mckinsey telecoms. recall no. 08, 2009 - high growth
TRANSCRIPT
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Telecommunications
Networks
RECALL No8
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3RECALL No 8 – Networks
Welcome ...… to the 8th issue of Recall, a publication for leaders
in the telecommunications industry. Within the overall
operations and technology (O&T) arena, this issue
focuses on networks and extends the McKinsey publication
series on marketing and sales themes, launchedsuccessfully last year.
There is a strong, growing management interest in
O&T topics in the telecommunications industry. Besides
the challenges of stagnating growth and declining
margins in many parts of the world, it has been undergoing
major technological changes – some marking progress
while others have been disruptive.
New entrants and alternative, innovative business
models present ongoing hurdles to established structures.
This has led to a greater focus on management’s part
in delivering services not only efficiently and effectively
but also with maximum service quality in mind – thus
seeking competitive advantages from operations
and technology. Successful operations in this environment
require close senior management involvement in
identifying opportunities and options, to devise optimal
solutions, and to drive mindset changes across the
whole organization.
This publication aims at providing a comprehensive view
of priority operations and technology issues, covering
the range from new network technologies to IT and from
service operations to procurement, discussing bothinnovative technical solutions as well as challenges arising
from operational transformations. In this series,
we’ll “recall” how successful companies manage their
operations and technology base but also offer our
emerging perspect ives and outlooks for the future.
Networks are the backbone of the industry, as they are
one of the main cost elements of telecommunications
operations. Networks are also the primary arena for
ongoing technology innovations.
We begin this issue with an introduction to network
operations and technologies, exploring the ways to
do more with networks – with less money. In the next
article, we discuss the value of fiber networks and follow
that with a look at the challenges of consolidating and
offshoring certain functions within network operations.
An overview of network outsourcing is next on the agenda
and leads to a discussion of wireless business models ,
a look at the exciting new technologies of femtocells and
4G, and the case for alternate spectrum use. We round
out this issue with an interview with Mads Middelboe.
We were very excited to sit down with the CEO of
TDC Mobile and get a firsthand account of operations and
technology issues in telecommunications.
Over the past several years, McKinsey’s Global
Telecommunications Practice – a group of more than
380 dedicated practitioners and over 60 research
analysts – has built extensive capabilities in telecoms
operations and technology. Through our global
practitioner base, we now bring these capabilities to the
service of our clients. The authors of Recall are all
members of this practice, and each of us hopes that you
find this series useful and that it provides insights that
trigger ideas or discussions around the challenges andopportunities you face.
We look forward to your feedback on the articles in this
issue and to your thoughts on topics you would like to
see covered in future issues.
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Jürgen Meffert
EMEA Leader of McKinsey’s
Telecommunications Practice
Fabian Blank
Leader of the EMEA Mobile Operations
Service Line and Editor of this RECALL issue
Tomas Calleja
Co-leader of McKinsey’s Operations
and Technology in Telecommunications
Practice
Klemens Hjartar
Co-leader of McKinsey’s Operations
and Technology in Telecommunications
Practice
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Contents01 Introduction to Network Operations and Technologies 9
02 High Fiber Diet: The Value of Next-Generation Access Networks 15
03 Over the Seas of Complexity: Consolidating Mobile Network Functions Offshore 21
04 Off loading the Core: Exploring Network Outsourcing 27
05 Mobile Networks of the Future 35
Building a Sustainable Wireless Carrier Business Model 35
The Value of Femtocells 41
The Rocky Road to 4G 45
The Alternate Spectrum Opportunity 49
06 The Power of Letting Go 53
Appendix
RECALL No 8 – Networks
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9RECALL No 8 – Networks
Introduction to Network Operations and Technologies
01 Introduction to Network Operationsand Technologies
With change quickly becoming an industry watchword,
network operations represent a key telco priority.
Understanding which technologies will transform the
network operating model and their operator-specific
challenges is fundamental to success.
In a rapidly changing industry where players must deal
with fading top-line results and shrinking bottom-line
predictions, fixed-line and mobile operators face the twin
tasks of exploring new business models while becoming
significantly more efficient. Telcos must also confront the
reality that the introduction of new services will do
relatively little to reverse the deceleration in revenue growth
or the outright sales declines. These new services, such as
IPTV for fixed carriers or mobile TV for wireless operators,
will instead bring additional costs, thus placing morepressure on already stretched margins. Operationally
complex services will lead to increased call center volumes,
for example, while new services will generate higher
sales and marketing costs and probably additional invest-
ments in network capacity. Compared to voice, the average
provisioning cost per “gross add” for IPTV is two to three
times as great. Convergence and increased competition
will just make this picture more complex.
The network’s growing role
McKinsey’s research in this context of change indicates
that the network will play an increasingly important
role among both fixed-line and mobile telcos. On the one
hand, new network technologies will enable new
services (e.g., IPTV, mobile broadband, femtocell-based
services, and others). A key telco challenge involves
understanding the commercial possibilities these new
technologies bring, their potential impact on business
models, and the changes they could effect in the
competitive and regulatory landscape. On the other hand,
network operations represent a critical area in which
telco managers must improve in order to compete success-
fully in the industry’s likely less profitable future
environment. By optimizing current network operations
and leveraging new technological possibilities, telcos
can work to keep pace with the increasing demand for
products and services while maintaining or improving
margin levels. In a nutshell, operators need to find ways
to reduce cost in order to finance the new investments.
To this end, operators must ensure transparency of the
cost structure across their operating model.
The current telco operating model incorporates four
major dimensions (Exhibit 1): customer service (“sell”),
product innovation (“innovate and develop”), the
network itself (“access”), and support services (“support”).
Differences arise in terms of where costs occur for fixed
and mobile players. For example, for fixed operators the
network itself, with its hardwired tentacles reaching
out across the market, represents about 60 percent of a
company’s total spend (i.e., operating expenses – opex –
and capital expenditures – capex). Customer service
represents about 20 percent, support serv ices account
for 15 percent, and product innovation holds the smallest
share at 5 percent. Mobile operators, on the other hand,
find most of their costs (50 percent) in customer service,
while the network with its wireless efficiency consumes
only 25 percent, support services represent about 20
percent, and 5 percent is spent on product innovation.
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Telecoms operators’ costs comprise 4 domains01
Analyzing costs, capex accounts for about a quarter of
a typical fixed-line incumbent’s total cost in Western
Europe, with much of this (about 95 percent) focused on
the network itself. Operating costs make up the remain-
ing three quarters of a fixed operator’s total cost,
with the network requiring about 45 percent. For a mobile
operator in Western Europe, capex makes up about 15
percent of total costs, with much of this (about 80 percent)
concentrated on the network. Opex accounts for the
remaining 85 percent of total costs, with customerservice accounting for about 60 percent followed by the
network at about 20 percent.
Highlighting network costs and leveragepoints
Given the central role network improvement plays in
their value propositions, successful telcos wil l make
this work a priority. Overall, managers can map out
a network’s cost structure based on seven key areas
known as domains: the network’s IT system and
operational support systems (OSS), customer access,
aggregation, transport, platforms, the core IP network
and, for wireless players, the mobile network core.
They can also map costs across five main, high-level
processes: design and planning, implementation/
deployment, provisioning, supervision and main-
tenance, and basic infrastructure. Com bining these
two mapping approaches allows managers to create
a cost matrix that can serve as the basis upon which they
define and prioritize cost reduction levers.
From a network domain perspective, most costs arise
in the customer access domain while, from the viewpoint
of the high-level processes, most of the costs originate
in the supervision and maintenance areas. For the
integrated player in Exhibit 2, the key element of the coststructure involves supervision and maintenance of
the customer access domain.
This matrix will present different cost structures
depending on the type of operations (e.g., fixed, mobile,
integrated) and the level of maturity. For example,
mature operators with no major network rollout invest-
ments should focus on optimizing the supervision
and maintenance processes, whereas growing operators
(e.g., mobile operators in emerging markets) must
work to reduce implementation and deployment costs,
especially regarding capex optimization.
This transparency should allow operators to evaluate
different operational efficiency levers that, for an
integrated operator, can yield cost reductions in the
order of 35 to 40 percent of the total network cost base:
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The matrix gives the integrated operator perspective on the various elements
of overall network costs02
1. Efficiency levers that are independent of a telco’s
business model, such as the adoption of lean network
operations, network outsourcing, and wireless
network consolidation
2. Levers that depend on a telco’s specific assets,
such as fixed/mobile integration and cross-border
synergies
3. Radical moves that represent major business modelshifts, such as network sharing, structural network
separation, and significant complexity reduction (e.g.,
“no frills”)
4. Technological transformations that can have a potential
impact on the telco’s business model.
Charting a technological networktransormation
New network technologies can enable telcos to take
advantage of the commercial migration toward new,
high-capacity access approaches. They promote
technological renovation, make new, more efficient
operations possible, and simplify and rationalize
the network, eliminating obsolete elements and avoiding
duplications.
One example of such a transformation is t he rollout of
a Next Generation Access Network, both for fixed and
for mobile operators. Fixed operators are exploring – or
already rolling out – alternatives to the traditional copper
access network. The debate over FTTH vs. FTTC
developments is not new, but it has intensified of late as
the cost and performance gaps between the two network
alternatives have narrowed. Most fixed operators in
Western Europe have already made a decision based on
commercial business cases and on the hope that theendgame wil l be a network with a lower opex. Yet the
question for network operations managers remains – to
what extent are fiber developments really reducing
opex, and what is the best way for operators to capture
these potential savings?
In the mobile arena, wireless broadband access networks
open the door to “the next big thing” in terms of
applications and services, as consumer and business
adoption of mobile broadband services starts becoming
a major growth engine for wireless operators. In this
context, several technological options are emerging for
operators to satisfy the increasing bandwidth demands.
Beyond current 3G/WCDMA networks, the 4G race
has already started between technologies such as LTE,
Mobile WiMAX, and UMB, and operators will start
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Introduction to Network Operations and Technologies
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making their decisions on their migration paths in the
coming years.
