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Cash on the line: telecom operators and working capital management 2010 - EY - Global

Spurred in recent years by the need to strengthen balance sheets, increase operating efficiency, enhance service and respond to shareholder pressure, operators in North America and Europe have significantly reduced their levels of working capital.

Performance by telecommunications companies (telcos) against working capital management metrics varies widely across the globe.

Many such differences — positive or negative — can be explained by variances in product and service lines, local payment practices, regulatory regimes, prevailing market conditions/ maturity or other variables.

But more often than not, relative success or failure in working capital (WC) management is a function of the associated managerial and organizational focus. The more attention devoted to working capital, the more closely it aligns with strategy, the more optimized its deployment.

And without question, telcos globally need to pay more attention to working capital. Telcos worldwide need to pay more attention to working capital.

Key findings overall

  • Amid a challenging global economy, performance against working capital measures varied widely from region to region
  • Though partly explained by product mixes, such variances also suggest fundamental differences in management focus
  • No matter the company or region, research and comparative benchmarking suggest ample opportunities to benefit from a more disciplined approach to working capital (WC) management

Europe

  • European operators reported a slight deterioration in WC performance in 2009
  • Still, they are exhibiting better performance than their North American counterparts
  • The gap between leading and laggard performers is vast
  • The EY methodology gauges that the companies sampled in the European sector could achieve an additional reduction in WC totalling €23 billion, or 6.8% of sales

North America

  • North American operators were able to improve WC performance in 2009
  • Their performance still lags that of European operators
  • The EY methodology estimates that companies sampled from the region could squeeze an additional US$7 billion from WC, or 2.5% of sales

Other regions/countries

  • Operators from other regions/countries in the study carry the lowest level of WC among all regions, with China and India being the best performers
  • Strong WC performance across many of these regions/countries is driven by the relatively high proportion of revenues from mobile services, combined with high levels of pre-paid cellular
  • Tight margins are also forcing the conservation of working capital — but in general, companies here could benefit greatly from a more concerted, organized, disciplined approach

Opportunities for telecom

Telco operators in developed markets have made great strides in terms of improving their WC management.

Spurred in recent years by the need to strengthen balance sheets, increase operating efficiency, enhance service and respond to shareholder pressure, operators in North America and Europe have significantly reduced their levels of WC.

But not all are sharing equally in such successes. At 8 of these same 15 European operators examined, performance deteriorated dramatically. In fact, at one firm, cash-to-cash (C2C), the speed at which the company converts cash outlays into cash returns, climbed to a disappointing 32 days.

Compare this with another member of the group whose C2C weighs in at -13 days (a performance premium of 45 days). In short, some firms in this grouping are performing admirably, while others are struggling.

European operators outperform North American peers

Still, European operators are exhibiting better WC performance than their North American peers. This is primarily driven by strong performance against days payables outstanding (DPO) among European telcos, although this group did carry higher days sales outstanding (DSO).

By comparison, North American companies exhibit a much wider gap between DSO and DPO, suggesting these operators could benefit from a greater focus on cash conversion cycles.

As for the overall trends in WC management, for 2009, conditions worsened for European operators. That is, taken as a whole, performance against WC metrics deteriorated.

By contrast, North American operators have actually achieved improvement in WC performance amid the downturn, negotiating better commercial terms and in some cases pricing.

But regardless of such trending, the analysis gauges that the operators in the study could reduce their working capital deployed by a total of up to €23 billion (Europe) and US$7 billion (North America). In other words, meaningful improvements are still available.

As for countries such as China, India, Russia or regions such as Latin America, the Middle East or Africa, operating and competitive conditions are so varied as to defy generalization.

The future of working capital performance

However, it is safe to say that for telcos operating in much if not most of the developing world, there remains little evidence of a genuinely cash- or working capital-focused culture. Instead, companies here tend to focus on growing their infrastructures and building market share.

Moreover, their strength in WC is less a result of focus and more a function of both their relatively high proportion of revenues from mobile or prepaid services and the need to operate under tight margins.

The realization is that if these companies are doing so well almost without trying, what might they achieve by implementing even greater WC discipline?

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