per account” were no longer comparable. 

After U.S. cable companies started selling broadband access and voice, while telcos sold video entertainment and broadband, matters were even more complicated. A single house might buy voice, video entertainment or broadband, in any combination. 

Revenue contribution per product, and profit margin per product were distinct. Also, the question of how to define revenue contribution from any single location became complicated. So the concept of “revenue generating unit” arose. A house buying two services represented two RGUs. 

That concept replaced the concept of counting “subscribers.” RGU is a measure of units sold; a subscriber is an account. 

Similar issues arose with the concept of average revenue per user, in the mobile business especially, when the majority of accounts served multiple users on the same account. Average revenue per account and ARPU diverged. 

In the business segment, as competitive local exchange carriers emerged, upstarts wanted some way to describe sales in ways that generated larger numbers, since sales were often largely T-1 data lines. So the concept of the “voice grade equivalent” arose, representing the virtual number of voice grade circuits sold, at 64 kbps each. So a single T-1 line represented 24 VGUs. 

Undersea networks and other long-haul transport networks use dark fiber and lit fiber as metrics. 

Now Telstra uses a metric called “transacting minimum monthly commitment” (TMMC). It applies to postpaid mobile accounts.  TMMC is regarded as a lead indicator of ARPU trends, since actual ARPU might vary based on roaming revenue, handset revenue and out-of-bundle revenue. 

TMMC might be considered a measure of service contract value. 

The point is that new metrics reflect changes in the core business. Deploying lines or capacity is different from sales of capacity. Accounts and units sold are different. Revenue for products varies, as does profit margin. Contract value provides insight in a way that total revenues might not. 

Nearly all changes in terminology reflect changes in business models.

Small Firm Execs Say Work from Home Harmed Productivity

Big firms behave differently than small ones, in almost every respect. Big firms often can support and even benefit from regulations that add cost to running a business. Small firms have almost no ability to leverage regulatory overhead for business advantage. 

Large businesses can survive a significant number of underperforming employees. Few small businesses can do so. 

Some large businesses believe work at home for most employees will not harm productivity. But 45 percent of U.S. small business employers say employee productivity decreased while working from home, according to a survey conducted by Digital. 

source: Digital 

B2B Sales Journeys Now Begin Online

No matter how long a business-to-business sales process takes, perhaps 60 percent to  70 percent of potential business product buyers have conducted research on solutions to their problems before they contact a sales professional.  

In other words, “B2B customers today progress more than 70 percent of the way through the decision-making process before ever engaging a sales representative,” according to some studies.

The B2B sales journey in 2020 began online, using search about 90 percent of the time, according to Forrester Research. Search is involved 90 percent of the time, according to Google.  

In 2020, 80 percent of the average B2B buyer journey took place online, and whatever statistics you choose to believe, online research is a huge part of the buyer journey.  

Though intensified by the pandemic, 96 percent of B2B sales teams have shifted to remote selling, according to McKinsey.

That includes checking a supplier’s website, doing online searches and reading user reviews, according to Marketing Charts. Some 94 percent of all potential business customers conduct online research before making any purchases valued at more than $100,000, for example.  

source: Marketing Charts 

Accenture notes that business buyers also increasingly expect a “consumer online” experience when buying B2B. In 2014, for example, about 40 percent of prospects conduct online research for a majority of goods priced under $10,000, and 31 percent do so at that frequency for goods costing at least $100,000.  

More importantly, perhaps, many B2B transactions take place online as well. 

source: Marketing Charts 

That remained true in 2020. More than half of prospects reported found solutions online. And 70 percent of buyers defined their solutions before they ever contacted a sales professional. 

source: Demand Base 

Work from Home Productivity Less Clear than Many Believe

Work-from-home productivity often is thought to be as good, if not better, than in-office productivity, at least in the short term, and at least for knowledge workers. It is less clear whether productivity for many types of government services has improved. 

source: McKinsey 

It likely is much more complicated and nuanced than that. Business owners, for example, do not share the belief, though employees like it. But such attitudes are not the same as productivity gains. 

And there is some evidence that work from home productivity actually is lower than in-office work.  

According to Microsoft, “when we compare collaboration trends in Microsoft 365 between February 2020 and February 2021:

• Time spent in Microsoft Teams meetings has more than doubled (2.5X) globally and, aside from a holiday dip in December, continues to climb.