Finally, some “hybrid” (fixed/wireless) access network
alternatives are receiving increasing interest from
operators globally. With major infrastructure players
such as Motorola and Ericsson already investing in this
technology, femtocells – i.e., indoor base stations – are
set to cause fundamental changes in the industry if key uncertainties are resolved.
On the backbone side, the main technological transfor-
mation ahead for operators is the switch to an “all-IP”
operation along the aggregation and switching domains.
This would allow a radical reduction in switching/
aggregation equipment and eliminate “service-edge”
hardware, generating savings in the order of about 70
percent. It would also result in reduced network
management costs for load optimization and replace the
public switched telephone network (PSTN) with IMS
(IP Multimedia Subsystem) or soft switches. The newly
converged POTS/data access infrastructure will reduce
the amount of time and effort needed for installations,
and the all-IP approach would eliminate traditional
ATM and SDH transmission approaches in favor of
Gigabit Ethernet aggregation.
In the core network, the shift to all-IP would result
in significant reductions in backbone switching and core
equipment, producing savings in the 40 to 60 percent
range, depending on the specific situation. It would allow
network management centralization and processsimplification, reduce maintenance costs by 40 percent,
and cut space, power, and HVAC costs approximately in half.
* * *
As the traditional industry gives way to new competitors
and new ways of doing business, telecoms players
need to find ways to deliver the profitable growth that
investors require and the products and services that
subscribers demand. Given the central role the network
plays in delivering customer value, incumbents can
explore a multitude of cost-saving technologies and
techniques that will allow them to do a lot more with
their networks with a lot less money.
Duarte Begonha
is a Principal in McKinsey’s Lisbon office.
Javier Gil Gomez
is an Engagement Manager in McKinsey’s
Madrid office.
Hugo del Campo
is a Principal in McKinsey’s Madrid office.
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With few applications requiring its blazing access speeds,
many telcos are still aggressively pursuing fiber.
Holistic modeling ensures the right rollout strategy and
a prof itable investment.
Internet usage continues to expand at phenomenal
speed. Demand for bandwidth has kept pace, creating
a completely new playing field for service and applications
providers in terms of what kinds of services can be
offered through Internet/DSL connections. YouTube
and Akimbo are examples of service providers with
business models that rely on high-speed access. Despite
the fact that – from an application point of view –
no real demand exists for access speeds beyond those
that ADSL2+ can deliver (i.e., 20 to 25 Mbps), most
operators worldwide are mobilizing to transform their
access networks in order to accommodate theever-increasing demand for bandwidth (Exhibit 1).
From among a number of different technology solutions,
deploying pure fiber close to end customers has
emerged as the potential silver bullet for telecoms
operators – one that could suddenly transform 30 Mbps
into a mass-market product. High-speed applications
are seeking new, faster avenues into the home. For
example, standard-definition TV requires only 3 to 4
Mbps per channel, while high-definition TV cal ls for
speeds in the 8 to 10 Mbps range, and multi-feed HDTV
streams would need even higher speeds. Major telecoms
operators have already announced more than EUR 100
billion in fiber investments, accounting for more than
90 rollouts worldwide – a fair amount of money considering
that current applications don’t even need the speed. So,
what is really driving this investment frenzy? McKinsey
research reveals three goals that have whetted the
industry’s appetite for f iber’s high speed.
Defend market share. Competitive pressure continues
to grow as telcos aggressively push triple-play offerings
(i.e., TV, telephony, and high-speed Internet access) and
as cable operators eat into the margins of incumbent
telecoms operators around the world. Cable operators
enjoy an existing network infrastructure that supports
much higher speeds than a telecoms operator’s legacy
access network, which is limited by the “last mile”
connection to the typical customer’s home or business,
usually consisting of lower-speed copper. Furthermore,
upgrading to “fiber speed” (i.e., 100 Mbps+) could
also be done more quickly and at a lesser relative cost by
a cable operator, should the demand arise.
Many cable operators worldwide already provide 20 Mbps+
Internet access services to their high-end customers.
More than a few telcos, however, face a structural
impediment that prevents them from being able to offer
similar speeds. Due to existing local loop lengths in
Europe, for example, without fiber only 30 percent of
EU consumers could be reached with a 15 Mbps product
and only 12 percent would have access to 30 Mbps.
The figure is even lower in the US.
Protect the industry structure. Another reason for the
industry’s switch to fiber has emerged from an unusual
corner. In some markets, government initiatives to fund
fiber rollouts have become serious threats to incumbents.
In Switzerland, for example, local municipalities
decided to fund a fiber rollout across Zurich, with other
large European cities such as Amsterdam and
02 High Fiber Diet: The Value of Next-Generation Access Networks
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Stockholm following suit. These governments decided
to “leapfrog” the incumbent’s investment decision
because providing high-speed broadband access to
businesses and consumers has become an increasingly
crucial success factor for regions and cities.
In the long term, reshaping the industry in this way
could have disastrous consequences for the future revenue
streams of existing network providers. Proactively
managing the home market industry structure by launching the rollout of a fiber network could help
incumbent operators counteract possible future moves
by governments or municipalities.
Attract consumers seeking high-speed access. Despite
the small number of speed-needy applications, the
appetite for high-speed Internet access among consumers
appears to be growing quickly. In Japan, for instance,
demand for ADSL has virtually disappeared since NTT
introduced a 100 Mbps FTTH (fiber to the home)
solution. While cable maintained its market share, NTT’s
100 Mbps fiber offering quickly captured virtually
the entire ADSL market.
A surge in demand for cutting-edge access services
could help operators not only attract new customers
but also migrate existing customers from old legacy
networks more quickly. Furthermore, speeding up
the shutdown process of old networks helps operators
reduce costs. In the long term, fiber can certainly be
considered the most viable solution for meeting
the growing demand for fast access because the operator
will be able to accommodate bandwidth demand beyond
100 Mbps and provide equal speeds for uploads
and downloads. In the short term, however, an investment
in a fiber access network is a huge challenge – bothoperationally and in financial terms. Given the current
lack of applications demanding fiber-optic speeds
to secure future revenue, the business case for fiber
deployment needs to be carefully considered.
Modeling fber’s uture
Because the impact of competitors, regulations, and
government interaction is far too important to be
neglected, no silver bullet exists for a fiber strategy that
can be applied in every market. Additionally, since a
fiber rollout represents a huge capex (capital expenditure)
investment – in many cases as much as 30 percent of
total capex spend – with little (or no) short-term return
in sight, getting it right the first time becomes critical.
For this reason, a telecoms operator must develop its
The trend of increasing bandwith will enter the “fiber zone” in the next few
years01
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fiber strategy with micro-markets in mind, taking into
consideration all aspects of the specific regional market
conditions the company faces.
McKinsey’s approach to making the telecoms operator’s
business case for the optimal next-generation
access strategy takes a holistic view of the operator’s
current situation (Exhibit 2). It builds on a detailed
neighborhood analysis of the local condit ions for each
central office that the operator runs within itshome market. The modelis built on the following three
drivers:
Market drivers include demand, competition, and
technology. In terms of demand, operators need to
determine the area’s current broadband penetration
and whether it is expected to grow over the next five
years or has already reached saturation. The competitive
assessment should include a detailed understanding
of the operator’s current market share in the area, the
status of cable operator and/or telecoms attacker positions,
and a clear perspective on whether a more or less
aggressive environment can be expected in the future.
Technology issues include understanding the
operator’s current coverage in terms of ADSL technology
and the status of the equipment used.
Capex drivers comprise the cost to rollout fiber in the
specific area, the cost to upgrade and extend the
number of street cabinets, and the installation costs,
including customer premises equipment (CPE).
Opex drivers are the set of issues that relate to the degree
to which operations and maintenance costs would
increase as a result of a fiber rollout. Answers to a key
set of questions will determine the drivers of an operator’s
opex: To what degree would a fiber rollout increaseoperations and maintenance costs? By how much could
smarter services processes (pre-provisioning or an
automated distribution frame) reduce costs? Would a
fiber rollout impact power costs? Are there savings to
be found by freeing up space (real estate) from legacy
network equipment and shutting down central offices in
a given area?
By analyzing the above-mentioned factors and weighing
them against each other, an operator can gain a true
perspective on how the rollout plan should be developed –
local area by local area – in order to make the investment
profitable. The result would look very different
from a traditional incumbent operator rollout plan, since
the focus would not be nationwide, applying the same
technology universally to all customers. Instead,
Our model builds on 3 main input parameters and determines the case for
fiber on micro-market level02
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The regulatory framework can significantly reduce the profitability
of a fiber investment03
area-specific approaches would be chosen, all depending
on the above-mentioned factors. For example, FTTH
could be the best alternative for densely populated areas
with high broadband penetration rates and high market
shares, while FTTC (fiber to the curb) or DSL may work
best in less densely populated areas that still have a high
demand for broadband. Areas already heavily
penetrated by cable and/or those with very low broadband
penetration might not even justify an investment at all
at this point. In other words, an incumbent mustundergo a complete change in mindset to make a multi-
billion dollar fiber investment successful, abandoning
the old belief that one service fits all and, instead,
incorporating a carefully planned mix of technologies
and implementation strategies for each local market in
which the company is active.
Several specifc challenges ahead
We note a number of operator hurdles to a successful
fiber rollout in the areas of fiber strategy and regulatory
frameworks. An operator’s chosen fiber strategy can
have a far-reaching impact on its operating model. Since
telcos cannot fully reduce complexity until all legacy
networks have been shut down completely, deploying
fiber will more likely increase complexity in the
short to medium term. Fiber access (i.e., FTTH, FT TC,
or both) will be an additional component that
managers must control and maintain within the network,
alongside DSL and other legacy networks.
NTT decided to undertake a complete migration to
FTTx (i.e., FTTH or FTTC) in a single process by leveraging
existing network assets. The company faced specific
challenges, including the need to convince customers of
the value of FTTx, to design a completely new process
to reduce opex, to put operations skills training in place,and to migrate to a brand-new system while reshaping
the existing one. Verizon, by contrast, chose to split the
value chain (i.e., FTTx versus non-FTTx), managing
both oper ations separately. In doing so, Verizon had to
contend with several hurdles, including complexity
management issues in terms of operations and systems
as well as an increase in opex, the duplication of some
systems, and operations skills training.
