Forging a new path for European communications service providers

August 2013
“If the news is so good, then why do I feel so bad?” Executives of European communications service providers might be forgiven for uttering such a sentiment, in light of their financial performance over the past few years. Consumers are spending more than ever on technology and communications services, in spite of a soft economy. And future business opportunities seem bright in an age of convergence, as the movement of data and rich applications across networks increasingly characterizes how people live and how work gets done.
But key performance measures for the telecommunications industry are lagging. Metrics such as shareholder performance, revenue growth and positioning for future growth point to a much more fundamental and sustained value erosion in the communications industry. If allowed to continue, such erosion will make these companies much less attractive to investors over time and could threaten the very existence of some industry players.
A new strategic direction is urgently needed. Communications service providers have to do much more than take small strategic steps--such as increasing revenue per user or making incremental gains in some market share.
A key strategy for providers is to increase the breadth of their digital offerings and capabilities, becoming an “integrated digital services provider,” or an IDSP—the supplier of choice for all things digital for consumers as well as for small and medium-sized businesses. By becoming such a company, providers could offer a full range of digital services while also being the platform by which those services are delivered.
How bad is it?
How dire is the economic outlook for communications service providers if they remain on their current path? As illustrated in this chart, the European communications industry lags most industries on both current performance and future positioning, as measured by eight key performance indicators. This is especially true of companies serving mainly mature markets. Our analysis shows that the few providers with a significant presence in both mature and emerging markets outperform their peers on both current performance and future positioning.

Why are service providers struggling? The foremost reason is the shift from all voice to data running over advanced networks. That shift is being accompanied by especially disruptive competition from over-the-top companies that get all of the benefits from using telcos’ infrastructure while bearing none of the costs to build and maintain the vast network that makes these new services possible.
In the convergent marketplace, companies are also dealing with knowledgeable and often impatient customers who want to be connected at all times and who demand fast access to a variety of online services.
How can providers respond to these challenges? One answer is to expand their coverage of the overall communications value chain. However, we believe that could be the wrong move. In most cases, providers do not have the scale or execution capabilities to compete in such areas as creating content, developing devices and aggregating platforms. Building those capabilities would be prohibitively expensive and could undermine any new revenue ultimately generated.
Onward to the future: The coming of the integrated digital services provider
We believe that the better choice for communications service providers is to increase the breadth of their digital options, becoming an IDSP—supplying digital services to consumers as well as businesses. Service providers are well positioned for that kind of horizontal expansion because of their strong customer relationships and extensive customer data, an extensive sales force for business customers, sophisticated customer contact centers and a full set of fixed and mobile networks.
According to preliminary research,¹ companies that broaden and integrate their services in this way can realize substantial improvements in business performance. For example, a communications service provider that offers quad-play services (broadband, TV, phone and wireless) can reduce customer churn by 20 percent to 50 percent. They can also increase revenue-generating units, as up to 50 percent of a typical customer base purchases quad-play when offered.
Six enabling capabilities
The benefits of becoming an IDSP are compelling. To reach that destination, however, a traditional service provider needs to embrace new ways of doing business—and that, in turn, requires new capabilities. Six capabilities are especially critical to making a successful transition to an IDSP:

• Delivering a superior customer experience. To be taken seriously by customers as an IDSP, a company must deliver an engaging and consistent customer experience, with personalized service and offerings across all channels.
  
• Fueling a continuous innovation engine. A company aspiring to become an IDSP must build an innovation execution engine that can help the company tap new revenue sources by getting new offerings into the market quickly—in months, not years.
  
• Creating a collaborative ecosystem. Service providers should resist the urge to “go it alone.” There are thousands, possibly millions, of allies with which companies could work to devise and deliver new over-the-top services.
  
• Increasing operational agility. To maximize profitability, service providers must keep their operating costs as low as possible. Unfortunately, many such companies today are awash in duplication of processes and technologies that reduces efficiency and responsiveness and increases complexity and costs. To boost profitability and overall business performance, service providers need to dramatically simplify their operations.
  
• Transforming digital services. Most of a service provider’s business processes are good candidates for partial or full digitization. By digitizing a process, a company can increase the speed of that process as well as reduce its cost, thus making the business more productive, efficient and responsive.
  
• Forging more customer-centric governance. Communications service providers historically have been product-focused businesses and have created internal silos to support the development, launch and servicing of those products. However, success as an IDSP requires taking a much more customer-centric approach. One important element to making this transition is a formal governance structure that keeps the organization’s daily operations aligned with the overarching customer-centric vision.
  

These six capabilities can have significant, positive impacts on a service provider’s earnings before interest, taxes, depreciation and amortization (EBITDA)— impacts ranging from an improvement of 0.5 percent to 2 percent, based on enhanced customer engagement, stronger innovation and more effective collaboration with partners; to 4 percent to 10 percent for implementing more agile operations and digitizing business processes.
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The situation in which European communications service providers find themselves today is challenging indeed. However, in those challenges are also considerable opportunities to grow and generate stronger future value. The interest in and use of communications- and data-related services by consumers and businesses have never been higher. And even in an era when new entrants and established innovators dominate the headlines, service providers remain highly relevant to most customers. The “pie” of opportunity is growing, and it is time for communications service providers to grab a bigger slice.
Footnotes
1. “Beyond Quad-Play: How Multiscreen, OTT and the Cloud Are Transforming Next-Generation Bundling,” Global Information, September 20, 2012. (Back to story.)

For further reading
To read the full research report on European communications service providers, go to: http://www.accenture.com/us-en/Pages/insight-opportunities-european-communications-providers.aspx