• The average meeting is 10 minutes longer, increasing from 35 to 45 minutes.

• The average Teams user is sending 45 percent more chats per week and 42 percent more chats per person after hours, with chats per week still on the rise.

• The number of emails delivered to commercial and education customers in February, when compared to the same month last year, is up by 40.6 billion.¹

• And we’ve seen a 66 percent increase in the number of people working on documents.”

So people spend much more time in meetings than they did when in the office; more time with email and chat; more time working on documents. 

In principle--and assuming one can measure it--productivity increases as output is boosted using the same or fewer inputs. An initiative in Iceland, which has notable low productivity, suggests that service productivity by units of government does not suffer when working hours are reduced. 

To be sure, service sector productivity is devilishly hard to measure, if it can be measured at all. It is hard to measure intangibles. And there is some evidence that satisfaction with public sector services is lower than private services, and substantially lower for many types of government services. 

Productivity is measured in terms of producer efficiency or effectiveness, not buyer or user perception of value. But it is hard to argue that the low perceived quality of government services is unrelated to “productivity.” 

source: McKinsey 

And what can be measured might not be very significant. Non-manufacturing productivity, for example, can be quite low, in comparison to manufacturing levels. 

And there are substantial differences between “services” delivered by private firms--such as airline travel or communications-- and those delivered by government, such as education, or government itself. 

 

The study argues that reductions in work hours per week of up to 12.5 percent had no negative impact on productivity. Methodology always matters, though. 

The studies relied on group interviews--and therefore user self reports--as well as some quantitative inputs such as use of overtime. There is some evidence of how productivity (output) remained the same as hours worked were reduced. 

For public service agencies, shorter working time “maintained or increased productivity and service provision,” the report argues. 

There is perhaps ambiguous quantitative evidence in the report of what was measured or how it was measured. The report says “shifts started slightly later and/or ended earlier.” To the extent that productivity (output) in any services context is affected directly by availability, the key would be the ability to maintain public-facing availability. The report suggests this happened. 

But the report says “offices with regular opening hours closed earlier.” Some might question whether this represents the “same” productivity. Likewise, “in a police station, hours for investigative officers were shortened every other week.” Again, these arguably are input measures, not output measures. 

So long as the defined output levels were maintained, the argument can be made that productivity did not drop, or might formally have increased (same output, fewer inputs). In principle, at least over the short term, it should be possible to maintain public-facing output while reducing working hours. Whether that is sustainable long term might be a different question. 

The report says organizations shortened meetings, cut out unnecessary tasks, and reorganized shift arrangements to maintain expected service levels. Some measures studied were the number of open cases, the percentage of answered calls or the number of invoices entered into the accounting system. 

In other cases the test seemed to have no impact on matters such as traffic tickets issued, marriage and birth licenses processed, call waiting times or cases prosecuted, for example. Some will say that is precisely the point: instances did not change as hours were reduced. 

Virtually all the qualitative reports are about employee benefits such as better work-life balance, though, not output metrics.

Will Enterprise 5G Follow the Traditional Pattern?

Enterprise private networks long have been a lucrative field for system integrators. And that pattern already seems to be emerging for enterprise private 5G networks.

A study by BearingPoint suggests mobile service providers are winning fewer enterprise 5G projects than anticipated a year ago, while the percentage of enterprise “do it yourself” projects also fell short of original expectations. 

Specialized service providers, on the other hand, are winning vastly more deals than expected a year ago. That category includes system integrators and others who specialize in building and operating private networks. 

source: Bearing Point 

Compared to 2020, a BearingPoint analysis of enterprise 5G suggests less optimism about roles for mobile service providers. In 2020, Bearing Point expected 21 percent of enterprise 5G projects would be led by a mobile service provider. This year, that expectation dropped to 16 percent. 

Involvement by mobile service providers as a secondary supplier also dropped from the 2020 estimate of 40 percent to the 2021 projection of 37 percent. 

Enterprise “do it yourself” rose from 20 percent to 32 percent. 

source: BearingPoint

AT&T Divestitures of Warner Media, DirecTV Illustrate Value of a Portfolio Approach

Virtually all analyses of AT&T’s spinning out Warner Media and DirecTV focus on the “back to the core business” implications. Some of us might argue there is a strategic rationale for owning assets as a portfolio, without full control. 

