The future is now!
Cross Border
Telecom Production
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Over decades, major telco operators have mastered their multi-national being. Yet, after countless transformations, harmonized business landscapes and restructured organizations, they’re still struggling to compete
against the dreaded OTT services. The lack of agility and speed to react to the ever more demanding voice
of the customers decelerates these infrastructural heavyweights. But, there’s light at the end of the tunnel!
Today’s technology is exposing synergy potentials that will drastically change the way how operators have
done their business.
The four subsequent entries examine the future of a cross-border telco production with focus on the transformation towards centralization, the organizational impacts and the novel methods of service pricing
through the enablement of an entrepreneurial spirit.
From small scale production to transnational production of
telco companies
As capitalism spread over the world it created societies of ever
growing demand of goods and services. A never ending ­hunger
for more, better and cheaper products had to be s­atisfied.
Production in many small factories became ­
­
unreasonable,
­replaced by large manufactures taking advantage of economies
of scale and scope. Henry Ford, the father of mass p
­ roduction,
not only revolutionized automobile production with his moving
assembly lines, but also almost every other producing sector
worldwide. A new era of mass consumption and s­ tandardization
of production begun. Producing the same goods in the same
way only implementing minor changes to adapt to local
­customer needs became the prevalent strategy to conduct business g­ lobally. But that does not apply to telecommunication
providers. As of today, every single telco operator in any given
­country produces its services1 in a different way, even if belonging to a major telco group. That’s about to change. In order to
better explain the difference between the manufacturing industries like automotive and Telcos it is easier to sketch a world in
which car manufacturers’ produce like Telcos.
What if automotive manufacturers would produce like
­telecommunication companies today?
Imagine Toyota would set up a new factory in every country they
want to sell their cars in. Even for small countries with a tiny cu-
stomer base Toyota would have to build a new ­factory, arrange
new deals with suppliers and develop its local way of a­ ssembling
the parts. Each factory is only provided with a ­picture of the
final product and no plan of construction. The result would be
different factories, all producing the same cars but in different
ways and with different parts. As the years go by, modifications
of existing and the offering of new products would result in
completely distorted companies. Economies of scale and scope
would only be realizable within a factory or ­respectively within
a country, not across borders. Suppliers would gain ­unnecessary
market power. Moreover cost of complexity would sky rocket
and most group-wide synergies been blocked. The resulting
rigid structure would be inflexible and therefore unable to
­respond to changes in customer needs adequately, leaving the
market woundable to substitutes and competitors. Last but not
least, tapping new markets would have become tremendously
difficult and combined with horrendous investment costs.
If this sounds insane to you, then you just got a glimpse of what
opportunities a cross-border production holds for telecommunication providers.
Recent technological advances and innovations can enable telecom
mass production
Henry Ford never came up with the initial idea of assembly lines
– a common fallacy. However he was the first one to mechanize
this system. At that time, the new technology of conveyor belts
enabled the first moving assembly line in history.
1 A service like a SMS is produced in a physical factory quite similar to a car but
on an intangible level
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Detecon Management Report dmr • 2 / 2016
The same applies to the telco industry today: The idea of cross
border production is not new but the first time in history the
technology is available to make it real for telecommunication providers. So far, every telco service has been produced
on s­pecific hardware components run by a specific software.
­Resulting in proprietary hardware and software. The new technology means a standardized hardware with the running software ­providing the functionality.
trend in the industry that is ‘softwareization’2, better known as
‘Network Function Virtualization’ or simply ‘Virtualization’.
Telecoms want to use “common of the shelf ” hardware that is
independent from the applications running on top and available
as shared resource pool for all applications.
Let’s illustrate that by taking an example from your everyday
life. Imaging of owning and maintaining a dedicated computer
for every application that you’re using: One device for p
­ reparing
documents, one for presentation, another one for tax reports and
even one for emails. In order to send an email directly from your
text application you first have to build and maintain a d
­ edicated
interface and involve an integrator, potentially ­suppliers of both
application. This is exactly like the telecom industry is working
today.