Operators must also carefully consider the regulatory
framework within their home markets because these
frameworks can significantly reduce the profitability of
a fiber investment (Exhibit 3). Thus far, three different
rollout models have emerged globally.
Protectionist model. Adopted in the US, this model
favors incumbent operators because it does not require
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network unbundling. It provides the telco with a
competitive advantage against attackers that cannot
provide TV/high speed outside the direct coverage
of the central office area.
Open model. Adopted by many European countries,
this approach obligates operators to unbundle and offer
wholesale services to attackers. This model will likely
result in telco market share erosion, although improvedTV content quality and service/customer experience
performance may change this result.
Subsidy model. Some Asian countries (e.g., South Korea
and Singapore) have chosen this model, whose main
goal is “broadband for everyone.” Under the model,
governments closely involve themselves in the fiber rollout,
either by subsidizing existing players that are investing
in fiber or by driving the rollout process themselves.
* * *
Incumbents have been compelled to pursue high fiber
diets in order to defend their market shares, protect the
industry structure, or attract consumers seeking high-speed access. Our fiber model provides critical insights
regarding the challenges incumbents face in rolling
out these networks. Successful operators will carefully
choose from among several possible fiber rollout strategies
and closely consider the regulatory frameworks under
which the rollout will take place.
Ferry Grijpink
is an Associate Principal in McKinsey’s
Amsterdam office.
Achim Wörner
is an Associate Principal in McKinsey’s
Munich office.
Eric Grob
is a Principal in McKinsey’s Zurich office.
Luis Miguel Santos
is an Associate Principal in McKinsey’s
Madrid office.
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Mobile players can reduce certain network costs by up
to 30 percent by consolidating and offshoring key network
functions. Assessing the potential and evaluating
management commitment are essential to mak ing the
right choice and ensuring successful relocation.
With profits wilting beneath a one-two combination of
competitive intensity and regulatory pressure,
network-related costs can weigh heavily on a mobile
network operator’s (MNO’s) bottom line. As a result,
most operators are considering their network cost
reduction options, which include applying “lean” principles
to network operations, signing managed services deals
with equipment manufacturers or agreeing to network
sharing arrangements with other operators. The most
common cost reduction options share one characteristic:
they focus on local costs and activities, and rightly so,since network maintenance and operations comprise up
to 85 percent of non-people-related operating expenditure
(opex) – or two thirds of the total network opex. If
considering people costs, however, the picture changes:
up to 75 percent of these costs are incurred by functions
that don’t necessari ly require a presence in the field,
such as network planning.
Attempts to regionalize network functions in order to
cut costs tend to concentrate primarily on workforce
consolidation and offshoring opportunities. Key oppor-
tunities for consolidating jobs lie in network design,
planning and engineering, and network monitoring and
support. As the only sizeable remote network functions,
these three represent the primary areas suitable for
regionalization. Offshoring possibilities also include
network design and remote support for maintenance.
Within network functions, “desk-based” activities offer
the greatest potential for relocation and consolidation
(Exhibit 1). Operators interested in capturing region-
alization value should build two business cases: one for
planning and engineer ing and the other for network
monitoring and support.
Planning and engineering. Areas of interest exist
through-out the network, including transmission, the
network core, the intelligent network layer, value-
added services such as SMS and MMS, and operations
support systems (OSS). In these cases, regionalized
functions don’t require direct access to live infrastructure,
and because they’re primarily office-based, the need
for specialized equipment beyond software is minimal.
Planning and engineering functions that demand
significant access to live infrastructure, such as radioaccess planning and optimization, should remain local.
MNOs can regionalize or offshore all of the other functions,
including the remaining radio planning and engineering,
core architecture/capacity design, and OSS.
Network monitoring and support. Network monitoring
and support activities can be performed from remote
locations (i.e., other countries) using appropriate network
management systems. In addition, it is possible to
redesign processes in order to maintain direct interfaces
with local maintenance suppliers, thus removing the
need to locate a network management center (NMC) in
the country of origin. In many instances, however,
regulatory and security concerns restrict operators from
taking full advantage of these opportunities, since
they are required to retain monitoring capabilities in the
country of origin.
03 Over the Seas of Complexity:Consolidating Mobile Network
Functions Offshore
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Making the case or regionalization
The resulting business cases show that the combination
of regionalization and workforce consolidation can
generate significant run-rate wage savings, albeit from
a small base. One company operating in many European
countries identified savings of about 30 percent of
the addressable cost base, corresponding to a reduction
of about 1 to 2 percent of the operator’s total annual
network costs (i.e., capex plus opex). The operatoridentified economies of scale and scope that brought
the potential for efficiency gains to at least 20 percent
of all addressable FTEs (full-time equivalents) in
the network planning, engineering and monitoring, and
support functions. Managers discovered that labor
cost arbitrage would deliver between 70 and 80 percent
of the savings, while staff consolidation would contribute
the remaining 20 to 30 percent. The comparatively
low savings seen in staff consolidation result from the
tendency of operators to scale up most capacity-
planning functions (e.g., site selection, transmission
planning) based on the amount of network change
taking place, so these actions couldn’t simply be taken
just once across all operating countries.
Likewise, while design functions such as new technology
assessment or systems integration could, in principle,
be addressed once, compared to capacity planning this
phenomenon is less common.
Another impediment involves processes and IT systems,
which tend to differ across operating countries. They
often rely on different vendors and have separate systems
architectures and products/services, thus inhibiting the
potential consolidation of design or monitoring functions.
The significant role of labor cost arbitrage has
valuable implications beyond the multinational realm:mobile operators active in only one country could “match”
80 percent of the savings available to multinational
operators by relocating their remote network functions
to low-cost countries without the need to involve
an outsourcer.
In terms of timing, operators should be aware that
differences in local processes can complicate implemen-
tation. In fact, paral lel implementation of the
regionalization and consolidation programs could take
several years in order to minimize service level disruptions.
As a result, payback can take three to four years, and
recruitment, restructuring, and knowledge transfer will
require significant management commitment.
Operators must put a number of prerequisites in place to
ensure a successful regionalization effort. They need
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to establish the right governance model before region-
alization can start and cultivate sufficient focus and
support from both top- and middle-level management
that doesn’t distract from their other local initiatives.
MNOs should make sure that the host country can step
up the pace of recruitment without triggering significant
wage inflation and also determine whether a timeline
of two to three years to complete the ful l transition is
acceptable.
Choosing rom among three network operatingrameworks
For a multinational group, the divide between remote/
regional and local functions implies a choice of three
natural network operating frameworks (Exhibit 2).
1. Stand-alone. Independent operating companies
could deliver up to 80 percent of total identified savings
through the independent offshoring of remote functions
(or more than 80 percent if a network outsourcer of
the right profile and with suff icient scale is used, so that
economies of scale and scope can be achieved as well).
2. Remote functions coordinated. This model divides
network functions between one regional and several
local units. All report primarily to a group network unit
and only secondarily to their country businesses. The
regional funct ions could be consolidated across the
group (with or without the help of an outsourcer),
and the local functions could be optimized independently
on a per-country basis.
3. All functions coordinated.A single group network
function would drive the consolidation of regional
functions and a single, cross-group strategy to optimize
local functions. Outsourcing arrangements could
also be negotiated for regional and local functions on a
cross-group basis.
The model that an operator chooses will depend on
its key beliefs and the opportunities in the local markets
in which it operates. MNOs pursuing the stand-alone
model likely assume that the best way to capture labor
arbitrage savings is for each country to act alone (i.e.,
creating independent near- or of fshore centers). They
probably also believe that consolidation savings from
regionalization will be too small to be worth the cost
in terms of increased management complexity. These
beliefs may be compounded by the need to act in widely
varying markets – possibly in emerging economies
or from incumbent or attacker positions in different
countries.
Companies pursuing the coordinated remote functions
model will consider the group to be sufficiently stable
Potential operating frameworks consider a geographic spread of
responsibilities02
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and similar in priorities. They will probably also view
regionalization savings as being incremental to those
gained on local equipment and functions, consider
a coordinated low-cost hub pref erable to individual
initiatives, and believe that regional management can work due to the flexibility of their management culture. If
they are active in emerging markets, they will probably
favor this option, since talent shortages may not
allow them to replicate network functions in each country.
In addition, these players might view single-vendor
outsourcing as unacceptable due to vendor risk and vary-
ing local conditions. Final ly, groups choosing the
“all functions coordinated” model will likely align with
the coordinated remote functions model in terms of
beliefs, except regarding how to outsource. They will
presumably deem single-vendor outsourcing for
multiple countries acceptable and consider it less expensive
than usingmultiple suppliers.
Operators can implement any of these three models
with outsourcing in mind. Outsourcing can enable network
sharing among competitors, accelerate savings
through vendor financing, lower the level of management
focus needed, and reduce severance costs if the
outsourcer is able to reallocate dismissed staff. It may
also lead to increased savings if lower-cost countries
host the outsourced regional functions and due to theoutsourcer’s potentially greater scale. Additionally,
a growing body of reference cases exists for outsourcing
some or all network functions, so operators need not
fear they are pioneering some new and untried experiment.
That said, a number of drawbacks could also arise,
including the risk of relying on a third party for key network
functions, the probable need for an extra management
layer to interface with the outsourcer, and the risk that
the operator won’t achieve expected service levels and
cost savings.
Extending the benefts o regionalization
Operators may find that while regionalizing and
consolidating network functions provides a positive
business case in terms of opex savings, it addresses
a small portion of overall network costs and requires
as possible. For example, it retained its chief technology
officer and its data centers in Europe and North
America, while centrally locating remote engineer ing
operations in the emerging market region.
The operator maintained only the radio network
and field maintenance functions “in-country.” As a
result, it captured substantial overall savings,
including those gained through the creation of common
processes and standardized technical specifications.
Falling short
Conversely, an MNO consolidated its network
functions from more than 20 countries down to 3,
but, in this case, didn’t capture the expected
synergies due to a lack of coordinated governance
and an over-reliance on the remaining local teams.
Consequently, most of the regionalized functions
were gradually returned to local operating unit
control.
