Over the past decade and a half, an unprecedented wave of expansion has altered the global telecom industry. New global competitors are emerging swiftly in the Gulf Cooperation Council region, bringing with them the opportunity for operators to capture their full synergy potential and derive maximum benefits from their enormous footprint. GCC operators must recognize to what degree they can create synergies across six key areas: procurement, product and service offerings, new revenue sources, shared services, knowledge sharing, and international best practices. They also must establish proper models for their organizational structure and subsidiary governance to capitalize on the potential gains from synergies.
Beginning in the mid-1990s and through the early 2000s, several telecommunications operators embarked on international expansion programs in pursuit of growth opportunities outside their home markets. Several of these operators achieved global status, with a significant portion of revenue from international operations and footprints spanning multiple continents. As a result, investors have favored telecom companies that expanded aggressively, rewarding companies for growing revenue and setting high expectations for future earnings gains. Booz & Company analyzed the performance of telecom operators with the second-highest market share, behind the incumbent, in 25 large, mature markets, in order to compare the global operators in the number two spot with single-market or regional operators in the same position.
In each case, the difference between the EBITDA margin of the best-performing global operators and those of the smaller companies is substantial. The average difference in EBITDA margin between the four leading operators in terms of international revenue and the incumbent was 3.8 percent, whereas the single-market and regional operators had an average of 8.1 percent difference with the incumbents in their markets.“That 4.5 percentage-point differential translates on average into a more than 10 percent gain in shareholder value for the successful global operators. The analysis found that successful companies underscored the potential for global operators to outperform the competition,” said Dr. Karim Sabbagh, Senior Partner and the Global Practice leader for Communications, Media and Technology, Booz & Company.
In the mid-2000s, GCC incumbents began embarking on international expansion programs of their own. To date, these incumbents have expanded their presence across emerging markets from Indonesia to South Africa, passing through South Asia, the MENA region, and sub-Saharan Africa. “However, by expanding internationally they will not automatically capture all of the value of having a global operation” said Amr Goussous, Senior Associate, Booz & Company. The most successful global operators have realigned their organizational models, enabling them to fully realize the potential of their global presence. Accordingly, GCC operators will need to realign their organizations and institute synergy programs to benefit from their international expansion and justify the premiums paid for their cross-border acquisitions.
Determining Synergy Potential
The potential synergies that lie within an operator’s global footprint can be measured by looking at the scale of the operator’s international portfolio relative to its home market, the group’s level of control in its subsidiaries, and the coherence of its international portfolio. “The larger the operator’s international reach, the more synergy potential it has—and, thus, the greater its need to institute a broadly and deeply integrated approach to capture those synergies,” said Dr. Sabbagh.
Deriving Synergies in 6 area
A strong synergies program can enable operators that have gone or are going global to improve their performance significantly. Operators can seek to create synergies from six key areas.
Consolidating procurement across a global platform involves collaboration among the different subsidiaries that are part of the global operator’s footprint. Collectively, these subsidiaries can negotiate with the same supplier as a group instead of as individual entities. The negotiating power of a larger, unified group likely will result in an overall reduced procurement spend.
Group Products and Services
Developing an integrated global plan to market products and services, especially those targeting frequent high-end business travelers, is second only to procurement in terms of potential value to reap gains from synergies. To date, however, many operators have neglected this category of synergies. Doing so is a missed opportunity, because although it is a complex endeavor to develop such a strategy, the potential benefits are substantial.
Access to New Revenue Sources by Leveraging Scale
Many global operators can make use of their scale to gain access to additional sources of revenue, thanks to their extensive geographical footprint. For example, a global operator is better positioned to emerge as a preferred wholesale roaming partner for another telecom operator because it can offer that operator access to more markets.
Shared services may appear to be an obvious step for a global operator seeking to maximize synergies—but it is an opportunity that many companies are not exploiting. Some global operators have created shared services functions within their organization to improve their profitability and efficiency, particularly for services that are not strategic to the local operations, such as human resources administration, payroll, IT services, and cash management. Much of the savings in these areas comes from a reduced number of full-time employees and lower IT hardware and software costs.
Operators with experience in multiple markets can take lessons learned—failures and successes—and put that knowledge to use across their footprints. It is invaluable to be able to evaluate the likelihood of success of a product or service based on actual field experience in other markets regarding pricing, distribution, marketing, and penetration expectations.
Global Organisational Readiness
“The telecom operators that evolved successfully into profitable, well-functioning global giants focused on building the right organizational model to manage their sprawling operations in different countries and, at the same time, developed governance and operating models to leverage scale and realize synergies,” said Goussous. Synergy programs within successful global operators have evolved in tandem with the evolution of the overall organization. These programs typically unfold in three stages:
Ad Hoc Synergy Model: This model is common during the early stages of an operator’s globalization efforts, when there is no global organization in place and subsidiaries are operating as silos. There is no executive oversight and support, a lack of incentives for synergy realization, no global processes, and an undefined interaction model between the subsidiaries.
Collaborative Approach: This approach is common in a nascent global organization with only a few global key performance indicators (KPIs) at the C-suite level. When the global framework is not mature enough to facilitate global activities, companies often create virtual structures or global committees composed of executive members from each operating company who together develop the global synergy agenda and ensure its effective execution.
Fully Integrated: A handful of global operators have matured into fully integrated organizations in which the global framework is developed and operating companies are synthesized in the group.. In these organizations synergy-related processes are embedded as part of business-as-usual operations, thus enabling these companies to derive full economies of scale from their operations.
The ideal model for each operator will depend on the size of its international program and its corresponding synergy potential. The larger the synergy potential, the more integrated model to synergies should be adopted. Those operators that have little control in their operating companies, limited scale, and low strategic alignment are unlikely to achieve synergies even if they are fully integrated and can thus get by with an ad hoc model.
All operators—regardless of the model to be adopted—need to focus their efforts on three main areas to manage, control, and realize synergies:
1. Develop a global vision and ensure that it is articulated and aligned across all operating companies.
2. Establish KPIs and incentives to create clear goals for senior executives and those at the operational level.
3. Develop a transparent and cohesive governance model that empowers the group level executives, particularly in areas that have great potential for synergies, such as procurement and technology planning.
GCC telecom operators are continuing to expand aggressively beyond their home markets. These operators are poised to reap many rewards from their international reach—as there clearly is value in being global. They, however, must recognize that they need to take steps beyond merely expanding into new markets. First, they need to look in the right places for synergies. Once the operators identify the areas in which they can exploit synergies, they then must set up a corresponding organizational model that will enable them to fully recognize these potential benefits.
The sheer complexity involved in offering a vast range of services to customers in very different markets is immense. Global operators must institute highly developed portfolio management, governance and organizational skills, the ability to replicate differentiating capabilities throughout their large footprint, and the ability to manage talent that can work effectively on a global basis. They must be able to operate across a wide range of market maturities by building capabilities in each market and by establishing a shared-service platform that could be leveraged across markets. Operators that are already global in reach clearly have the early competitive advantage. But all operators that can transition successfully from collections of independent local companies into truly integrated global companies will sustain competitive advantage for years to come and continue to win favor from customers and investors.