14 November 2024
Vincenzo Basile and Fabio Bianchi, Arthur D. Little
Telcos face a key business challenge – greater competition is bringing down revenues while they are under pressure to invest more to meet customer needs. Over the long term, this is financially unsustainable. Essentially, traditional telco efficiency programs that focus only on cost reduction through analyzing costs and budgets, redesigning processes, and adopting automation are no longer enough in a next-generation world. How can telcos reshape investment to meet changing needs, wherever in the world they operate?
Understanding the pressures on operators
Four key factors are widening the gap between revenues and required investment:
- Regulatory pressure
Regulatory interventions are increasing to support various objectives, such as creating more competitive markets with lower customer costs and providing with higher-quality services and experiences. - Growing technology complexity
The rapid evolution of technology is adding new layers and network components, increasing the need for capital expenditure (CAPEX) spending to compete with rivals. - Market hyper-competition
Competition is lowering average revenue per user as operators offer generous deals to attract customers, with consequent low margins reducing resources to reinvest in the network. - Mounting data traffic volumes
Data traffic is constantly growing, due to streaming, 5G devices, and fixed wireless access (FWA). Huge capacity expansions are required to maintain the same quality of service, necessitating higher CAPEX for investments and operating expenditure (OPEX) spending on maintenance.
Taking a new approach to telecoms investment
To bridge the gap, operators need to take a new approach, starting with a focus on new metrics. When prioritizing network investments, operators have traditionally focused on metrics such as speed and coverage, as these are seen as vital to customer retention. Although meeting customer needs is crucial, two other critical key performance indicators (KPIs) are now equally important when making investment decisions:
- Network reliability and quality
Currently, customers are generally satisfied with modern networks that deliver speeds of 50Mbps or higher and offer consistent coverage, so they are unlikely to perceive or value any future improvements. Operators should focus on reliability and quality, shifting from coverage and speed to pursuing network resilience based on achieving operational and infrastructure-led excellence and running service-centric operations. - Network sustainability
The telco sector is seeing an increasing focus on sustainability from stakeholders, including investors and regulators. Operators must therefore ensure that their technology investments support this objective. To deliver this, many telcos have modified their CAPEX appraisal process, for instance, setting aside ring-fenced funds for projects that offer sustainability benefits.
A framework to reshape telecom investment
These factors mean that operators need to put in place a new framework to guide spending to ensure ROI. There should be less emphasis on spending reductions and more on targeting investments geographically and over time. This framework should be built on five levers:
- Geolocated tailored services
Instead of a blanket approach to network CAPEX, operators need to evaluate their spending on a geographical basis, centered on the three KPIs of commercial drivers (population density, GDP and market share), technology drivers (mobile voice, mobile data, fixed line voice and data), and customer experience drivers (complaints and churn).
They must also evaluate their complete service portfolio on a geographical basis to meet the diverse and varied demands of their region. They should tailor the quality of service (including throughput and latency) and the portfolio itself at an access node level (i.e., the mobile site). This analysis should be based on a financial evaluation of required CAPEX/OPEX versus expected revenues generated by the forecast customer base, competition, and customer requirements and expectations at a local level. - Technology transformation
Technology surely drives costs up; however, it can also bring costs down. Automation, AI adoption, and equipment modernization are fundamental levers to speed up processes, reduce operational costs, and improve customer experience. An emphasis on adopting modular, reusable, cloud-native, and AI-ready architectures supports scalability and modernization for both developing and developed markets. - Vendor management
Effectively managing vendors is a classic approach to delivering cost savings. However, often more can be done. Well-structured sourcing and negotiation strategies built on a thorough analysis of strengths, weaknesses, opportunities, and threats (SWOT) should form the foundation of strong vendor management, especially when operators must rebalance costs and revenues. - Infrastructure as a service
Many mobile and fixed operators have implemented physical or virtual company separations, splitting themselves into a network company (NetCo) and a service company (ServCo). The NetCo can generate new revenue streams by offering its infrastructure as a service more widely to other telcos and non-telcos. - Building partnerships
Establishing partnerships with vendors or market players enables operators to create an ecosystem where they can cost-effectively offer a wider portfolio of services to their customers or increase volumes to decrease costs through economies of scale. Opening their network to other companies through APIs allows operators to create an ecosystem where third-party developers and businesses can leverage their infrastructure, leading to increased innovation, expanded service offerings, and enhanced customer experiences.
A next-generation approach to telecom investment
Telcos need to rethink their business models and quickly adopt a new, bottom-up, data-driven framework to address the widening gap between stagnant revenues and increasing investments. That means they need to take a more holistic approach, built from the bottom up and focused on local needs. This will enable them to stay within budgets, better manage costs and deliver for customers.