Consolidation around the Globe
Examples from emerging markets
It’s not surprising that a growing number of operators
are looking at relocating some activities off- or near-
shore – or at cross-border consolidation of network
functions in the case of multinationals. But to date,such plans have seen varying degrees of success.
Making the grade
One emerging market operator benefi ted by
establishing regionally shared services among up to
six national operators, gaining economies of scale,
scope, and expertise. It solidified these gains by creating
a number of global best-practice sharing centers,
enabling the pooling of expert ise for each topic area
and providing hands-on coaching for national operators.
Likewise, another emerging market operator
grouped the businesses of its network operations for
15 countries into regions. By dividing functions and
operations between developed and developing
markets, it rationalized its approach as cost-efficiently
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a significant multi-year effort that poses implementation
risks. When deciding whether to proceed, a multi-
national operator should also consider more strategic
implications brought on by the needs to rationalize
architectures, processes, and systems, such as capex
sav ings, asset efficiency gains, and quick network/
systems rollout across countries. In the long run, such
benefits will extend to the entire network capex base and
could enable operators to optimize network investments
significantly across countries. This is especially the casein markets with high growt h potential where the
network buildup remains to be completed.
Making it all work
To evaluate a regionalization project’s potential, group-
and country-level chief technology officers must be
open to radically reorganizing their departments and
willing to commit their functional organization managers
to the project. The head of each network function in
every country represented should conduct workshops
to allot FTEs against a common internal process map
and gain consensus on expert estimates of the project’s
overall consolidation and offshoring potential (Exhibit 3).
* * *
Mobile operators seeking new ways to save can jointly
consolidate and regionalize a range of related network functions, reducing addressable costs and capturing
broader benefits in the long term. Whether this strategy
is worth undertaking depends on the operator’s beliefs,
on its market position and prospects in each country,
and on its overall management culture. If undertaken,
making such a play successful requires that operators
choose which one of the three models best fits their
group’s needs and competitive positioning and devote
sufficient management focus over many years.
5 key practices ensure an accurate assessment of regionalization potential03
25
Giorgio Migliarina
is a Principal in McKinsey’s Beijing office.
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Vise-like market pressure and a growing network
services industry are compelling operators to significantly
reduce their costs. A new approach to outsourcing
is placing many on the path to achieving the savings that
the market demands.
Should established telecoms operators follow the
attackers’ lead and outsource their net works? Facing
top-line challenges, eroding margins, and declining
incumbent market shares, industry veterans continue to
seek new revenue streams and fresh opportunities
to drive far-reaching operational improvements. In a
recent McKinsey study (Future Telecoms Operating
Model), we concluded that incumbent telecoms operators
in mature markets, such as Western Europe, need
to reduce their total opex + capex (operating expenses +
capital expenditures) cost base by 20 to 40 percent. Inaddition to this focus on costs, they need to simultaneously
invest in new services and technologies (e.g., the
full-scale deployment of 3/3.5G access or IPTV) to remain
competitive and meet capital market expectations.
The network domain constitutes a significant share of
total operator opex + capex (up to 30 percent for mobile
players and up to 60 percent for fixed players) and is
an inevitable target for achieving the next wave of perfor-
mance improvement. However, the experience of most
established telecoms operators is that making network
performance improvements and rolling out new services
at the same time is a challenge.
Attacking operators have already signed large outsourcing
deals that are having significant impact. Players in
the United Kingdom, Germany, Scandinavia, Brazil and
elsewhere already have multi-billion dollar agreements
with Ericsson, Nokia Siemens Networks, Alcatel-
Lucent, Huawei and others to deploy, operate, and
maintain fixed and mobile networks.
Operators’ outsourcing options
From an industry point of view, network outsourcing
is still embryonic compared to IT outsourcing, and most
current arrangements focus only on the “out-tasking”
of operations such as network construction and field
workforce maintenance. We observe three levels of
network outsourcing, beginning with the basic out-tasking
of stable operations, which can deliver savings of 10
to 15 percent through the consolidation of maintenance
contracts and the capture of scale advantages (Exhibit 1).
The second level often involves single-vendor end-to-endoutsourcing and focuses on low-level design, rollout,
and operations, delivering savings in the 30 to 40 percent
range. Finally, operators can choose the extreme of
sharing and outsourcing the entire network. While the
benefits of this approach for established operators
remain to be seen, they will likely be significant.
Attacking mobile network operators have already
embarked on all three levels of outsourcing, but there is
an increasing number of examples of established
operators pursuing full network outsourcing. One mobile
incumbent transferred the full responsibility of rollout
and operations to a single vendor realizing more than
30 percent savings over the lifetime of the deal while
at the same time accelerating the completion of the
3G rollout.
04 Offloading the Core:Exploring Network Outsourcing
RECALL No 8 – Networks
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A new approach to outsourcing
As observed in the market, successful network
outsourcing arrangements can bring significant cost
savings and accelerate new service deployment if
executed well. The evidence also reveals that successful
operators are adopting and adapting the best practices
developed over the last decade of large-scale
transformational IT outsourcing, given that function’s
longer experience curve and demonstrable performanceregarding outsourcing. McKinsey has developed a
collaborative approach to network outsourcing based
on four cornerstones, which we have successfully
applied to help telcos achieve significant savings while
accelerating service rollout (see text box). In summary,
the approach builds on the fundamental belief that
outsourcing should be assessed and executed as a vehicle
to achieve transformational change rather than a
transformational lever in itself. If the value at stake and
the activities required to capture it are unclear, it
will be challenging to manage a vendor relationship. The
above-mentioned four cornerstones are:
1. Create full transparency around business objectives.
Operators should define clear strategic decision
criteria that align with the company’s overall business
objectives and use them to guide trade-off discussions
and decisions. These criteria can be summarized as
“rapid and sustainable operating profit improvements,”
“sustained service quality,” and “retained operational
and strategic flexibility” in order of importance.
This will allow executives to assess the trade-offs between
available operating model options, e.g., an in-
house executed improvement program, a part ial scope
multi-vendor technology outsourcing deal, or a
full-scale single-vendor outsourcing arrangement.
2. Jointly exploit all improvement levers and reduce
am biguity. Operators need to think in terms of the
entire business system, from customer segments to field
workforce operations, in order to capture the most
value possible and exploit all possible improvement levers
to achieve the greatest benefits, including demand side
levers such as product complexity reduction or increasing
service deployment discipline. They also need to minimize
uncertainties by collaborating with the short list of
vendors early on to specify who will be responsible for
what actions and decisions. The first, crucial step is to
create a comprehensive picture of current and projected
capacity and activity volumes as well as underlying
cost drivers for each technology platform. Since the value
levers will be very dif ferent, e.g., for a wireless 3G
platform compared to fixed voice TDM platform, so will
the sources of vendor-added value in an outsourced
Operators have 3 basic network outsourcing options01
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arrangement. As a result, the prerequisites for jointly
capturing that value will be varied as well. As an example,
the biggest source of value in outsourcing a 3G access
network typically lies in single- vendor optimized planning
and the rollout of managed capacity (primarily capex),
whereas for a TDM network, increasing utilization of field
workforce and accelerating the closedown of redundant
sites is often valuable. Exhibit 2 illustrates the logic (wire-
less access platform example) for why operators should
establish clarity concerning their internal ability to improveand the vendor’s ability to incrementally add value.
In our experience, up to half of the value creation in an
outsourced arrangement is subject to the ongoing
participation of the operator. At the very least, the operator
will be involved in the decision making. In wireless,
we have seen as much as 15 to 20 percent in incremental
savings plus accelerated rollout of new capacities
captured via single-vendor outsourcing models using this
approach (Exhibit 3). A typical value creation assessment
should in the end also include a view on internal
management capacity and experience to run an in-house,
large-scale operational transformation program
on top of the business as usual. A common conclusion is
that many of the identified performance improve-
ment initiatives that could be pursued in-house are more
likely to succeed using an outsourced model.
3. Craft a deal that accelerates value capture. Telcos
need to ensure the alignment of key deal mechanisms
and the company’s overall business objectives. Among
these are commercial mechanisms as well as deal
terms. The purpose of the former is to translate the value
realization plan into services, prices, and volumes
and incentivize both the operator and vendor to act in
accordance with the agreed-upon objectives of the deal.
These mechanisms include clear services definitions,
standardized SLAs, capacity-based pricing models, volumeforecast models, and carefully deployed penalty/
reward regimes. Given the industry’s relative lack of
standard definitions of services and SLAs in a managed
service context, it is part icularly important that
telcos invest in getting this right. The purpose of the deal
terms is to minimize the risk of operational disruption
or even dispute should either party divert from the
agreement (with or without proper cause). Operators and
vendors achieve the latter by jointly defining and agreeing
on business principles for how to deal with potential
future issues. Such principles can include HR policies,
deal termination clauses (full and partial), confidentiality
issues, major scope changes, and innovation.
4. Roll out world-class service management and
governance practices. Lastly, operators need to make
sure they have established clear interfaces, roles, and
Jointly negotiating value add minimizes ambiguity of
operator-vendor relationship02
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3. Craft a deal that accelerates value capture
Include clearly defined mechanisms that ensure
realization of strategic objectives, e.g., competitive
pricing, SLAs, continuous improvement
Focus on business impact, not technology,
through negotiations of business principles and
services
4. Roll out world-class service management and
governance practices
Ensure clear interfaces, roles, and responsibilities
for operational, tactical, and strategic issues
Include mechanisms to manage internal demand,
e.g., capacity planning, clear order points, project
prioritization
1. Create full transparency around business objectives
Define clear strategic decision criteria that are
aligned with overall business objectives
Define and detail operating mode options
Evaluate options against business objectives
2. Jointly exploit all improvement levers and reduce
ambiguity
Establish full transparency around prerequisites of
value capture up-front
Understand both parties’ economic models to
define the win-win point
Four Cornerstones of a Collaborative Approach to Outsourcing
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responsibilities for the operational, tactical, and strategic
issues that will ar ise among the provider, customer, and
other (sub-)providers (often referred to as the operational
model). Simply put, a comprehensive operational
model translates the commercial and deal terms into a
set of well-defined day-to-day processes working end-
to-end from business users all the way to the vendor
delivery staff. Operators must also invest in upgrading
the internal skills necessary to transform from a
delivery organization into a vendor management orga-nization. Exhibit 4 illustrates how the deal mechanisms
and operational models come together.
