Measuring What Matters In Telecoms

Many telecommunications executives still believe that more information is always better. One telephone company CEO recently ended up with no fewer than 6,000 metrics he could use to diagnose the state of the business. While many metrics raised red flags, few told the CEO who was responsible for the problem in the organisation and who could fix it.

There's a better way. In our experience, management teams should concentrate on no more than 20 vital metrics, assessed weekly and compiled monthly, that fit on a single page. This exercise forces executives to allocate precious metrics, which in turn often serves to sharpen a company's strategic priorities.

Companies also need to ensure their metrics are leading indicators of ongoing trends rather than backward-looking reports that show what happened last month. The Vital 20 should not only include operating measures that can point to root causes, but also avoid a bias toward financial metrics that usually identify symptoms. Finally, each metric should be linked to an owner accountable for explaining the right trends and correcting the wrong ones.

Don't overemphasise on backward-looking financial metrics. It is less likely that measures will spur action when companies rely too much on financial metrics. At one telco, over 95% of metrics were about past performance. The company measured facts such as profit per customer instead of analysing trends that influence investment decisions, such as the number of high-value customers acquired last month or the number of new corporate contracts closed. Capital expenditures and other cash outlays are important factors in a company's free cash flow, but returns on recently-invested capital are a better predictor of profits.

Companies also tend to measure where information is easier to gather. But although financial data is readily available and can be useful for understanding a company's state of health, operating metrics can diagnose the causes of problems and help management prescribe a cure. Declining sales numbers, for instance, point to a problem, but what telco executives really need to know is revenue churn-specifically, the amount of revenue that was lost when customers cancelled contracts. This provides a starting point for managers to take action.

Useful metrics are focused and consistent. To spur useful action, metrics must be tied to an owner and consistent throughout the ranks. The few metrics that the CEO sees for the wireless business unit, for instance, should be the same key metrics at the top of the list for the head of the wireless business. It does little good for the CEO to fume about wireless churn among high-value corporate customers if the head of wireless tracks churn differently.

Success story: Japan Telecom. Focused measures helped Japan Telecom Holdings achieve an impressive earning and cash flow turnaround at its fixed-line subsidiary, Japan Telecom. When Bill Morrow stepped in as president of the company in December 2001, the company was heading for its worst reported financial performance, but there were few alarm bells.

Morrow recently commented, "Early warning indicators (EWIs) and key performance indicators (KPIs) were at the top of my list as we began building the turnaround plan." Japan Telecom structured many metrics to look forward on a run-rate basis and monitored them against their targets.

Over time, the results book evolved into a highly focused, single-page summary starting with five key financial metrics-revenue, contribution margin, overhead costs, EBITDA and cash flow-which cascaded into 16 metrics at the business unit level. This summary allowed management to identify the root causes of trends, determine the person accountable and agree on actions in monthly operations reviews.

The result? Japan Telecom reduced costs by 14.8%, and net income moved from a loss of US$640 million to a profit of US$130 million, boosting free cash flow to just under a billion US dollars.

Conclusion. What gets measured gets done. Focusing on the Vital 20 metrics will help CEOs in telecoms and other industries to tap the right metrics so as to make the right decisions and to act on them.

Michael Garstka is a vice-president in the Tokyo office of Bain & Company; Ravi Vijayaraghavan is a vice-president with Bain & Company based in Singapore.