2014/10/28 Our recent experience with a medium-sized African mobile operator suggests that there is significant potential for capex efficie

 Until recently, operators in emerging markets have focused on building networks and customer acquisition. However, operators' profit margins and cashflow are increasingly squeezed as markets approach saturation, which drives the need for cost optimisation and efficiency. A review of capex will help operators to identify and prioritise opportunities for rationalisation (such as network sharing and increased asset use), and to maintain or improve margins and return on capital invested, despite stalled ARPU and revenue growth.

Significant scope for capex optimisation exists in both network and non-network elements

Capex inefficiency in a network is generally driven by use of legacy systems with a focus on immediate requirements, lack of rationalisation and not keeping up with technology innovation. Additionally, optimisation is focused on network elements (such as RAN, transmission and backhaul, network IT and passive infrastructure) and not enough emphasis is given to non-network elements (such as land and buildings, vehicles, office equipment and furniture). However, based on our experience of working with multiple operators on cost optimisation, non-network elements contribute between 5% and 15% of the total capex investments and typically offer significant scope for further capex optimisation.

It is also essential that operators evaluate all technical and non-technical elements to identify areas that carry significant potential for improved cost efficiency. Procurement is one such classic example – having a robust procurement framework drives efficiency and cost reductions. An efficient procurement process (with a centralised procurement team, process transparency, prudent contract management and good co-ordination among relevant departments) can on its own result in a reduction in equipment procurement cost of more than 10%.

Before embarking on such an exercise, operators must identify areas and functions that offer significant potential for improvement through technical evaluation and benchmarking. Great care must be taken when comparing performance benchmarks from mobile operators in different countries – the external and internal environments specific to each mobile operator affect their performance. In order to ensure that true like-for-like comparisons are made between the inherent performances of different mobile operators, it is necessary to remove the effect of external and internal factors on KPIs by normalising benchmarks in an open and transparent manner.

More importantly, while finalising cost-cutting initiatives, it is imperative that operators maintain the balance between short-term cost savings and long-term objectives. An initiative may help address a short-term cost-reduction target, but could have significant cost implications in the long term. For example, a single-RAN deployment may not lead to capex savings in the short term, but in the long term it will result in benefits such as providing a future-ready platform for 3G and 4G services to meet the ever-growing mobile broadband demand (data-centric), reducing equipment cost because of use of a single platform (single BTS instead of two or more BTSs for different technologies), and drive savings as a result of reduced equipment operations and maintenance and power consumption costs.

When initiatives have been identified and finalised, operators need to develop a short-, medium- and long-term implementation strategy and roadmap because most of the technology-related initiatives are complex and require time to implement because of established systems in place and/or current market regulations. For example, infrastructure sharing can lead to significant capex savings, but in many markets the regulator may not allow active infrastructure sharing. Additionally, to implement network sharing, finding strategic partners (operator) willing to share the network, and putting such network-sharing agreements in place can take significant time to finalise and set in motion.

Operators have opportunities to reduce capex significantly without undermining network performance or QoS

Our recent experience with a medium-sized African mobile operator suggests that there is significant potential for capex efficiency enhancement and cost reduction. The operator was experiencing a slowdown in revenue growth as a result of market stagnation and increased competition putting a squeeze on margins and cashflow. The operator entrusted Analysys Mason with the task of assessing its technical and non-technical capex investments across different functions of the organisation and identifying areas with potential for capex optimisation.

As a starting point, we reviewed the operator's network technology, architecture and design, management (including resilience and built-in redundancy) and maintenance strategy. Thereafter, we benchmarked its capex spend across main functions (RAN, backhaul, core, IT, passive infrastructure and non-network capex) and per-unit procurement cost of key network equipment against a set of carefully selected local, regional and worldwide operators from emerging markets. This enabled us to identify key functions where its capex investments were significantly higher than the peer group average.

Finally, we analysed the main reasons behind the identified capex gaps based on technical assessment and discussions with senior and mid-management executives and on-the-ground personnel across the organisation. As a final output, we recommended multiple technical and non-technical initiatives to drive capex efficiency and reduce costs, without any negative impact on its network performance or quality of service (QoS), based on our past experience and 'best in class' practice adopted by operators in similar markets. Some of the capex reduction initiatives suggested were:

• equipment procurement optimisation
• multi-vendor strategy for core network
• adoption of energy service company (ESCO) model for alternative energy solutions (to be implemented only in a situation where funds are lacking)
• deployment of SON technology
• active network sharing.

These initiatives will help the operator to reduce its capex by 6.3–8.0% in the short-to-medium term (that is, over the next 3 years) and about 11.0% in the long term (see Figure 1).

Figure 1: Capex optimisation potential in a medium-sized MNO in Africa [Source: Analysys Mason, 2014] (Click to enlarge)

1 Only in a situation when funds are lacking – while it will reduce capex, opex will increase.

For a successful capex optimisation exercise, operators need to:

• ensure buy-in from significant internal stakeholders: Any cost optimisation activities need to be communicated clearly across the organisation – this is important in ensuring buy-in, collaboration and active involvement of core teams within the organisation
• understand the compromise between capex and opex: Capex reductions may have negative implications for opex. Operators should focus on understating the total cost of ownership and the opex implications before undertaking any reduction initiative
• set up a robust programme management organisation (PMO): Most of the capex optimisation initiatives require a few years to show results because legacy systems need to be replaced and operators need to build a robust PMO to ensure effective implementation and continuous monitoring.

Source: Analysys Mason