* * *
There are good reasons to suggest that as the first
incumbent operators now outsource their network oper-
ations, the market will follow. Adding further volumes
and sharing network operations through a third-party
provider gives operators access to far better scale effects
than what is possible through a solely internal focus.
There is also evidence that the capital markets favor higher
capex efficiency and that network assets are operated by a specialist. Furthermore, regulators have so far been
lenient towards outsourcing of deployment and operations
as long as the customer service quality responsibility
remains with the license-holding operator, although
this varies by market. The already fast-growing,
network-managed services market may provide early
evidence of a chain reaction towards a new era in the
telecoms industry.
Service management and governance model embodies the joint objectives,
incentives, and value realization plan04
RECALL No 8 – Networks
Ofoading the Core: Exploring Network Outsourcing 31
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André Christensen
is a Principal in McKinsey’s Toronto office.
Susanne Suhonen
is a Practice Manager in McKinsey’s
London office.
Martin Lundqvist
is an Associate Principal in McKinsey’s
Stockholm office.
Tor Jakob Ramsøy
is a Principal in McKinsey’s Oslo office.
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Driven by lower pricing, higher speeds, and better form
factors, wireless data traffic has f inally taken off. To
cope with this exhilarating demand, mobile operators
must plan significant build-outs of their networks,
in many cases within the next three to five years.
McKinsey’s analysis of wireless trends suggests that
operators will face business model challenges
in the coming years. Competitive pressures have already
led the industry to adopt flat-rate pricing plans
that might starve players of adequate margins.Operators
must now develop innovative approaches to
pricing, revenue generation, and network evolution that
result in cost-effective ways to meet their
customers’ growing need for high-speed mobile
broadband.
Questioning mobile data’s proftability
Demand for high-speed mobile data has seen meteoric
growth since early 2007 (Exhibit 1). Four factors have
ignited this worldwide boom:
1. The introduction of High-Speed Downlink Packet
Access (HSDPA) has led to improved wireless speed
and access time, finally delivering what users expected
nearly a decade ago.
2. New competitors are offering f lat rates as a strategy
to put pressure on mobile data pricing. This, in turn, is
driving down prices across the market. In the UK,
for example, mobile “attackers,” who use f lat-rate plans
to lure customers, drove incremental broadband
price plans down by nearly 90 percent between 2005
and 2007 (Exhibit 2). The same has been seen
in Scandinavia and other European markets.
3. Improved form factors of new handsets lead to
increased data usage – exemplified by Apple’s iPhone
that, when introduced in the US, tripled the carrier’s
mobile data traffic in many major cities.
4. Plummeting prices of UMTS cards make it attractive
for a larger section of society to plug into their laptops,
creating a “wireless DSL” experience.
While backhaul issues are now well researched, we predict
that this seemingly insatiable demand for mobile
broadband will lead to the bottlenecking of access networks
in the next three to five years in highly populated
cities such as Amsterdam, London, and Singapore. Theaccess network problem could accelerate if current
spectral efficiency promises are not kept – historical
wireless performance has, in some cases, undershot
promises by a factor of four. Resulting from fierce com-
petition, mobile operators may be losing the means
to pay for their broadband networks even as they push to
build them out. Research shows that mobile data
premiums over the fixed line continue to erode as many
operators adopt flat-rate fees. In countries such as
the United Kingdom and Austria, operators have currently
priced their broadband mobile plans below fixed-line
DSL alternatives.
Our analysis shows that in cases in which mobile
subscribers exceed usage levels of 1 giga byte per month –
which appears to be quite possible – the incremental
network cost of building capacity alone could exceed the
05 Mobile Networks of the Future:Building a Sustainable Wireless Carrier
Business Model
RECALL No 8 – Networks
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emerging European flat-rate price (Exhibit 3). In fact,
a significant number of heavy mobile data users may
already be unprofitable – an unsett ling notion,
given that these subscribers have traditionally been the
most profitable for mobile operators. This seems to
be a significant medium-term risk for the industry.
Mobile companies can learn from fixed-lined telcos,
for which the exponential growth of data, driv en by flat-
rate pricing, has already squeezed their economics.For example, the introduction of BBC’s iPlayer has placed
the economics of smaller UK-based ISPs under
pressure, with backhaul cost doubling and resulting in
no ARPU (average revenue per user) increase. This
type of growth can pose an even greater problem for wire-
less networks because the radio access network is
a far more shared and limited resource than the copper
lines for wired networks, with a much higher capex
cost for incremental capacity.
Operator actions
Operators need to star t shaping mobile data usage
immediately to avoid significant profitability issues in
the future. Achieving this change will be diff icult,
given the internal and market pressure to grow data
penetration. It will require operators to take a holistic
view of various customer segments, understanding their
profitability across the portfolio (e.g., in some Asian
markets, data has been a “loss leader” for many years).
We believe that operators need to take three specifications:
1. Consider recasting pricing models to ensure profit-
ability in what is rapidly becoming a “data-heavy” world,
especially on the “access type” UMTS card offerings.
Operators could, for example, better differentiate theirhigh-value customers by offering pricing plans that
pro vide priority access during peak hours. They could
also tighten up and enforce fair-use policies by reducing
traffic allowances or limit/disallow certain data-heavy
applications during peak periods. Other options include
pricing “be yond-limit” minutes at higher rates or promoting
“cache and carry” options, with which the user
downloads fixed-line content onto a mobile device to
use when on the move.
2. MNOs should also invest in exploring the business
model implications of potential shifts in revenue and
profitability towards content and devices, specifically
on applications linked to the mobile phone. This could
include actively shaping traffic, brokering revenue-
sharing content deals with video sites, or opening one’s
own site. Operators can also actively push additional
Wireless data growth is exploding globally01
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Intense competition has resulted in flat-rate plans ...
... leading to the real risk that margins will come under pressure
02
03
RECALL No 8 – Networks
Mobile Networks of the Future: Building a Sustainable Wireless Carrier Business Model
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Migration options depend on spectrum availability and the urgency of
operators’ capacity needs04
low-volume applications that carry big margins
(e.g., machine-to-machine applications, location-based
services, low-bandwidth games) or t ime shift down-
loads (e.g., pushing music overnight or offering overnight
phone updates).
3. Operators should also look into building additional
network capacity more cheaply. In principle, the network
solution an operator chooses should depend largely
on spectrum availability and the urgency of the capacity need (Exhibit 4), in combination with operator- and
country-specific characteristics, such as topography,
existing spectrum, existing network investments, and
the wireless/wireline regulations.
* * *
While all three of the elements above are critical
to a sustainable business strategy, the following chapters
will delve more deeply into the third element, network
capacity – given the focus of this publication on technology.
In this area, operators typically have three options
when seek ing to cost-effectively boost wireless capacity:
Use smaller cells and/or more sectors. There is an
economic limit to how small a cell can be and also a
significant cost to taking this approach. The most
interesting recent development is that of femtocells
and the complementary use of wireless LANs (e.g.,
WiFi), which will off-load traff ic from macrocells.
Gain spectral efficiency through 4G. In light of
the current expectations from 4G and their current
3G networks, operators will want to carefully consider their next generation deployment strategy
and all respective trade-offs.
Explore new spectrum. Network, chipset, and CPE
vendors, whose innovations enable network
extensions to multiple spectra and standards, are
helping operators exploit new spectrum. Network
vendors, for example, are providing base stations
that offer flexible frequency and standard support.
Chipset makers continue to move towards multi-mode,
multi-band chipsets, while CPE suppliers offer
high-end phones that combine HSPA, WiMA X, and
WiFi in different bands. The availability of the
current analog TV spectrum within the next two to
three years presents brand-new capacity options.
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Ferry Grijpink
is an Associate Principal in McKinsey’s
Amsterdam office.
Bart Delmulle
is an Associate Principal in McKinsey’s
Brussels [email protected]
Tanja Vaheri-Delmulle
is a Senior Research Analyst in McKinsey’s
Brussels office.
Suraj Moraje
is a Principal in McKinsey’s Johannesburg
office.
Stagg Newman
is an Advisor to the Global Telecoms
Practices in McKinsey’s Boston office.
RECALL No 8 – Networks
Mobile Networks of the Future: Building a Sustainable Wireless Carrier Business Model
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Femtocells have continually grabbed the mobile world’s
headlines for over a year – and for good reason.
They could become the go-to technology for quick and
economical network expansion.
Femtocells, now in advanced field trials and early
commercial deployment, are low-power 2G and 3G home
base-station transceivers (analogous to WiFi hot spots,
but working on licensed spectrum) for consumers, with a
target cost of EUR 70 to 100 (Exhibit 1). They connect
a limited number of pre-defined users as determined by
the operator, using a home’s existing broadband
connection as backhaul to provide a 2G/3G mobile
connectivity directly inside the premises. Femtocells offer
a coverage range of 50 to 200 meters, provide up
to 7 Mbps of bandwidth, and feature plug-and-play
instal lation and remote troubleshooting access. In theideal world, they would be self-configuring within
an operator’s 3G network and capable of operating under
a range of standards.
Therefore, femtocells could feature lower costs and
better coverage than most other home-based technologies
and improve the data usage experience at home.
Furthermore, they can be used with the customer’s current
mobile handset and, therefore, avoid network handover
issues. However, femtocells do require additional customer
premises equipment (CPE), a broadband subscription,
and only offer voice over IP protocol (VoIP) quality
of service (QoS).
With the growing presence of mobile usage in the home
(e.g., almost 50 percent of usage in the US is either at
home or in the office, more than 75 percent of mobile
video usage in Japan is at home), the increased focus
on fixed-mobile convergence, and indoor coverage still
remaining a tough problem to solve, femtocells increasingly
appear to be a potential way forward for the industry.