Providers can decouple their hardware from software, ­breaking
up with old, monolithic platform structures. This means,
­computing power can be shared and scaled, new features can
be added without changing the hardware. A telco group could
now upgrade - country by country - their production facilities,
­getting the benefits from hardware software decoupling. But
there is obviously a great opportunity to take this innovation
not country by country but once for all. As groups need to
­invest and change platforms in all subsidiaries anyways to keep
technology up to date, the additional step towards cross country
production becomes smaller and cheaper than doing it later on
as a second step.
However, the industry is now moving forward to become more
like a regular desktop PC today. Running multiple applications
on one device. This approach is based on the current t­ echnology
2 Also called Software Defined Networks /SDN and Network
Function Virtualization / NFV).
Figure 1: Virtualization Challenge
Today: Monolithic Platforms
Future: Virtualized Platforms
Voice
Mess.
E-Mail
TV
•••
Voice
Mess.
E-Mail
TV
•••
SW
SW
SW
SW
SW
SW
SW
SW
SW
SW
•••
SW
SW
SW
Source: Detecon
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Detecon Management Report dmr • 2 / 2016
SW
SW
HW
INTERVIEW
Interview with Kerstin Günther and Sven Hischke,
DT’s Pan-Net Company Ceos
„Today we can do things that
were not possible before“
DMR: Can you explain the Purpose and the Set UP of Pan-Net?
Kerstin Günther
K. Günther: The Pan-Net is basically a service factory that will
produce all telecom services like SMS, TV or voice on behalf of
DTs European subsidiaries. By creating a PAN-European telco
“factory” we will be able to reduce cost and speed up p
­ rovisioning
and innovation of new products significantly. L
­ egally PanNet is
set up as an own company, headquartered in Bratislava.
DMR: When did you first realize that the future of the industry
goes in the direction of cross Border and internationalization?
Sven Hischke
K. Günther: Seeing all the OTTs like WhatsApp launching
their services at “light speed” all over the world, whereas we as
telecoms needed country by country implementations for every
service – for me it became clear we need to act. Not only as
Deutsche Telekom but as an Industry. Luckily I was at this time
the CTIO for DTs European subsidiaries and thereby in the
position to kick off such an initiative.
DMR: Why did Cross Border Production fail from your perspective
in the past?
Kerstin Günther (KG) and Sven Hischke (SH) are
the CEOs of Pan-Net – Pan-Net aims to integrate
the production of telecom services like SMS or
TV across the European subsidiaries of Deutsche
­Telekom and is thereby a corner stone for Deutsche
Telekom to become the leading European Telco
­Provider
K. Günther: You are right. There were multiple attempts to
utilize more synergies already in the past. The key fact is: We
learned from it. One pivotal driver is the harmonization of
the product and service portfolios across countries. If you sell
different services everywhere, the production factories can’t be
the same. This harmonization of the offerings is therefore one
main driver. On top comes that we learned that such a step can
only be successful if it’s not dictated top down. The CTIOs and
CMOs from the countries are the drivers of Pan-Net – not the
Headquarter.
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DMR: What is the main driver for you? Cost, new business,
­something else?
K. Günther: For sure cost is an important driver. We believe we
will cut down more than half of our service production cost by
implementing Pan-Net. But equally important is that we close
the structural agility gap to the OTTs. There were great s­ ervice
ideas in telecoms in the past decade, but we were always to slow
and complex in the implementation. With Pan-Net we can
­develop and implement a service once and deliver it everywhere
in our footprint.
DMR: Do you regard OTTs as role models for your approach?
K. Günther: Not entirely. For sure our future scaled production
will have the key ingredients that are also leveraged by the OTTs
- focus on software rather than hardware, flexible utilization of
computing power in the cloud and so on. But we will add the
“telecom advantage”. We are master of the network and we can
offer a better service experience for the customer by aligning the
connectivity with the service as such.
DMR: What will change for the customer in the future?
K. Günther: They will perceive a better usability in an enhanced
product and service landscape. Consumers will look differently
at Deutsche Telecom in five years. Since we can pool our investments at one factory we can do things that were impossible
before.
DMR: What are for you the biggest challenges in the t­ ransformation?
S. Hischke: The organizational complexity is immense to
drive the transformation from many local to one cross border
­production. Multiple stakeholders have to be aligned, many
­trade off decisions. Just to give a recent example: Pan-Net will
be ready to provide a cross border TV solution in approximately
2018. But what are entities doing that have a TV platform end
of life this or next year? Another local investment? Just wait?
