Telco Manufacturers Striving for Agility as Job Losses Continue, Survey Shows

Flexibility, Cost Reduction, Revenues and Innovation Seen as Keys to Survival

Many telecom equipment manufacturers worldwide are responding to ongoing recession by shifting their strategic focus to an urgent new quest for business agility and flexibility, according to a global survey of leading companies across the sector carried out post-September 11th for international consultants Cap Gemini Ernst & Young. The survey, which included in-depth interviews with top executives up to CEO level at major telco sector companies in Europe, North America and the Far East, showed that more than 40% are homing in on flexibility as a key strategic focus over the next two years.

The race to achieve greater flexibility is also being fuelled by continuing uncertainty about the scale and timing of the hoped-for upturn. For example, estimates of the year-on-year change in overall market demand in 2003 ranged from a fall of 25% to an increase of 60%.

The other three areas of strategic focus for TEMs are the predictable ones of protecting and growing their revenues, reducing costs and maintaining innovation, which emerged from the survey as high or highest priority strategies for 52%, 20% and 14% respectively.

Bert Hunter, an executive of the Global High-Tech Sector at Cap Gemini Ernst & Young, which commissioned the study, said: 'These results show that most TEMs are now fully alive to the need for major cost reduction if they are to survive the recession and thrive when the upturn comes. But there also appears to be uncertainty about the type of changes that are needed and how to achieve them.'

The majority of interviewees who quoted flexibility as a prime aim said that they planned an increase in their use of alliances to rapidly meet changing market needs. Typical responses were:

• 'We are moving to a role of solution architects so our alliances will become increasingly important. By having partners that implement we don't need implementation resources.'
• 'The market demands faster solutions and because no one company has all of these we are forced to enter into varied alliances.'
• 'Alliances will be vital because there will be a demand for products we don't have.'

Some 82% of the TEMs surveyed had started formal cost reduction programmes, refecting press reports that 425, 000 jobs have been lost worldwide in the sector over the past 12 months and suggesting that job losses in the sector are likely to continue into 2002. The percentages targeting specific areas for cost reduction were:

• headcount reduction: 60%
• inventory reduction: 50%
• sourcing from cheaper suppliers: 40%

The sharp headcount reductions achieved or planned by most TEMs are generating worries about longer-term ability to compete, the survey showed. The survey showed that many of the headcount reduction programmes have been implemented on an across-the-board basis, leading to several respondents expressing concern about retaining an adequate skills base to cope with the expected upturn. Other respondents mentioned the problems of 'inexperienced management' (in relation to managing the business through a downturn) and 'the need to recognise when change is needed and not shirk from making changes'.

Bert Hunter commented: 'Many TEMs have felt forced to cut costs to survive the downturn but our survey suggests that tactical headcount reductions could be threatening their ability to focus strategically for the upturn and compete effectively when that upturn arrives. The key message from the survey was the need to focus on and protect the core business.'

The survey shows that an upsurge in the outsourcing of activities such as manufacturing and IT can be expected over the next two years. Cost saving was by far the most frequently mentioned motivator for outsourcing activities previously or currently carried out in-house.

Bert Hunter said: 'Outsourcing is an area where short-term savings could be made but it can also be part of a longer-term strategy to build a more flexible and focused business.'

Although mentioned as one of the four main planks of strategy for surviving recession, innovation was seen by most responding as relating purely to products as opposed to services or to business processes and strategies. Continued innovation is ranked as either very important or quite important for the timeframe of 1-3 years ahead by over 90% of respondents.

However, the telcos are currently more interested in reduced costs and improved service levels than in innovation.

Bert Hunter commented: 'The historic record shows that TEMs have the capability to be real powerhouses of innovation, but, as one respondent put it, "we do not innovate for innovation's sake. It is important to control innovation so that it is practical, applicable and delivered at the appropriate time."'

Some 52 % of TEMs listed 'sustaining revenues' as their number one strategic priority. However the telcos interviewed awarded ratings averaging only 3.7 out of a possible maximum of 6 for customer service, with one product category - mobile handsets - scoring the low mark of 3.1. The survey shows that TEMs are aware of the service issue, with many respondents claiming to have embarked upon 'significant' or 'very significant' innovations in customer service and customer relationship management (CRM). The rising awareness was also reflected in unprompted answers to the question: 'what will contribute most to your company's success that is within your control?' Typical answers included:

• 'The most important thing is our ability to satisfy our customers and to do it in a superior fashion to everyone else.'
• 'Customer Relationship Management'
• 'We will continue to invest more heavily in our relationships with customers.the market is more competitive, with the same companies competing for the same customers more aggressively.'
• 'We must find ever more innovative ways of working with our clients - even to the extent that parameters become blurred between ourselves, our customers and even our competitors.'

Pierre Durand, Head of the High-Tech Global Centre of Excellence, summarised the research findings: 'Overall, the survey paints a clear picture of a sector that is struggling for the first time in its history with the issues of recession, following some years of hectic expansion and truly remarkable innovation. There is clearly strong awareness that structural and organisational change initiatives need to be energetically pursued to survive the ongoing downturn and be in good shape to benefit from the upturn. The main problem is that too many of the initiatives currently being pursued are tactically motivated and reactive rather than proactive. Areas such as alliances, outsourcing, customer relationships and supply chain efficiency need to be carefully considered and rapidly improved if the benefits are to be of the long-lasting, strategic kind and not merely skin-deep.'

-ENDS-

The research reported in this study was planned and commissioned by the Global High-Tech Sector of Cap Gemini Ernst & Young and carried out by Gartner. It is based on a random sample of 22 telecom equipment manufacturers drawn from a population defined as the "top 40 global telecommunications equipment manufacturers". In order to supplement and bring perspective to the TEM results, a further sample of 10 telecom operators was drawn from the "global top 20 operators". Both of these populations (top 40 TEMs and top 20 operators) were defined as encompassing firms based on revenue, global presence, and product/service coverage. Respondents and interviews were included in the data only if the decision maker could speak for global corporate strategy within their company. As a rule, respondents were very conscientious about the information they gave. In some instances the questionnaires were answered through telephone conferences with several senior executives in order to guarantee that the responses given reflected the position of corporate global strategy and are not simply the idiosyncratic views of individuals.