Operator implications
We believe that from an operator standpoint, femtocells
could significantly improve customer value through
lower churn and higher ARPU, while providing new fixed-
mobile convergence possibilities. Femtocells could
also enable mobile network operators to reduce long-term
capacity issues by lowering macrocell loading and
hence reducing pressure on some of the most loaded urban
cells. Furthermore, the technology will help limit the
impact of WiFi (and potentially VoIP) in the home by reducing the use of dual-mode phones and by capturing
set-top box opportunities. Finally, it would allow
operators to reduce backhaul costs, using the subscriber’s
existing paid-for broadband line for backhaul.
McKinsey has compared the economics of femtocells
to dual-mode phones and homezones, and we believe
femtocells to be superior for three reasons.
Significant churn reduction.As a “for the household”
solution, the operator would establish its own “network”
in the subscriber’s home, leading to a reduction in
churn – clearly not the case with WiFi homezones, for
example, which do not reduce switching costs. This
benefit in itself could well increase customer value by
more than 20 percent.
05 Mobile Networks of the Future –The Value of Femtocells
RECALL No 8 – Networks
Mobile Networks of the Future – The Value of Femtocells
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Femtocells offer wireless access through a home’s existing
broadband connection01
One household, one operator. A home-installed femtocell
would create a reason for the entire family to switch
to one operator. This, again, would not be the case with
a homezone and would be more expensive with dual-mode
solutions.
Lower subsidies. The subsidy required for femtocells
is less than that for dual-mode phones (although more
than for homezones), since the subscriber can use his or
her existing handset.
Over time, femtocells could give rise to a string of new,
longer-term business opportunities, ranging from new
possibilities for creating fixed-mobile bundles with
“real” customer benefits to merging with other boxes and
becoming a home media storage device. The value
creation for integrated players is even higher, as they may
benefit from higher speeds and lower churn on the
DSL line, while creating effective bundles that span the
fixed and mobile worlds.
Only one player, Sprint, has launched a femtocell offering
to date, with a commercial pilot on its CDMA network
in Denver and Indianapolis (US) in September 2007. The
operator sells the CPE for USD 49 with unlimited
airtime, while selling the femtocell for USD 15 per month
for an individual or USD 30 per month for the entire
family. Results are not publicly available, but indications
are that the user experience has been positive,
with the devices being reasonably self-installing and
user-friendly.
And other players are likely to follow suit. Vodafone
announced it could launch commercial services by
the end of 2008; Telefónica/O2, TeliaSonera, and SoftBank
have ongoing trials; and AT&T, Verizon, and T-Mobile
have announced that consum er trials will start inthe near future.
Operator actions
We believe that all operators in countries with developed
fixed-line broadband systems should act quickly to test
this opportunity – both technically and from a business
case standpoint – while considering potential disruptive
moves. Integrated operators, specifically, should bring
together both networks to understand how to truly
exploit this technology in order to drive the next wave of
fixed-mobile convergence.
The question remains whether the benefits of femtocells
will be sufficient to lure customers into widespread
adoption. We believe that, by 2011, three sizable customer
segments could show interest in femtocells:
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Price-sensitive homezone customers, who will
constitute 10 to 25 percent of all end users in the US
and the UK
Customers experiencing poor indoor coverage,
estimated at 5 percent of al l US end users and 15
percent of all UK end users
Heavy data service users seeking an improvedat-home experience – potential ly 5 to 25 percent of all
end users.
The appeal would be even greater if operators aggres-
sively push the technology (as they seem willing to do)
through CPE subsidies and attractive on-femto tariffs.
In a recent McKinsey proprietary survey conducted
in Germany, approximately 50 percent of respondents
said they would be willing to pay a EUR 25 premium
to have a femtocell installed in their home. The top three
drivers for their decision were savings (by far the most
important), connection quality, and faster mobile data
capture. The acceptance rate goes up to 75 percent
if the femtocell is fully subsidized.
Given the consumer interest, industry analysts
expect to see 80 to 120 million femtocell users worldwide
by 2011. Most industry observers agree that femtocells
could become an integral part of the expected
mobile operator push into converged fixed-mobile services.
It is interesting to note that more than 50 percent of
installed femtocells are expected to also include embedded
DSL and WiFi modems, with some operators already
working on installing other set-top-box-like features.
While the discussion here paints a fairly rosy picture
for femtocells, operators should keep in mind that wide-
scale deployment is likely to be at least two to three years away, with a number of technical and operational
details still needing to be resolved. On the technical
side, operators will need to ensure adequate backhaul
capacity (especially in a multi-user scenario)
and guarantee smooth network integration and RF
performance (especially at higher volumes).
Operationally, they wil l need to manage forward and
(especially) reverse CPE logistics and keep track
of CPEs in the field – from a regulatory perspective.
* * *
While several pre-deployment matters must still be
worked out, none will block the road to femtocells
and the expansion opportunities that it presents. It would
be a very good idea for operators to closely study this
new technology from a commercial and technological
standpoint – you can love them or hate them, but
femtocells shouldn’t be ignored.
Bart Delmulle
is an Associate Principal in McKinsey’s
Brussels office.
Peter Verboven
is an Engagement Manager in McKinsey’s
Brussels office.
Suraj Moraje
is a Principal in McKinsey’s Johannesburg
office.
Ken Serdons
is a Business Analyst in McKinsey’s
Brussels office.
RECALL No 8 – Networks
Mobile Networks of the Future – The Value of Femtocells
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As the dust from the technology battle settles, operators
need to crystallize their thinking on what the timing
and business model for fourth generation (4G) deployment
should be and how to make the required spectrum
available. Given the complexity of the issue, players need
to start formulating the answers now.
As the mobile industry prepares to select the 4G mobile
broadband standard, three technologies are struggling
on the competitive battlefield. Each promises
low latency, high bandwidth, a f latter IP-oriented
architecture, and higher spectral efficiency by using
Orthogonal Frequency Division Multiplexing (OFDM)
and advanced antenna technology (Exhibit 1).
WiMAX is a wireless broadband technology pushed by
Intel, sponsored by the WiMAX Forum, and based onthe IEEE 802.16(e) standard finalized in 2005 for fixed
and mobile deployment.
LTE(long-term evolution) arises from the 3G Partnership
Project (3GPP) ecosystem that dominates mobile
deployment today and represents a new generation of
mobile telephone standard that will probably replace
current GSM/UMTS offerings.
UMB (ultra-mobile broadband) comes from the
Qualcomm-driven 3G Partnership Project 2 (3GPP2)
ecosystem as the proposed successor to the CDMA/
EVDO product line.
WiMAX: early lead, but altering
Of these three, WiMAX took an early lead in deployment,
with at least one fixed network now deployed in most
key markets. From a technology readiness perspective,
WiMAX currently enjoys a two- to three-year time-to-
market advantage over any other wireless broadband
technology, for both fixed and nomadic applications.
Furthermore, many key vendors (e.g., Intel, Samsung,
Motorola, Alcatel-Lucent) are clearly supporting the
standard, with Intel committing to embed WiMAX
chips in its microprocessors starting in 2008 (as it did
with WiFi).
Given these factors, it appears that WiMAX wil l
attract three times more network and ecosystem invest-
ment than LTE in the short term. However, the bulk of 4G
demand will probably materialize only af ter 2011, by
which time WiMAX could lose its lead, due to four factors:
1. The current technology cannot be deployed in
paired frequency division duplex (FDD) spectrum,
which dominates global allocations.
2. There are currently no tier-1 operators on the global
level – with the exception of Sprint/Clearwire –
with commitments to widely deploy a mobile WiMAX
network. Most WiMAX deployments are small and
promoted by new start-ups. The bulk of deployments is
focused on fixed WiMAX implementations in emerging
markets.
3. Most WiMAX deployments are in the 2.5 GHz
spectrum or higher, where attackers are able to obtain
spectrum. Radio signals do not propagate nearly as
well as higher frequencies. Therefore, WiMAX operators
must deploy far more cell sites and hence have higher
05 Mobile Networks of the Future –The Rocky Road to 4G
RECALL No 8 – Networks
Mobile Networks of the Future – The Rocky Road to 4G
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4G effectively handles large spectrum blocks to deliver higher peak data
rates and lower latency01
costs than today’s cellular networks. Subsequent improve-
ments in WiMAX could close these performance gaps (e.g.,
adoption for the 700 MHz spectrum, paired spectrum),
but it takes time to certify new standards, chipsets, and
equipment. A new version of WiMA X, currently
referred to as 802.16(m), is planned for full mobility, but
it is on the same timeline as (or later than) LTE.
4. WiMAX is designed for fixed and nomadic applications
and is only now being adapted for fully high-speedmobility. Other 4G technologies have been designed to
handle high-speed mobility and hand-offs from the start.
UMB does not appear positioned to gain any share,
as current operators – most notably Verizon, Telstra,
and Reliance – migrate from the 3GPP2 to the 3GPP
ecosystem, either through the 3G WCDMA family or
directly to LTE. And Sprint, which had been on the
3GPP2 path, has announced its plans to migrate to WiMAX,
seemingly leaving UMB with no major operator support.
While WiMAX has been perceived to have the lead based
on early deployments in the race to become the 4G
standard, momentum appears to be shifting to LTE. It is
likely that LTE will capture the lion’s share of 4G
investments post-2011, while advanced 3G systems will
dominate investment for the next five years.
LTE: a late starter, but gaining momentum
LTE was just approved by the 3GPP in January 2008.
Experience shows that most standards take more than
six years to go from publication to commercial success,
so it is likely to be a few years before LTE is available for
broad rollout as the 4G standard. However, there
seems to be broad mobile operator support for it. Most
European GSM-based operators show a strong inclination
to adopt this standard. In the US, Verizon, with itsrecent spectrum purchase at 700 MHz, is on an aggressive
timeline to test LTE in 2009 and deploy limited LTE
service as early as 2010. With the exception of Sprint, the
other major players (ATT, T-Mobile, Alltel, etc.) appear
to support LTE.
Designed to be a “smooth upgrade” from the current
GSM path, LTE is supported by leading operators,
including Alcatel-Lucent, Ericsson, Nokia, Orange,
T-Mobile, and Vodafone, who launched the Long-
Term Evolution/System Architecture Evolution Trial
Initiative in May 2007, aimed at promoting LTE.
