African Telcos need to tame runaway costs

Details: Tom Makau; Category: Trends & Forecasts; 08 June 2012; 11170 views

Developing Telecoms' Africa blogger Tom Makau takes a look at how African operators can curb their soaring operating costs...

With the unprecedented growth of the telecommunications sector in Africa over the past five years – particularly with regard to mobile communications - African telcos saw a near exponential growth in their customer base and revenues. With so much liquidity, the majority of them embarked on expansion of their networks and services so as to offer better services and increase their geographical coverage. This expansion carried with it an increase in operating costs.

Unfortunately, the factors behind the expansion were not solely commercial. Regulators required operators to extend coverage for universal access, and political factors were also at play, but above all the oversized egos of the leadership in these companies led to the unplanned expansion of services in a bid to be the biggest, the fastest, the most cutting edge.

In time, the marginal revenues gained due to these expansions became lower than the marginal cost incurred. Even with all signs pointing to the danger of continued expansion past this point, many operators are leaving nothing to chance as they expand beyond borders. With the cost of operating a network in Africa being much higher than in other continents, copy-pasted business models from Europe and India didn’t hold water and these companies have started seeing diminished profit margins.

In a bid to control runaway costs, operators have embarked on cost cutting measures which they hope will bring down the cost of doing business. I am however of the opinion that some of these measures will not be effective unless the root of the problem (marginal increase in revenues being lower than marginal cost increase) is tackled.

Outsourcing

Many operators have started outsourcing what they term non-core business to parties who are supposedly experts in activities such as customer service, network operations and IT. An example is Bharti Airtel in Africa, which has outsourced finance and operations to PwC, IT to IBM, customer service to Avaya and network operations to Nokia Siemens Networks – allowing the operator itself to focus on marketing. One of the biggest reasons for outsourcing is the belief that it leads to lowering of costs. If this was the case, why isn’t Bharti Airtel now returning a profit after outsourcing nearly everything in its Africa OPCOs? The answer lies in the fact that outsourcing does two things:

In markets where human capital is cheap such as Africa, the cost benefits of outsourcing can sometimes be negligible. The difference between what an operator would pay an engineer and what the third party pays the same engineer is usually not very big. However, if a European operator were to outsource operations to an African or Indian third party then the cost benefits are substantial, as what the engineer in the African/Indian third party earns is much smaller than his European counterpart. This is the reason why American and European companies outsource to India, not to American or European third parties.
If the above is true, then the cost of doing business simply moves from the fixed cost column of a telco’s books to the variable cost column; the figure doesn’t change much. This movement alters management finance ratios, improving the operator’s financial health. This unfortunately makes it seem more viable as an investment avenue to attract more funding for expansion from gullible venture capitalists.

In my opinion, what African telcos need to do in order to lower operating costs is to have lean operations. The phone line to staff ratio is very low in most African operators, with some having a staff to line ratio of 1:200. In India, Bharti Airtel’s ratio is around 1:10500, exemplifying what a lean operation is. Lean operations can also be achieved by putting in place world class processes and management systems to improve on their operating efficiency. Many African operators do not adhere to BSS/OSS process standards or accepted project management principles, with the resulting inefficiencies leading to escalating costs of operations.

The other way in which operators can lower operating costs is going green. Second to commercial power generating companies, telcos in Africa generate a lot of power from fossil fuels to power their networks. With grid power sporadic to say the least, power costs form one of the highest components of a firm’s cost of operations. Adopting low power consumption network equipment and generating power from renewable sources such as solar and wind will go a long way in lowering operating costs. With mains power supply getting worse by the day, operators have no option than to go green.