There are many advantages. 

Connectivity providers do not destroy value by insisting every asset contributes directly to the communications revenue stream, products or positioning. If one owned a minority stake in Amazon, Google, Facebook or other assets, one would not insist that those marketplaces, apps or platforms be available “only on our network; only under our brand; only under terms that require buy-through of our other services.” 

Executives are able to grow their businesses as they deem best, unconstrained by mother ship politics or needs. Business leaders often can create greater value faster, as equity multiples are unburdened by connectivity provider valuation metrics. 

Warner Discovery benefits from a pure-play content asset valuation, for example. 

Some companies have made an art form out of holding minority stakes in firms without needing control. In other cases majority ownership also is the case, though an argument can be made that overall value growth (equity value, for example) tends to happen when minority interests are held. 

That portfolio approach arguably makes lots of sense when incumbents seek to expand their growth profiles by moving up the stack into applications, platforms or apps. In a clear sense, AT&T’s spinning out of Warner Media and DirecTV offers some similar advantages.

Merging Warner Media with Discovery gives AT&T a $43 billion cash infusion while removing the asset from its books. But AT&T still will own 70 percent of the new Warner Bros. Discovery asset.

The sale of DirecTV and related video operations to private equity firm TPG raises $7.8 billion in cash, removes the assets from AT&T’s books, but also allows AT&T to retain 71 percent ownership of the asset. 

The move frees AT&T executives to focus on the remaining connectivity core businesses, while retaining exposure to assets that could well produce higher returns than core AT&T. The video entertainment assets generate cash flow, if not equity value growth. 

The point, some of us would argue, is that overall asset value growth, profits and profit margins might arguably be higher using a portfolio approach, compared to retaining all the assets within the communications units. 

For firms such as AT&T that must deleverage, spinning out assets--even if losing control--might well result in greater overall financial value. That might be true even if the original perceived value of full control and ownership was the ability to consolidate revenue, profits and cash flow for the corporate parent. 

True, owning minority stakes in platforms, apps and marketplaces creates overall equity value, but not direct revenue, profit or value for the connectivity unit. But it does create a pathway to diversifying firm value and operations away from strict reliance on connectivity revenue sources.

That might be especially important if one believes the connectivity revenue streams will be under continual pressure, going forward. Many connectivity providers might prefer to say they are something other than “connectivity providers.” 

But doing so has proven to be difficult when new lines of business are forced to operate “inside” the connectivity operation. Let them remain outside. Simply own a portfolio of valuable and growing businesses that complement the connectivity core, without stifling them. If at some point in the future it makes sense to reshuffle assets, missions and roles, that can be done later. 

If one believes the connectivity business will be under pressure in coming decades--struggling to provide value and hence earning high profit margins and gross revenue--then a transition to additional lines of business is essential, as difficult as that might be. 

A portfolio approach has much to offer.

SD-WAN Service Provider Revenue, Though Important, is Smallish

 The SD-WAN infrastructure market has been the larger segment of the SD-WAN market since its inception. Yet, despite its importance for enterprise communications, the market remains small by global standards, representing perhaps $2.5 billion in worldwide sales volume in 2021, according to Markets and Markets.  

source: Verified Market Research 

Others believe the market--managed services and infrastructure sales--was larger: $6 billion in 2020, IDC estimated. 

IDC projects an infrastructure market worth about $4.6 billion in sales by 2022. Globally, that is a relatively small number. That might also imply that the managed services market is less than $2 billion in annual revenues. 

source: IDC 

Some project that service provider sales will be bigger than infrastructure sales in the future, as connectivity provider service revenues have--by some estimates--been bigger than do-it-yourself approaches since 2016. Others would say infrastructure sales are higher than managed service managed service revenues, which might not have reached $1.5 billion in 2020, for example. 

The issue is how much bigger, or how much smaller managed services revenue is, compared to sales of infrastructure.  By some estimates, the managed service portion of the business is nearly the same size as the infrastructure market, which supports both managed and DIY approaches, according to Frost and Sullivan data. 

source: Frost and Sullivan

Basically, SD-WAN is an enterprise networking service that replaces MPLS. So one way of estimating the size of the SD-WAN market is to look at the size of the MPLS market, which might be estimated at no bigger than $32 billion--including infrastructure and managed service approaches--at its peak. 

source: Cisco