Another big challenge is on the political and legal side. All rules
and laws affecting our services are written for a telecom industry
that produces services locally, in every country. To convince all
local authorities to move production towards cross border is a
challenge, but we are confident that also this will be solved soon.
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DMR: How do you ensure the commitment of the local entities?
S. Hischke: The simple answer is: We let them drive the transformation. The game is won or lost in the local market. So they
need to decide if it makes sense to wait for the implementation
of a cross border services or make an interim step by updating
the local production. The head quarter is moderating and if
­necessary also guiding the discussions. But the Pan-Net is built
by the local technology and commercial organizations. We call
this concept “Dual Citizenship”. The local CTIOs and CMOs
are managers of the local company and of the Pan-Net.
DMR: Often central entities are seen as not really cost sensitive.
How do you ensure that Pan-Net is an efficient factory?
S. Hischke: Actually this was one of the main concerns of the
local entities when we started to discuss the idea. They said
“Now you say it’s less expensive then today, but we heard this
before …and at the end the reality was more expensive and we
had no chance but to pay”. Therefore we left also here the beaten
path. We determine at the beginning what a service should cost
in the production, for example a SMS. The local entities only
agree to this price and make the first payment when the service
is delivered and not before. The implementation risk lies with
the Pan-Net. It puts a lot of pressure in the central entity, but
we believe that is what is needed to make such an entity work
cost sensitively.
Cross Border Service Production: Technological
­possible but economical feasible?
Ever since the European Union was formed, there have been
drivers to bundle European forces to increase the relevance
of the European continent. These trends have arrived in the
­Telco industry with the European Single Market3 initiatives
by the ­European Commission. One of the key initiatives is
the e­limination of roaming fees within Europe. Even though
the i­nitiative was cut down from elimination to reduction of
­roaming fees for 2017, European operators, who are on the
verge of losing revenues, can foresee the impact of such governmental ambition.
allows them to provide price-competitive roaming products to
all customers within their footprint. The target is clear: to build
cross-border cooperation, generate synergies and provide b­ etter
prices. This sounds great to customers. But from a telecoms
­perspective the cooperation ends at the customer front end. The
„factories” producing the services still remain national, leaving
the biggest optimization levers untouched.
While mostly the European Commission drives the roaming
initiatives in Europe, Asian operators took the matter of
­
­decreasing roaming prices in their own hands. They saw that
OTT players had severe impact on their service revenues, they
formed international partnerships to outplay those OTT attacks
on their business. 35 Asian operators founded an alliance to
benefit from reduced wholesale roaming costs which in return
Cross border production is good news for customers. The more
countries are supplied by an integrated production the lower are
the additional investment costs in order to launch a new service
or enhance an already existing one. That doesn’t only mean t­ here
will be more services in already established countries but also
tapping new markets will become significantly more attractive.
As illustrated in figure (XX), the synergies for telcos to launch
More for less: Cross border production has a positive impact
on customer experience
3 http://ec.europa.eu/growth/single-market/index_en.htm
Investment
Figure 2: Cross-border vs. separate production
separate production
Invest
per country
Cross-border
production
Minimal adjustment
costs per country
Number of countries
Source: Detecon
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Detecon Management Report dmr • 2 / 2016
a service in multiple countries is basically ­nonexistent, making
it economically “unattractive” especially to launch s­ ophisticated
services in small countries.
The initial setup cost for a new service in a cross border
­factory may be even higher than the traditional way. But the
­incremental cost to scale the service to other countries is minor.
The old p
­ roduction model was also a barrier to entry, but it is
also a barrier for players within markets to launch new services.
Let’s take an example: A TV service requires an average around
5mn subscribers to justify that invest. If an operator provided
by a cross border production can cut the fixed costs by half, TV
is already worthwhile at half the subscriber base.
Imagine small countries with a limited subscriber base or a ­large
country but with extreme poverty. The launch of ­advanced
­services fails because most business cases cannot be justified. As
a consequence, many potential market opportunities are still
untapped. Let’s look exemplary at Brunei and Afghanistan.
