Talking shop

Many operators outsource their retail presence to cut opex, but the strategy can pose significant risks.

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Talking shop Josep Que stresses that there are risks with outsourcing deals.
By  Josep Que Published  February 20, 2011

Telecom operators around the world are striving to reach market share, revenue and EBITDA target in an increasingly competitive environment. This impels companies to cut costs while differentiating in key areas and to move away from non-core activities that allow little or no differentiation and do not impact bottom-line KPIs in a direct and tangible way.

This strategy has supported the outsourcing option in most levels of the telecom value chain such as network infrastructure, customer service and management of own or branded shops. In this way, operators are focused on the core drivers of their business while leveraging on external specialists to deliver in non-core areas.

The branded channel is critical for any operator as it is the main point of contact with customers and has significant weightage on opex (1-3% of an operator’s revenues) and capex (a shop can cost around $100,000).

Outsourcing of the branded channel gained momentum with the realisation from operators that the required know-how to manage shops successfully around HR, stock optimisation and trade promotions, was not present in their organisations.

For example, annual staff turnover levels in telecom operators are around 10-15% while in technology retailers these figures can go up to 50-60%, which poses a completely different challenge on staff selection and recruiting.

At the same time, salary schemes in operators usually account for 10-20% of variable compensation while best practices in the retail industry suggest levels of 70-80% to ensure proper motivation of the front-end personnel. Although the two businesses – telecom service provider and telecom retail – are linked on the product side, they differ in the key drivers.

As soon as telecom operators realised this, new players emerged as “sales partners” in the branded channel. In an outsourced model, sales partners are responsible for managing and operating the branded channel (commonly known as operators’ stores or “own” stores) on behalf of the operator.

Capturing the benefits

In addition to allowing operators to focus on key areas of their business, outsourcing the management of the shops often facilitate roll-out of the branded channel since part of the responsibilities in the roll-out program are transferred to external partners. On top of that, the roll-out can be achieved at relatively low expense when some of the roll-out costs are also transferred to the partners (for example, through franchise fees or by charging civil work costs), which reduces investment in new outlets often by more than 50%.

As a result, telecom operators manage to finance expansions of the branded channel and even reduce roll-out timelines quite significantly. For instance, Orange and O2 in developed markets or MTN and Etisalat in emerging markets have all added stores managed by external partners to their established network of company-owned outlets in a way to support expansion.

External partners also typically have know-how related to the local market which not only streamlines the process of identifying and securing a new location but also allows managing shop operations in alignment with local dynamics. In many diverse countries like South Africa, Jordan, Spain or Belgium, operators have even opted for regionally focused partners to manage branded shops due to the different characteristics of each region.

The benefits of the outsource option are evident and tangible but there is no such thing as free lunch and one has to bear in mind the threats that lie behind.

Threat 1: Potential hostage situation with strong sales partner

With such clear advantages why would operators still opt to control the branded channel directly?

MTN South Africa is one of the operators that can probably illustrate this well. When, in January 2009, MTN made the decision to acquire the remaining 59% of iTalk, a distributor that managed more than 100 of MTN exclusive stores, it knew the importance of gaining control and security over such a critical channel. Among other reasons, MTN wanted to avoid decisions regarding its premium channel that were not aligned with the company’s best interests.

The early stages of the various outsourced models have often disguised its potential risks. South Africa is one of the countries where outsourcing models in branded channel are more mature and so also the early benefits were already captured and the effective risks are now taking place.

Any external partner is profit-driven and can easily deviate from the initial strategy and engage in actions that go against the operators’ goals and therefore, compromise the branded shops, which represent the premium channel of any company and where one wrong action can have the most negative impact.

For example, if a certain shop is not performing well, the company (or partner) managing it might prefer to shift its traffic to another shop and therefore push the operator to close it, while the latter is concerned about customer service, positioning and brand visibility. Often the operator will even agree on closing it in order to prevent disruptive actions that might harm the channel deeper.

In some situations, operators see themselves in the hands of their “partners”, completely vulnerable to “their” will due to their weight and dominance of the
sales channel. That is why many operators, especially in emerging markets, limit the share that a single partner can have and impose effective covenants to prevent “super-dealers” in the branded channel.

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