Telecom Operators in Europe have to Drastically Change their Cost-Reduction Strategies in Order to Survive, Finds AlixPartners Survey

As cost pressures drive a wave of M&A, operators need to cut costs by up to 100 billion euros

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| Source: AlixPartners

NEW YORK, Feb. 19, 2014 (GLOBE NEWSWIRE) -- Although significant progress has been made by telecommunications companies in Europe in rationalizing their operational models, transformative cost reduction programs, of up to 100 billion euros in total, are required if industry players, including their international parent companies, are to survive and return to a sustainable growth trajectory. This is according to a new AlixPartners study and C-level survey on cost and profitability in the sector, which is published on the eve of the Mobile World Congress in Barcelona.

The challenges facing the industry loom large in 2014, a year in which many experts expect to see a fifth consecutive revenue decline for telcos in Europe. The AlixPartners 2014 EMEA Telecoms Executive Survey on Cost and Profitability Imperatives, which interviewed a representative panel of senior telecom executives across France, Germany, Italy and the UK, finds that, although cost reduction opportunities in the sector are great, the best intentions of executives are not often reflected in the end results. The study proposes that, in order to return to a competitive footing globally, operators need to go beyond their current strategies of tactical and incremental cost cutting and instead pursue a transformative approach to achieve sustainable cost reduction and foster the necessary conditions for their other strategic priority, revenue growth.

Today, however, the stark reality is that companies are simply not doing enough in either area and the AlixPartners survey highlights a fundamental tension in chief executives' attitudes to cost reduction. While some 60% of respondents said they would like to adopt "radical" cost-cutting methods, over two-thirds (67%) admitted that their companies' approaches to cost reduction had not notably changed over the past five years suggesting that, companies are failing to deliver significant transformation despite strong support in the boardroom.

The stakes have never been higher for companies in this sector, says the study. European telecom operators are not only up against low financial returns but also a complex mix of structural, strategic and regulatory pressures - all likely contributing to increased M &A activity, with major deals in 2013 such as Vodafone/Verizon, Vodafone/KDG and America Movil/KPN, and many other deals now ongoing (e.g., Vodafone/Ono in Spain, Bouygues/SFR in France and Vodafone/Kabel Deutschland in Germany).

In today's low-growth environment, according to the study, telco CEOs are facing unprecedented pressures on their operating costs. At the same time, 56% of those surveyed anticipated that their funding needs for infrastructure investment, such as next-generation 4G technology, would increase whereas only a third expected healthy returns on invested capital (ROIC) from their investments in mobile and fixed-data services. The severe market view therefore seems to be shared by executives themselves who, worryingly, seem to lack confidence in their own capacity to generate healthy returns, hardly a reassuring sign for investors.

A vast majority of executives in the survey are determined to take action to curb revenue declines, as 95% stated that their company had approved or planned a cost reduction project for the next 12 to 18 months, with network upgrades, product reviews and strategic reviews of countries listed as top priorities. Yet, their poor track record in executing such plans, added to the current turbulence within the sector, should be cause for scepticism, says the study. The survey shows that the failure of traditional tools (incremental cost-reduction schemes, basic efficiency plans, etc.) can be at least partly explained by a lack of persistence and follow-through in their implementation, with 43% of respondents saying that previously such programs did not reach completion due to other projects taking priority.

Caught between the rock of an unconvincing record in driving substantial operational change and the hard place of current pressures on business models resulting from the fiercely competitive market, telecom operators appear to be paralysed by the complexity of the challenge ahead, says the study, and they must learn to navigate these rough waters in order to avoid being swept away.

From its research as well as its industrial experience and expertise, AlixPartners recommends the following guidelines to telcos, regardless of the region in which they operate, to help achieve true transformation in their business models:

  1. Telcos have to know their "destination" -- understanding in detail their cost base by network, service offering and market sector, and setting performance goals based on a detailed and forward-looking analysis that takes into account where the industry cost levels need to be a few years ahead to remain fully competitive.
  2. They must challenge the fundamentals of their business models. Tactical or incremental cost improvements are not enough to avoid a "Titanic" scenario. They must chart a transformative path to remove complexity from their business models in order to face the various challenges of the years ahead: broadband, content, digital, etc. And they must seek to leverage step-changes in systems and architecture.
  3. Above all, change must be driven as an imperative by top management, through a strong, future-oriented corporate vision that drives alignment combined with high CEO visibility and close management of the cost reduction program by a strong and experienced PMO (project management office).

"Our executive survey sheds light on the immense challenges facing telecom operators today, not only in Europe but in North America as well," said Karl Roberts, managing director at AlixPartners and co-lead of the firm's global TMT (telecommunications-media-technology) Practice. "In order to stem the tide of revenue and cost challenges, companies must admit the difficult truth that their business models need to be fundamentally redesigned and further simplified. Time is of the essence: Our findings come at a time when cross-continental mergers as well as tactical divestments are gathering steam, with the potential to radically alter the industry landscape in the not-too-distant future."

About AlixPartners

AlixPartners is a leading global business-advisory firm of results-oriented professionals who specialise in creating value and restoring performance at every stage of the business lifecycle. We thrive on our ability to make a difference in high-impact situations and deliver sustainable, bottom-line results. The firm's expertise covers a wide range of businesses and industries whether they are healthy, challenged or distressed. Since 1981, we have taken a unique, small-team, action-oriented approach to helping corporate boards and management, law firms, investment banks and investors respond to critical business issues. For more information, visite www.alixpartners.com.

Tim Yost
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