EFFECTIVENESS TRUMPS EFFICIENCY: DESPITE SCARCE CAPITAL, TELCOS THAT FOCUS ON STRATEGIC INVESTING – NOT COST CUTTING – CAN SHAVE UP TO 10 PERCENT OFF CAPEX SPENDING

New research from Bain & Company finds that capital effective companies optimize their CAPEX spending in order to improve their strategic position - and in doing so develop an engine for delivering extraordinary shareholder returns

New York – Dec. 15, 2016 – Capital intensity has become a hot-button issue for network service providers (NSPs) around the world, but as revenue slows to low single-digit growth, wireline and wireless CFOs are finding it more difficult to hit the industry’s standard goal of 15-20 percent capital intensity (defined as the ratio of capital expenditure to revenue). A new report from Bain & Company, The Fool’s Gold of Capital Efficiency in Telcos, warns that executives are approaching this challenge from the wrong angle. Too many view capital intensity through a lens of efficiency, trying to squeeze as many projects as possible into a restrictive capital envelope. However, leaders take a programmatic approach that can help their companies shave up to 10 percent off spending, which can then be reinvested to gain market share or returned to shareholders. NSPs that fail to realize this will ultimately have to cede to the competition.

Bain’s extensive experience working with telcos around the world confirms that it is difficult for companies to become capital effective simply by spending less. Among those who try, a full 88 percent of telcos studied often end up putting themselves at a competitive disadvantage by slowing down critical investments. While this may make investors happy in the short-term, it is not a path to sustained growth.

Instead, telcos and investors should reverse this mindset and think about capital intensity through the lens of effectiveness, with a focus on channeling investments to the things that will most improve a company’s strategic position. This approach requires a steady focus on business goals and a willingness to pare back on initiatives that promise a good return on investment but do little to boost a company’s market share. To put it another way: effectiveness trumps efficiency.

“Constricting spending is a fool’s errand,” said Herbert Blum, a Bain partner and lead author of the report. “You cannot cost-cut your way to long-term profit growth. Instead, the more effective approach is to focus on how to invest to win greater market share.”

Yet, focusing on effectiveness can be challenging for many companies, particularly if executives haven’t defined their strategic goals clearly enough to facilitate meaningful prioritization of their capital expenses. According to Bain’s research, only one out of nine providers could be considered capital effective, meaning that they have gained at least 1 percentage point of market share each year over the past five years without having spent significantly more than their fair share of capital to do so. The rest are split into two groups:

• Half are caught in an efficiency trap. While they have spent less capital than would be expected given their market share, they have failed to gain meaningful revenue.
• The other half are wasteful, spending more than their fair share of capital while either losing market share or failing to gain as much as their investments would warrant.

“The most capital effective telcos attack spending by targeting four key areas: situation, strategy, spend and structure,” said Blum. “Companies that understand how to do this and can develop a repeatable capability for it have an engine for extraordinary shareholder returns.”

Bain defines the ‘four S’s of capital effectiveness’ as follows:

• Situation. Every company and every market is different, and a range of factors determine the right level of capital intensity. Even though many of these are external factors over which an NSP has little influence, executives still must account for them when setting capital intensity targets.
• Strategy. A common mistake is to try to win everywhere, which can spread capital too thinly across too many efforts. A more effective approach focuses capital investments on the geographies and customer segments where senior leaders have made an explicit decision to play to win.
• Spend. Once senior management determines strategic intent, the challenge becomes maximizing each project’s ROI above and beyond what is possible through traditional procurement levers. The key to unlocking larger returns is disciplined consideration of alternatives to achieve the same goal.
• Structure. Capital budgeting can be a painful process for everyone involved. The harder CEOs and CFOs look for opportunities to cut spending, the more IT chiefs and other business unit leaders look for ways to justify the projects they need to maintain the network and deliver on their profit targets. One way to reduce this pain is to replace the typical annual capital budget battle royal with rolling quarterly reviews that are closely tied to business operations.

For a copy of the report or to schedule an interview with Mr. Blum, please contact Dan Pinkney at dan.pinkney@bain.com or +1 646 562 8102.

# # #