The telecom industry has been under scrutiny for its economic performance for some years now. Its return on capital is often lower than its cost of capital: In 2019, two of the top five operators in Europe had lower return on capital employed (ROCE) than the weighted average cost of capital (WACC), while the ROCE of a third company was just 1 percentage point above WACC. This economic profile is a consequence of an industrial context in which the pace of technological change induces one investment cycle after the other and, at the same time, competition, regulation, and changing customer behaviours drag down revenues.
Telcos are working hard to transform their businesses, seizing the advantages of digitization and carving out some of their infrastructure layers to become asset-light and efficient. However, they also need to generate stronger growth.
Recently, growth has been difficult to achieve for telecommunications operators, especially in Europe. According to Gartner Group, telecom services will grow by -0.2% between 2016 and 2021 in Europe and by only 1.0% in North America. Several lines of work have been and are being explored to foster growth in the telco industry. One avenue is the approach to test more rational competitive strategies, averting price wars. Another example is the attempt to preserve the infrastructure layer from fierce competition. A third development path, especially relevant in Europe, is the dialogue with the regulatory bodies to have a more investments-friendly regulatory model.
In this context, we think that the biggest growth opportunity for telecom operators, especially for the largest players, lies in their existing customer bases. Big telecom operators hold customer bases sized at millions or tens of millions, generating recurring revenues in a subscription-based model. The name of the game to grow the value of the customer base is well known: customer marketing, through retention, upsell and cross-sell actions.
However, the approach to manage the customer base in the telecom industry (and, in fact, in all subscription-based industries) must be revisited if the purpose is to maximize growth. The model has to become really customer-centric, in contrast to a product-centric or campaign-centric approach, which is the one in place at most operators globally. Campaign centric approaches start from a marketing idea, and then identify the customers that will conform the target group. As a result, on the one hand, groups of customers can be fatigued by exposure to multiple campaigns while, on the other hand, there can be portions of the base that are never addressed. Suboptimal recommendations, with limited personalization, also limit the impact of this approach.
Customer centricity has been at the center of the business and management rhetoric for some time now. CEOs have been strong advocates and invested in ambitious transformation programs leveraging advanced data and analytics, customer relationship management (CRM), and marketing platforms. But the idea is much more easily uttered than implemented. Decision-making and processes across organizations take too long to properly align to the envisioned customer-centric model, according to a recent survey of 3,000 top executives. This delay has hindered accuracy, speed, and business results.
We have worked with some of the leading telco groups transforming their approach and operations to manage their customer bases by the application of three principles:
A shift from generic or segmented offers to the generation of fully tailored next-best actions (NBAs) for each customer. In one of our recent projects, over 50 million personalized NBAs were produced and launched every month.
Full omnichannel approach
A consistent customer experience through all channels. The channels are connected to the NBAs, and the commercial potential of inbound-assisted and digital channels is unlocked. After we transformed some telcos’ customer base management, more than two out of three incoming calls to the service call center resulted in a commercial offer to the customer, and over 70% of all transactions were NBAs.
Full use of big data and advanced analytics
Unleashing the power of artificial intelligence by employing it in all interactions with customers. The projects we have delivered use AI’s ability to predict customer behaviors in between five and 10 machine learning models. These feed the recommendation engine that generates the NBAs.
This new, customer-centric approach to manage the customer base generates renewed economic growth: in the projects with our clients we have consistently achieved revenue and EBITDA uplifts in the range of 2-4% and 4-10%, respectively. Moreover, the new approach allows operators to compete more effectively by making the top line moderately more independent from the trading value dynamics, hence becoming a competitive advantage.
Subsequent pieces of this series will dive deeper into the different elements required to transform a company to a customer-centric approach to manage the base.