Example szenarios: Mobile TV in Brunei and Afghanistan
Despite being one of the wealthiest nations in Asia, Brunei
struggles to bring its telecommunications industry up to speed
with the rest of the region. The blockade here is neither the
infrastructure nor affordability, but the market size. Its small
­population of less than half a million poses a challenge in
­getting a “green business case” for new services like mobile TV.
Imagine now a telco group with cross country production facilities and market presence in Brunei. Having only marginal setup
cost, mobile TV for Brunei would be almost around the corner.
Innovations that were once too expensive to be rolled out in a
small market become affordable for a telco group and therewith
available for customers.
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Afghanistan, on the other hand, has over 32 million ­populations.
The country suffers greatly from political ­
instability,
underdeveloped infrastructures and poverty. L
­
­aunching an
­entire mobile TV platform in Afghanistan would be e­ conomical
unfeasible – even ignoring other challenges like network
­coverage and speed. But the story changes completely when we
bring in the concept of cross border production. There are big
telecom groups operating in Afghanistan – if they would have
cross border production, Afghanistan could benefit from the
same service portfolio as in developed countries.
In developed countries, Telco operators have a strong focus
on being able to compete with advanced OTT services. Cross
­border production of service makes a difference here as well. It
allows operators to bundle investments from multiple countries
and build services on eye level with global OTTS. It enables
to unlock capacity constraints and brings the power of agility,
scalability and flexibility.
Telcos must look at their history to make cross border real in
their future
These examples show the relevance of the topic for the telecom
industry. Thus, one might question: what is holding back crossborder production for Telco operators?
History is the key. What happened in the industry in the past
was exactly what is described in the introduction: Service
­production and networks are build up in every country „stand
alone“, producing more or less same services, but everywhere
a little bit different. So the obvious question arising if starting
to think about cross-border production for telcos is: Where to
start?
Looking at recent history gives a good indication on the t­opic.
Deutsche Telekom and Vodafone for instance have already
­embarked on several centralization journeys in the past. The
biggest are the recent initiatives to centralize CRM systems
across countries. Beyond the fact that those projects are h
­ ugely
complex with their cross border nature it became more and
more clear that there are two major roadblocks that need to be
overcome to be able to centralize any other part of the Telco
value chain:
> Harmonize product offerings: Requirements must be
­reduced before moving to a joint production
> Centralize production platforms (e.g. TV, SMS or Voice
­services) to ease integration and support a harmonized offering
Imagine your customer purchases a product bundle consisting
of internet, voice and TV. This purchase instantly triggers a
chain of configurations in the backend production. Every single
service needs to get “ready for usage” – going all the way from
activation to billing – in order to provide the package to the
respective customer. The complexity of providing these services
across multiple countries lies in the various configurations that
are different from country to country due to the historically
grown setup and processes of the factories.
Leveraging synergies in the right places by addressing the main
drivers of complexity
The top two drivers of complexity are the amount of services
offered and configuration points created by operating t­hose.
Complexity in core functions directly translates into even more
complex supporting functions. Telcos can either ­reduce the mere
number of services they offer or standardize the ­components of
production. Consequently reducing the ­workload for ­supporting
functions and making their simplification easier as well.
But first things first: Telcos typically have a large product
­portfolio with very few services accounting for the majority of
profits and subsequently a large number of products generating
little. A harmonization of the portfolio is anyway an industry
trend for years to optimize local processes and save cost. For
cross border production it is a necessity.
Secondly reducing the configuration points in the production of
services: A service consists of several components and features,
the fewer there are the fewer combinations are possible. Considering the exponential relationship the reduction in complexity
is very quickly significant.
Figure 3: Virtuous cycle
Fewer Components
Reduction
of
Comnplexity
Fewer Products
Source: Detecon
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Detecon Management Report dmr • 2 / 2016
Figure 4: Customized Producs Continue to Serve the Customer Needs.
Individual
local
products
Country 1
Pick &
choose
Country 2
Country 3
Features
(e.g.