Since then, other operators, including NTT DoCoMo,
LG, and Samsung, have also gotten on board.
With the overwhelming backing of the mobile industry,
LTE will have the strongest ecosystem, the lowest
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47
cost, and the earliest/broadest device availability. However,
given that it will be tailored to paired spectrum, it is
unlikely to be the sole technology used – WiMA X may
still be deployed for unpaired spectrum, especially if
dual-mode devices become widespread. Nevertheless,
LTE will most probably still capture the lion’s share
of deployments, as existing carriers hold the bulk of
the spectrum where these technologies will eventually
modernize their networks.
Challenge or operators
As technology-related issues get resolved (e.g., what
exactly an upgrade will involve, the availability of multi-
mode phones), operators will need to answer a number of
strategic questions on the road to 4G.
What is the profitable 4G business model? Without
a change in business models, 4G will drive even higher
bandwidth and capacity needs (the iPhone experience
in the US is an example of this) without generating an
appreciable increase in revenue to recover the investments.
Operators need to resolve what applications/advertising
and content models, pricing models, distribution
models, partnerships, etc. they can use to make 4G a
profitable venture.
What are the economic advantages for starting early
versus being a fast follower or laggard? First-to-market
carriers could reap disproportional economic benefits
by attract ing the large proportion of high-spending
customers who are motivated by new devices/applications
and by gaining a scale/pricing advantage through
loading their networks ahead of the late arrivals. However,
as with 3G, first-to-market carriers will r isk market
demand and ecosystem maturity.
What is the optimum spectrum strategy? The economics
of high-quality, higher-frequency deployment can
be daunting. Ideally, operators would use large blocks of
lower-frequency spectrum to ensure 4G success. The
major benefits of 4G over 3G occur in frequency blockslarger than 5 MHz. With the impending auctions and
debate over access to 700 MHz spectrum around the world
(US 700 MHz was recently completed), operators
need to establish a clear plan for gaining access to the
low est-frequency spectrum in their markets.
How should operators migrate their networks from
2G/3G to 4G? Nearly 40 to 50 percent of the cost
(capex + opex) in transitioning from 3G to 4G will be
attributable to migration (OSS, BSS, network
reconfiguration, increase in backhaul capacity, customer
information migration, re-farming of spectrum,
sharing of networks, etc.). Operators will thus need to
start invest ing in their 3G networks now (OSS,
power, cabinets, applications, etc.) if they are to
facilitate a smooth transition.
* * *
In light of these issues and questions, the dynamics
involved in any 4G upgrade will be market-specific and
based on spectrum availability, competitive offerings,
the level of spectrum exhaustion, and the need to re-farm
spectrum using more spectrally-eff icient technology.
Kurt Cohen
is an Associate Principal in McKinsey’s
Stamford office.
Stagg Newman
is an Advisor to the Global Telecoms
Practices in McKinsey’s Boston office.
Ferry Grijpink
is an Associate Principal in McKinsey’s
Amsterdam office.
Suraj Moraje
is a Principal in McKinsey’s Johannesburg
office.
RECALL No 8 – Networks
Mobile Networks of the Future – The Rocky Road to 4G
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The demise of analog TV in the 2009 to 2012 time frame
will free up large swathes of spectrum with superior
propagation characteristics. How this spectrum is licensed
and to whom it goes could significantly alter industry
structure and individual player competitiveness.
The approaching phase-out of analog TV will free up large
chunks of spectrum for other uses and users. Across the
US, Europe, and Japan, significant amounts of spectrum
in the 400 to 700 MHz bands will become available by
2010. The spectrum will offer propagation characteristics
superior to those reserved for 2G/3G mobile service,
enabling truly wide-area, highly robust networking with
good building penetration and far fewer cell holes.
This spectrum – the largest amount made available in
years and potentially the last major offering for a longtime to come – will likely be licensed across markets for
telecoms usage on a technology-neutral basis. This
will create opportunities for new players to enter or for
existing players to significantly increase their
capacity and improve their coverage at a low cost.
Non-mobile players have also shown interest in this
spectrum, as demonstrated in the recent US auctions,
although how much they will be willing to pay would
depend largely on the conditions. While cable companies,
satellite providers, and others were all participating in
the current US auction, the dominant incumbent players –
Verizon and AT&T – were able to outbid other entrants to
acquire most of the prized real estate. Together, these
two companies paid well over 80 percent of the cost
in the winning bids. Satellite operator EchoStar (dish
network) won a single 6 MHz channel of 700 MHz
spectrum for much of the US. Having failed to win any
spectrum in the 2006 advanced wireless services
auction, however, this spectrum is not likely to provide a
solution for substantive two-way services. Possible
new entrants, such as Google, did not win any spectrum,
although it was successful in imposing open-access
conditions through its bid. Google also just announced
an investment in a partnership to develop a WiMAX
network in the US.
Price determinants o the newly availablespectrum
Given the intense interest from multiple competing
sources, the analog TV spectrum will undoubtedly be
more valuable than “off-mobile” spectrum in the pastas indicated by recent auction activit y (Exhibit 1). The
2006 US 700 MHz auction set a US record for money
raised. In general, regulators appear to veer towards
packaging this spectrum to be valuable to a large
set of players. Five decisions will determine exactly what
this value is.
Service/technology neutrality.Will regulators pre-describe
the services to be offered or the technology deployed?
More flexible regulations wil l increase the number of
potential bidders and thus raise the value of spectrum.
US licenses, for example, are usually technology-neutral
and offer a broad definition for allowed services. The
European Commission has now also recommended
service and technology neutrality policies, although
responsibility for implementation lies with local regulators.
05 Mobile Networks of the Future –The Alternate Spectrum Opportunity
RECALL No 8 – Networks
Mobile Networks of the Future – The Alternate Spectrum Opportunity
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Switchover to digital broadcast will free up valuable analog spectrum01
Spectrum restrictions. Will regulators impose restrictions
or obligations (e.g., limited spectrum per player or timing
and rollout obligations)? Any type of caps wil l lower the
value (and cost) of spectrum in an auction. The US has,
for example, imposed an open-access obligation at the
device and application levels for one of the recently
licensed 700 MHz blocks. To date, no evidence has emerged
of similar restrict ions in other countries, although
many EU wireless networks already have similar obligations
(e.g., SIM unlocked).
License structure. Will regulators award a lot of small
licenses or fewer large licenses? The band structure poses
a particular challenge for regulators. If they want to enable
4G in order to deliver maximum value in high-speed
performance, licensing in large spectrum blocks is
required. However, large spectrum blocks also mean fewer
licenses, posing the problem that not all current operators
can obtain the new lower-frequency licenses. Therefore,
regulators may want to enable and encourage spectrum
sharing among operators, so that no one is significantly
disadvantaged. This would also enable operators to
share the capex risk of new deployments and accelerate
new technology platforms and applications.
Spectrum configuration. Will spectrum be offered in
a paired or unpaired configuration? Large contiguous
blocks of nationwide spectrum would be the most
valuable. Whether this spectrum should be in paired or
unpaired blocks is debatable: paired spectrum
has distinct advantages for handling the difficult RF
problems posed by wide-area, full-mobility networks,
while unpaired spectrum provides more flexibility
for handling asymmetric traffic.
License method. Will regulators auction spectrum
whereby market forces decide the winner or use a“beauty contest” approach in which the regulator picks
the winners based on the perceived ability to provide
the greatest public good?
How operators can take strategic advantage
Overall, there are four strategic options available for
telcos looking at this spectrum.
Buy and use immediately.Buy spectrum and deploy it
either as an extension of current data capacity or as
something new (e.g., mobile TV). To do this, telcos will
need to resolve whether they can extend the current
network for use in the 400 to 700 MHz band.
Buy and “squat” until the 4G technology is really widely
needed. Buy spectrum, but defer commercial deploy-
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51
ment for the next few years. Questions here include
whether the economic threat wil l be large enough to
make this business case positive and whether regulators
would allow idle spectrum for a period of time.
Tailor to good economics. Influence regulations in order
to optimize value from spectrum (e.g., licensing in small
fragmented bands to allow many operators to access
small amounts to “fill holes,” mandatory provisions forpublic safety and government usage to ensure future-
proof public safety networks, forced use for mobile TV,
mandatory wholesale pricing to ensure equal access).
In this case, telcos need to prepare a good economic
argument for why such regulation would be desirable.
Ignore. Disregard new spectrum after ascertaining
whether the threat of a new entrant can be ignored or
whether the telco has sufficient bandwidth to meet
future needs.
When looking at the GSM spectrum – part icularly the
850 or 900 MHz frequencies – the operator needs to
evaluate how soon it can cost-eff iciently migrate enough
of the GSM traffic (incl. voice) onto 3G networks to be
able to re-farm spectrum. LTE (long-term evolution) has
been designed particularly to enable this re-farming,
since it supports multi-rates and, thus, deployment in
channels from just over 1 MHz wide up to 20 MHz.
So, operators can start with narrower channels and move
to wider channels and better performance as GSM
traffic is moved. In order to move the GSM traffic, it will
be critical to pro vide cost-efficient, attractive, multi-
mode subscriber equipment. Operators that have GSM
spectrum must assess their ability to convince the
regulator to allow re-farming without imposing any onerousconditions. Those without GSM spectrum must convince
regulators to enact regulations that either require
network sharing or prevent operators with GSM spectrum
from gaining a strong competitive advantage.
* * *
The soon-to-be-available analog spectrum offers
significant advances in coverage, networking, and signal
penetration. An operator’s approach to this harnessing
the power of this spectrum will vary from market to
market (e.g., which spectrum is available, what is the
industry structure). It will also be dependent on players’
specific situations (e.g., amount of spectrum available,
integrated versus mobile only, mobile data and network
strategy, current network configuration).
Klemens Hjartar
is a Principal in McKinsey’s Copenhagen
office.
Michael Wilshire
is an Expert Principal in McKinsey’s London
office.
Stagg Newman
is an Advisor to the Global Telecoms
Practices in McKinsey’s Boston office.
