Metrics transformation in
Across the global telecommunications industry, the fast-changing technological, competitive and customer environment is calling for a renewed look at the metrics operators use to measure and report their financial performance.
Why change — and why now?
The changes impacting the industry are pervasive and profound, and occur in several dimensions. Operators’ profitability remains under significant pressure, driven by:
- Rising customer sophistication and demand
- Ongoing price pressures, exacerbated by intensifying competition from over-the-top (OTT) providers
- Regulatory pressures on core service areas
As traditional markets become saturated, the business case for investment by operators is no longer driven by net additions and rising penetration. Many markets are now hyper-penetrated, while churn remains low despite intense pricing pressure.
Yet long-term capex requirements remain high. Future growth opportunities increasingly involve new types of customers, connectivity, use cases and profitability profiles.
Shareholders and analysts increasingly look for new sector growth stories in the wake of infrastructure upgrades.
Operators themselves are squaring up to the challenge of improving their business intelligence capabilities as a catalyst for better decision-making. This requires a more robust set of internal metrics that capitalizes on the wealth of product and customer data they have at their disposal.
New metrics for a new environment
Robust and relevant operational and financial metrics are critical to:
- Support informed decision-making across the industry
- Maintain the credibility and relevance of operators’ reporting and forecasts
- Sustain investors’ confidence
It is vital that the metrics used by the industry keep pace with changing market conditions, business models and service offerings.
It is also important to maintain global consistency in these new and evolving metrics as operators widen their service propositions and investors and regulators demand new insights into addressable markets and end users.
Factors challenging legacy metrics
1. External factors:
- Disruptive competition — OTT and other technology, media and telecommunications (TMT) players are increasingly competing for the same share of the same customer wallet while using different business models and metrics to do so.
- Regulation — Regulation of legacy services puts pressure on incumbents' revenue and profits, while the separation between net companies and service companies is fueling the creation of new types of telco.
- Customer needs — Web services and ongoing device innovation are driving up customers' expectations around price, convenience and value-add.
- Technology evolution — New technology rollouts are vital to support and enhance the customer experience — and long-term national coverage targets are already in place in many markets.
2. Strategic considerations:
- New business models — Business models for core services are changing, with a growing need to communicate new customer usage, revenue and cost considerations as the shift to data continues.
- New services — New service opportunities tend to score poorly when evaluated under legacy financial metrics such as EBITDA. Operators are already restructuring their operations to capture these growth opportunities and have put long-term growth targets in place.
- New stakeholders — Telecoms operators and their networks are now seen by a range of policy-makers, including government, as an engine of productivity growth and national competitiveness.
As such, metrics relating to service and network reach are no longer an indication of competitiveness but a measure of socioeconomic progress.
Key questions for management as they migrate to new metrics
While the industry metrics applied and tracked by operators and investors should ideally be consistent across the world, this does not imply that every operator should use exactly the same ones.
Depending on where and how value is created and the business models used, the choice of metrics will vary for each operator.
As operators and investors evaluate which metrics are most appropriate in each case, telcos’ management teams face a number of questions, such as:
- Which metrics should be used to evaluate profitability in these times of falling EBITDA margins?
- How strong are operators’ financial reporting systems?
- Can the systems deal with the additional measurement and reporting needs created by new business models and services?
- How are operators managing the expectations of the analyst communities and financial markets around revenue and margin erosion, while also outlining new growth agendas?
- In planning and budgeting, should traditional one-year horizons be replaced by two- or three-year horizons?
We believe that businesses that want to reap the benefits of new metrics, both internal and external, should have a clear vision and approach to enacting change.
As a leading advisory organization in the telecommunications sector, we have a network of professionals available to discuss the appropriateness of new performance metrics and the steps required to achieve greater business intelligence.