Language)
Standard
components
Broadband
Linear TV
Voice
Voicemail
•••
Common service catalogue
Source: Detecon
Figure 5: Finding the balanced cut off point
Cost
Cut off point
X
X
Basic Standardization
Source: Detecon
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Detecon Management Report dmr • 2 / 2016
Full Customization
Functonality
But reduced complexity does not necessarily mean less
­customization. Modularization is the solution – using same
components in different product or service contexts is a long
applied concept in manufacturing industries like automotive. It
yields massive efficiencies to use the same gear box in sedan, in a
roadster and in a van and made the segment specific offering of
automotive possible in the first place. The same approach that
revolutionized manufacturing and the automotive industry, is
now applied to the Telco industry.
It’s all about the Mix! Need to find the right balance between
customization and standardization
Still, even with modularization the desire to accommodate all
possible features and functionalities from different markets
and operators into one central production will lead to cost
­explosion. To achieve synergies, the right cut off point needs
to be defined. Telcos need to harmonize the demand of their
­different ­subsidiaries and create standardized product components that can be provided in different flavors. Essentially, it is
about finding the lowest common denominator.
Is one best-in-class production really less expensive than four
productions?
To actively strive for producing less variances and little d
­ ifferences
in existing services but rather more, new innovative services that
can be applied to multiple markets with the same feature set this will be the key challenge in cross border ­production! The
danger is that telecoms try to produce the many little differences
driven by the national roots of the business today in a central
factory. It would mean centralized chaos!
The industry must approach this challenge with a cross functional mindset. Only if a product manager understands what it
means “to add a little feature” production wise, he can make a
wise decision. Same applies vice versa for the technology staff.
Paveena Vasusophon has successfully delivered multiple strategic projects for
fixed and mobile operators in Asia and Europe, and currently holds the Managing Director position at Detecon (Thailand) Ltd.
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Detecon Management Report dmr • 2 / 2016
Cross-Border Service Production:
The Challenge is far bigger than
integrating systems and processes
The move to cross border production will not be at once and it
will not cover all core processes. First, the complexity to move
from “local to central” must not be underestimated. The transformations required will run for years if not for decades. Service
delivery must be ensured in all phases to keep revenue streams
flowing during the transformation. That leaves particularly big
telco groups only with the option to centralize „piece by piece“,
meaning to start with some part of the productions (e.g. SMS)
and then move on. Cutting out pieces that are being centralized leads to “complex in-between operations”. The new crossborder systems and processes need to be interlinked with the
remaining, not yet centralized local parts. Big bang scenarios
are in theory thinkable, but based on our experience unrealistic.
Simply the resources in terms of manpower and funds are not
available in the environment the industry is operating in.
Let’s start with the good news: the opportunity of cross ­border
production makes a „lemon juicy again that was believed to
be empty“. In the last decade telecom organizations in the
­developed, mature markets conducted efficiency measures over
and over again. While it has been fruitful in the early attempts,
it’s rather vanishing at the end. The national operations running
the business have been squeezed so many times, that there is
little juice left to achieve valuable impact. In other words: the
incremental gain of further optimizing the national operations
is affected by diminishing marginal utility (see figure 6).
By centralizing crucial parts of the core processes the game is
brought to a completely new level. The option to produce and
optimize cross country fills up again the efficiency potential that
has been believed to be almost empty - especially for telecom
groups
Second, there are areas that won’t be centralized at all ­because
the closeness to the national market is crucial. This is true for
sales, marketing and to a big extend customer service. These
­operations will remain local, especially in the B2C area where
cultural differences and habits play a major role. On the
­technical side the access network will always remain a local asset
given the locally dispersed nature of the infrastructure. Harmonized and standardized processes & technology are an opportunity to optimize, but the centralization effect here is limited
compared to other parts.
But the enormous chances will be also followed by significant
change. The centralization trend has impact far beyond systems,
processes and products. Telecom organizations today are characterized by the „multinational” nature of the business. Comparing the organization of an operator serving only one country
with the local business unit of a big group, there is structural
almost no difference. In both cases all core processes of an operator are covered within national borders (as figure 7 shows). So
far todays cross country collaboration is limited on supporting
functions like finance, procurement or HR.
Figure 6: OPEX Reduction per year
Centralization Effect
Local Optimization
1. Year
2. Year
3. Year
Source: Detecon
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Detecon Management Report dmr • 2 / 2016
4. Year
5. Year
6. Year
7. Year
8. Year
9. Year
> Cross functional perspective & thinking: Centralizing parts
of the core processes has impact far beyond “the cutoff point”:
E.g., you can only sell what comes out of the factory – ­meaning
if you centralize the production of ten countries into one (technology topic), the freedom to sell different services in every
country is gone (marketing topic).