Ferry Grijpink
is an Associate Principal in McKinsey’s
Amsterdam [email protected]
Tanja Vaheri-Delmulle
is a Senior Research Analyst in McKinsey’s
Brussels office.
RECALL No 8 – Networks
Mobile Networks of the Future – The Alternate Spectrum Opportunity
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TDC is Denmark’s leading communications solutions
provider. It is the incumbent and leader in all segments
including mobile, broadband, and cable.
Mads Middelboe is Senior Executive Vice President at TDC
and has eight years experience in the Danish/Nordic
telecommunications industry. He has been a member of
TDC’s Group Management Board since 2006 and had
served as CEO of Mobile Nordic since 2002.
McKINSEY: Outsourcing a mobile network would seem
to be counterintuit ive for a telecoms operator. How did
this become an idea you were willing to entertain?
MADS MIDDELBOE: We intended to move to a different
cost and capability curve – referring both to network
operation and expansion. Thus, outsourcing affects both the network we have and the one we want to build
for the future. For any telecoms operator – and for
an incumbent in particular – network ownership and
network operations constitute core business. This
makes the decision all the weightier. Still, we found the
idea appealing. We did look into this f ive years ago and
found out that we enjoyed some key economies of scale
as the incumbent – ones that we did not want to lose. In
principle, outsourcing would mean sharing strategic
business advantages with a partner who would use them
to attract new customers – in essence, our competitors.
McKINSEY: So what changed? What made it clear to you
that outsourcing on this scale would be advantageous?
MADS MIDDELBOE: Well, five years have since passed.
Now, we know that we are up against players in this
arena who have captured synergies and have even more
network potential regionally. The time was ripe. We
saw that we could benefit from an outsourcing partner’s
synergies and potential, despite the reality that they
would use the relationship to bring on new customers for
themselves. It was the right time to gain the “first-mover
advantage,” and we seized it by linking operating
improvement potential with future capex investment.
McKINSEY: What were the steps you took leading up to
this decision?
MADS MIDDELBOE: As I mentioned, we began laying
the groundwork for this move five years ago. We conducted
our own cost improvement project and streamlined
the organization to a large extent. Knowing in detail your
improvement potential prior to outsourcing makes thedeal more transparent and enables the provider to
focus its effort with further improvements on top of those
ideas in order to maximize value creation. In other
words, we were internally ready to capture a larger part
of the value created in a transaction.
McKINSEY: What factors did you consider in the selection
process? What did you emphasize?
MADS MIDDELBOE: The first key factor was the com-
petitive element. We had three bidders, but it is imperative
to have at least two. The second was the openness in
our pitch. No “wheeling and dealing.” We opened our books
and presented our baseline and current cost structure.
We chose to outsource the full scope of network operations
and build-out in order to provide the partner maximum
potential to exploit and offer synergy benefits across the
06 The Power of Letting Go An interview with Mads Middelboe, CEO, TDC Mobile and Senior Executive Vice President, TDC
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value chain. This emphasized that we were looking for a
strategic partner, not just a signature on an outsourcing
contract with short-term savings.
McKINSEY: At this point in the process, did you follow a
standard request-for-proposals approach?
MADS MIDDELBOE: Actually, we went on to design
the competitive element by selecting specific players. Sincetwo of our existing suppliers already had stakes in the
network, each of them had an interest in becoming the sole
vendor. This might have been sufficient in itself to spur
competition, but we raised the stakes by adding a third
player with no current interest in the network but who
was doing very well in many other markets. However, with
no existing experience and presence in the network,
it turned out to be very difficult for this vendor to present
a solid business case.
McKINSEY: Some say facetiously that if you want
negotiations like these to fail, simply involve your CEO.
How did you define your role to ensure success?
MADS MIDDELBOE: Involvement in such a strategic
project is, of course, why I’m here. I was deeply involved
in all major decisions and acted as a project sponsor.
My role was to monitor proceedings from the business
perspective and integrate technological aspects
into this perspective. We had our process in place. We
identified key criteria for success that went well beyond
the commercial bid. They reflected the inherent
complexity in a “technology swap,” whether the candidate
would retain our employees, how they could maintain
employee motivation after such a move, and how they would ensure smooth operations during the transition
and well beyond it. These elements rigidly served as
the basis to evaluate candidates and assess risk.
McKINSEY: As you said earlier, network operation
has historically been the core competence of mobile
operators. Now that this is being outsourced, what will
be your core?
MADS MIDDELBOE: Of course, it remains crucial to
exert strategic and operational control over the network.
When you outsource the network you obviously run
the long-term risk of losing the “feeling” for the network –
the risk of no longer being able to maintain the
competencies and the insights required to set the strategic
network agenda. Competency elements move into a
shared environment within a strategic partnership, and
financial, technical, and service contract management
become the core competency.
McKINSEY: How do you hold on to that level of
influence?
MADS MIDDELBOE: Operational control is ensured
by ser vice levels agreements, KPI monitoring systems, and
a structured governance model mirroring operationalfunctions on both sides of the table as well as senior
executive management levels. You don’t need to do every-
thing yourself if you can viably ensure that others can
and will. It is vital to understand which strategically
important features a network must offer, so that
your network is also competitive in the long run. This is,
for example, achieved through benchmark regimes
and mechanisms for the quality and standard of sites.
These are all new competencies our retained organiza-
tion needs to acquire. With this new focus, I am
convinced that our strategic competence will actually
increase over time.
McKINSEY: Is there an organizational effect of outsourcing
such a major part of your value chain?
MADS MIDDELBOE: Absolutely, and it is important to
take a look at what remains after such a major move –
the residual organization. It might have the potential to
take on other, more technically-oriented work. When
outsourcing, you also outsource some of the complexity.
This can free up capacity to concentrate on tasks previously
handled elsewhere in the organization. In our case,
various product management functions were spread among
both market and technical units. Now, we haveconsolidated all technical product management functions
into the network organization, and market units are
purely focused on the commercial perspectives of product
and customer management.
McKINSEY: How is it possible for an equipment vendor
to extract more value from network operation and
development than the network operator?
MADS MIDDELBOE: There are three reasons for this.
The first is that no one knows the equipment better
than the people selling it. The second is economies of
scale and a single-vendor approach, which reduces
complexity. Such vendors can operate a number of net-
works. We operate only one. Ours is at a national
level, but networks can be regional or even global. The
third very important reason is that we are currently
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seeing a shif t in the industry’s value chains. For a
network equipment vendor whose core business has been
the delivery of equipment, global competition
developments mean declining growth rates and shrinking
margins. This is why such vendors have strategically
chosen to engage in managed services. So what enables
these vendors to extract more value is the combination
of having a strategic base in network operations
and build-out, being a global player that enjoys bothregional and local economies of scale, and the fact
that they know their own technologies better than any-
one else.
McKINSEY: How do you ensure that your partner’s
prices and service offerings remain competitive in an
industry that is characterized by constant change?
MADS MIDDELBOE: By establishing what we call a
benchmarking forum. We involve a neutral third party
to track both the partner’s prices and those of their
relevant competitors around the world to establish
benchmarks at regular intervals. Then we have agreed
on principles and mechanisms to periodically realign
the agreed prices and terms with the industry bench-
marks identified. There are no price guarantees. There
is, however, a shared understanding and a system or
regime backed by a number of mechanisms integrated
into both partners’ governance structures.
McKINSEY: Will this change have any effect on your
own job?
MADS MIDDELBOE: When you outsource, you never
outsource responsibility. If you ask me as CEO if Ifeel that I’ve surrendered something – if my job carries
less weight than it did before – the answer is no;
absolutely not. Some people are motivated by managing
people. I am motivated by managing people but
equally as much by leading a business through the partner-
ship. In this sense, I am the goalkeeper for our financial
objectives. I still manage people. It just takes on a
different form now. I used to conduct business reviews
solely with our CTO and his staff. In this new governance
structure, I also conduct reviews with the outsourcing
partner. The job definitely doesn’t become easier or less
complicated after outsourcing. If anything, new
competencies are required to operate your company
through partnerships.
McKINSEY: What were your considerations regarding
your employees throughout this process?
MADS MIDDELBOE: We always knew this would be a
relatively sensitive area for our employees. As an incum-
bent, many of them have been with us for many years.
Understandably, they would have concerns about trans-
ferring to a new employer. This was our assumption
and the reason why we chose a process with more
restrictive information policies at the outset. We did
communicate that we were launching a process to find a
strategic business partner. The objective was to reducecosts, not necessarily to find an outsourcing solution.
Outsourcing was an option to this end and, as it turns
out, this was in fact the most value-creating outcome.
McKINSEY: Were your employees’ reactions
favorable?
MADS MIDDELBOE: All employees involved were very
positive on the day of the announcement. We spent a
significant amount of time explaining the rationale for
outsourcing, and the vendor also laid out a well thought-
through plan for all transferred employees. Despite
having to leave TDC, the employees applauded at the end
of the presentation. I believe that they truly understood
why this was the right move and that the chosen vendor
was the best possible partner.
McKINSEY: What have you learned from making this
ambitious move?
MADS MIDDELBOE: The first thing we learned regarding
operations is that nothing has changed. We are the
same people. We sit in the same building. Employees do
report to a new management team, but nothing has
changed real ly. Of course it is unlikely that things wouldchange radically in such a short time. On the other
hand, you should not ignore the challenge of changing to a
partnership. Over time it will develop into a completely
new way of cooperation, and you need to develop your
skill set and processes accordingly. If the processes
we established with our partner did not work, the impli-
cations on all processes – from customer support to
fault handling – would be immediate, and you should be
prepared to adjust properly and timely.
McKINSEY: You are the first incumbent in Europe to do
this. Do you expect other mobile operators to follow in
your footsteps?
MADS MIDDELBOE: Yes, I’m certain of that. I have no
doubts that it will happen here in Denmark, elsewhere
in Scandinavia, and in Europe on the whole. If one
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incumbent has actually done this, it means there are
many more out there weighing their options.
* * *
Mr. Middelboe was interviewed by Klemens Hjartar, a
Principal in McKinsey’s Copenhagen office.
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RECALL No 8 – Networks
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