Challenge
During a time when telecom spending in North America outpaced revenue, money was plentiful and there was little pressure for companies to limit investment. Once the communications industry entered its severe downturn, however, both outside investors and service providers began to take a more restrictive view of capital spending. The client, a major ILEC, had been investing similarly to its peers, with capex as a percent of revenue typically in the 22-28% range. As the landscape shifted, however, the client wanted to improve this ratio from a level of about 25% of revenues in one year to 18% in the next three years. An internal client team was charged with various network integration and optimization tasks, which yielded a share of this capital reduction. These implementation savings, however, were not sufficient to reach the goal of 18% capital efficiency the three year mark. The client asked TMNG Global to evaluate strategic product deployment options and identify additional capital reductions without damaging the company’s growth prospects.
TMNG Global Solution
We began the project by considering important industry trends that would guide the analysis. The most critical of these were the move to broadband, the shift of traffic from wireline to wireless networks, and a range of new network technologies that might transform network infrastructure and services. Taken together, the trends clearly contained many threats to traditional telco revenues, but also opened up many opportunities for new revenue through new services and more efficient technologies. The challenge in this project was to identify product/CO combinations that were capital-intensive and to stagger the timelines for deployment so as to improve the capex to revenue ratios.
In order to achieve this optimization, TMNG Global built a comprehensive strategic planning tool linking revenue, operating expense, and capital expenditure, at the wire center and product level. The client’s total wire centers were divided into four groups based on market attractiveness (size of market served, number of businesses, size and types of businesses, number of households, household makeup, and income levels). For each product and each wire center group, our team applied an interactive demand-driven model linking revenue, opex, and capex to optimize the product mix for that type of wire center.
Using this tool, we ran various scenarios and assessed their economic impact. After optimization, the model showed the optimal product deployment timeline by class of wire center:
For each class of wire center, this optimal deployment plan yielded gradually improving capex to revenue numbers. Ultimately, the tool allowed aggregation of product and wire center data and provided a high-level view of opportunities to improve capital intensity.
This extremely detailed analysis led to some broad strategic thrusts. For example, DSL deployment becomes rapidly less capital efficient as it extends into less densely populated areas. Using the results from the tool, DSL deployment was limited selectively in a way that had minimal impact on revenues, yet significantly reduced capex, improving the capex to revenue relationship. To avoid some or all of the revenue loss, value-added services enabled by DSL were scheduled for faster roll-out in the markets where customers already had DSL.
Our team looked specifically at three areas for these strategic goals and tradeoffs: DSL, wireline voice services, and broadband IP offerings. The same approach, of course, can be used with any set of client offerings.
Benefits to the Client
Using the analytic processes described above, we identified specific capex savings that met the client’s requirements for its three-year plan. We provided actual recommendations as to which products to eliminate or delay or speed up, in which wire center categories. In aggregate, TMNG Global was able to pinpoint over $400 million of capital savings over the next three years, representing over 10% of the capital budget that was encompassed by our analysis.