>“Visionary” with the ability to implement: The
­transformations will be marathon and there will be pressure
to take short cuts and dilute the target. Examples are the legal
and regulatory frame that puts pressure on telecoms in many
­countries to keep the production local.
> Create an “All Winners” set up, especially for the local stakeholders (e.g. C-Level, governments, and employees): There are
multiple stakeholders thinkable that could loose from a transformation to cross border production, many of them sit on the
“local side”. If the local side has no clear gain out of the transformation it will fail.
These points can be tackled via organizational measures but are
also traits of managers. Success will depend on both - having
leaders with the skill to think in the big picture as well as the
ability to implement an organizational set up that supports cross
functional and cross country collaboration.
The “Dual Citizen” can build the bridge from local to joint
In a first step it is crucial to identify the right leaders driving the
transformation from a strategic perspective, but with a strong
hands on mentality, also driving the implementation. As the real
business – in terms of producing and selling services – is local
today, the pivotal business knowledge is local as well. In here
comes one major mistake that we have seen multiple times in
Figure 7: All Centralized Functions are Within National Boundaries
Standalone Telco
Telco Group Today
Future Telco Group
Centralized
Functions
$
Parts of
Support
Centralized
Entity 1
2
Support Functions
entralized
Functions
$
3 ...
$
Parts of
Support & Core
Centralized
Entity 1
2
n
3 ...
n
Core Processes
Source: Detecon
Figure 8: Centralized Potential Telco Today vs. Future
Telco-Stack
TODAYFUTURE
Customer
LOCALLOCAL
Product/Pricing
LOCALLOCAL
Processes
HARMONIZEDHARMONIZED
BSS
HARMONIZEDHARMONIZED
LOCAL: Plan Build Run under local responsibility
OSSHARMONIZED
INTEGRATED
HARMONIZED: Same architecture, but operated in
Service Delivery Platform
HARMONIZED
INTEGRATED
each entity
ControlHARMONIZED
INTEGRATED
INTEGRATED: Centrally planned, centrally operated
TransportHARMONIZED
INTEGRATED
Aggregation
HARMONIZEDHARMONIZED
Access (Fixed/Mobile)
LOCAL
LOCAL
Support Functions (e.g. HR, Finance)
INTEGRIERT
INTEGRATED
Source: Detecon
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Detecon Management Report dmr • 2 / 2016
our careers that needs to be avoided: Looking across industries
the usual reflex of big corporations centralizing activities is: The
central builds the central!
The challenge is to drive the conception and implementation
by having both ingredients equally: The strategic “big picture
view” of a head quarter and the local market knowledge. A
­“combinatory role” is needed that is integrating both views. The
way is to go from “local business knowledge” to the ­strategic
view. The learning and experience effort needed to make
­strategist understand the national challenges and structures is
much higher than vice versa.
Deutsche Telekom approached the challenge by making CTOs
and CMOs from national subsidiaries “dual citizens”. The
­leader role to build a part of the “cross-border factory” was
­added to their regular role as a functional leader of a subsidiary
(e.g. CTIO of the country X leads also a part of building the
cross-border production).
With the Dual Citizenship approach, Deutsche Telekom is
­driving the conception and implementation of its Pan-Net.The
first implementation successes were presented at the ­Mobile
World Congress 2015 and 2016, including among others
the central production of SMS, MMS and Visual Voice Mail
­services for more than 10 countries in the footprint.
Alexander Hardt is Management Consultant who advises clients in the areas of
Strategy, Innovation and Business Development.
Figure 9: Transformation Challenges
Big Picture View
Headquarter
Dual Citizen
•Challenging to
a­ cquire local
market knowledge
•Opportunity to
develop Big
Picture view
Local Market Knowledge
Source: Detecon
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Detecon Management Report dmr • 2 / 2016
Local
CXO
Cross-Border Service Production:
Let the “factory” act enterpreneurial
through novel methods of service pricing
If looking for the right approach to share the cost and the ­benefit
of a cross boarder production with the local entities – Shared
service centers are the right spot to look at and learn!
Figure 10: Examples of SSCS in The Telco Industry
•
Vodafones „Shared Service India“ focusing on
­delivering IT, Customer Operations and HR Services
•One salesforce providing a unified customer view
by consolidating CRM systems across 15 countries
•Telefónicas European People Service Center in Dublin
is responsible for 29,000 employees across Europe
•Deutsche Telekom Shared Services s.r.o. is supporting
financial & accounting processes
The telecom industry has tried to yield benefits of internationalization and size for quite some time. For almost a decade,
experts in telecommunication group headquarters have been
trying to create “group effects”. Shared Service Centers (SSC),
Knowledge Centers and best practice sharing are “must haves”
on leading CEOs’ agendas in the industry due to their expected
synergistic effects.
The basic idea is that one entity within a large corporation
s­pecializes and takes over responsibility in producing a certain
service for all others. The entity can create the well-known
­effects stemming from scale and focus:
>
>
>
Lower unit cost due to higher capacity and utilization
Accumulation of expertise by making the respective service a core competence
Pooling of investment and immediate availability of
innovative services for all.
•Deutsche Telekoms „One.ERP“ consolidates processes
regarding IT and customer operations
Source: Detecon
Cost
Figure 11: Often SSCS Can Not Match the Cost Savings of Outsourcing
Target State
Steady State Business
Shared Service Center
Transformation
Outsourcing
Time
Source: Detecon
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Nonetheless, SSCs still often fail to deliver the expected results
especially if compared to outsourcing (handover a service to an
external supplier).But why is that the case?
The reason is simple: SSC today often work not as efficient and
innovative as they could. All the benefits shown in business cases
and board presentations are possible, but things often go off
track in the selection of the owner and the commercial setup of
SSC’s. The key challenges are:
The winner takes it all: It is regarded as an advantage to produce
services for the group. The SSC entity is able to invest, increase
its staff and is celebrated in investor presentations whereas all
others must reduce their staff and reduce costs.
Overstatement followed by underachievement: Usually one ­entity
is chosen in a “competition” to become the single supplier for
a specific service across the whole group of companies. The
„Game“ is often won with (over)ambitious business plans
that require more funding at later stages and provide fewer
­efficiencies than planned.
In for a penny, in for a pound: Everybody provides funds that
are pooled and given to the producing entity to establish the
SSC. The money is under the control of the producing entity
and p
­ otential changes to planned costs and timelines lead to
additional required funds needed and consequently to mistrust.
This challenges are not accruing when choosing an outsourcing
provider as service producer. In this case, the service recipient
is more able to pressure the producer to comply with timelines
and contracted cost levels. The service recipient can also ­change
the outsourcer if unsatisfied with the service. This poses the
strongest motivation possible for the outsourcer to strive for
continuous improvement in terms of service and cost.
Nevertheless, an external supplier also bears disadvantages
like sharing the benefit with other companies (often your
­competition) and the risk of not having full control. Hence, the
challenge lies in making an SCC – as in-house entity - act like
an external supplier while keeping the advantages “internal”.
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Reviving the Entrepreneurial Spirit to unleash the true strength
of the organization
Organizations know how the ideal picture should look like:
Being selected to host a Shared Service Center must entail
the duty to strive for satisfied customers and continuous
­improvement. For the producer, it’s supposed to feel more like
an ­obligation rather than a victory. In turn the advantage for the
service recipients must also be clear, transparent and measurable
– only then service recipients are incentivized to purchase the
service rather than producing it on their own. The ambition is
clear - but how can it be achieved?
Brief and to the point, the doors must be widely opened to let
the efficiency and power of the market enfold itself within the
organization. This can only be achieved by embracing the entrepreneurial spirit in order to guide the interactions between the
various entities and the SSC. In practice this means:
Chances and risks lie with the producing entity – and not with the
customers: Entrepreneurship means having contractual commitments. This also entails handling unforeseen costs, complexities
and changing external circumstances to generate value.
Customer payments start with service delivery (and not during
­development): To receive payment from its customers the SSC
has to deliver a service that creates value for the clients. Funding
the development of the SSC does not fall into this category.
A risk taker is needed (and it should not be the customer): Entrepreneurship means taking risks. The service recipients are focused on running their business rather than creating a new one.
Hence there is natural reluctance to making big investments and
organizational changes and thus it is the SSC’s role to cover the
initial funding.
By adhering to these principles the owner of the SSC cannot
rely on safety nets that guarantee its existence in case of i­nferior
­performance. In fact, the SSC will face the pressure of the free
market in terms of quality and price expectations. ­Furthermore,
the SSC cannot ask for additional “implementation investments” from its (later) customers in case unexpected higher
costs arise.
The owner of the SSC has to act as an entrepreneur. This
­incorporates all the responsibilities and repercussions in terms of
customer satisfaction, cost awareness and need for ­innovation.
Consequently, also the mindset shifts from simply a­ dministering
a large scale project which happens to be a Shared Service ­Center
to genuinely striving to run a business successfully.
To bring it into practice when setting up an SCC the following
should be considered:
Step 1 – Start the business case with the question “what is the
­client prepared to pay?“: An entrepreneur starts by considering
the ­willingness to pay of potential customers in a transparent
­market. Accordingly, the producer plans capacity and costs.
Step 2 - Create an independent entity: Create an independent
entity that decides over its costs, employees and business case
while creating trust through transparency.
Step 3 - Create a simple set of rules: To build an entrepreneurial
environment the organization must define clear rules such as:
> The independent entity, i.e. the Shared Service Center, will
assume the risk (initial investment) and not the customer.
> The customer only pays with service delivery.
> General conditions and guarantees for volume and price
must be comparable with external market conditions.
By following the principles and steps described above the
o­rganization is able to lay the foundation for a prospering
­entrepreneurial environment that truly capitalizes on the synergies that can be realized through Shared Service Centers.
How Deutsche Telekom successfully uses the “Entrepreneur
Approach” in its new service production model (Pan-Net)
Currently, Deutsche Telekom is in the process of transforming
its entire production landscape in Europe. The Pan Net aims at
integrating the various service production facilities of its European entities in one legal entity – the Pan-Net. The Pan-Net will
produce in future telecommunication services like SMS or voice
on behalf of all national entities
In the past cost of a shared production entity like the “Pan-Net”
where shared to the consuming entities via the “Cost+” m
­ odel,
meaning cost where distributed based on occurrence and not
based on service delivery and quality The risks that national
entities would have had to assume in terms of investment was
hardly bearable in relation to their individual size – and without
their commitment the transformation could not be realized.
Deutsche Telekom made the Headquarter the investor and
­ rovide initial funding and taking the risk for the Pan-Net.
p
­National entities will only start to pay for the service with
­“consumption” based on a “pay what you use principal”.
Figure 12: Classic Shared Service Center, Separate Factory from Internal Customer, Outsourcing
Classical Shared Service Center
Separate Factory from internal Customer
Organization
Prosumer
Outsourcing
Organization
Organization
Free Market
Forces
Producer
Free Market
Forces
Consumers
Producer
Consumers
Consumer
Producer
Consumer
Organization
Source: Detecon
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While the benefits are considerable, this new setup also bears
challenges for Deutsche Telekom. The pricing of the services,
for instance, is not particularly straightforward given the fact
that upfront investments are high and committed volumes for
some services can be fairly difficult to estimate. While the future
volumes of SMS are very well known, demand for newer service
like Smart Home can be hardly anticipated with accuracy.
To apply such a model and unleash the entrepreneurial ­power
needs a distinct trait – risk tolerance! The Pan-Net and any other
entity working with such an approach will make ­unplanned
­losses and gains. Especially big corporations are not exactly
famous for liking uncertainty. It boils down to the u
­ ltimate
question how much entrepreneurial spirit can be injected to
big corporations with structural change and smart incentive
­systems.
Nicolas Stichel is a Management Consultant with expertise in the areas of
Strategy, Finance and Digital Transformation.
Daniel Steinfeld is a Management Consultant and advises clients in the areas
of Strategy, Innovation and Marketing.
Investition
Figure 13: Market Based Charging is Based on Service Delivery
Market based
Service Charging
Service Delivery
Usual Service Charging
Cost of Production
Time
Source: Detecon
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