Wednesday, 14 June 2017

Analysing The Telecom Tangle 1 - Systemic Risks

The telecom sector has been in the news of late for all the wrong reasons – rising stress, high debt, loss making or low profitability, mergers, job losses and lot… this sector is one of the high-points of the India Growth story. For this to happen in this showcase industry seems strange from the outside… the reality is, in my opinion, the exact reverse. The seeds of the stress were sown right at the beginning; all hints to this reality were ignored, and by everyone. I do not recall anyone pointing these, self included; though I did come close, to be honest. Yet, when I now look back with my experience garnered since then – there can be no doubt : the seeds of the problems were inherent in the model itself…

It wasn’t, for the most part, deliberate; the decisions that were reached were all rational decisions made by rational people. They may not have been the right ones, as we know from hindsight, but they were decisions reached with a strategy in mind, as we shall see. Also bear in mind that this was a new trade, with no established learnings, norms, procedures, case studies. In essence we were creating them as we went along. And this was the first, most critical point – we went wrong, as we focused on the end-results – new customer acquisitions – in isolation; there should have been equal focus on establishing industry firsts, processes, learnings, sharing of good practices, deep analyses etc. None of this was done for the levels that mattered. The result is there for all to see!

The next error that happened was frankly, stupid in the extreme – I make no bones about it. It was simply inexcusable – and it was simply this : there was never any training imparted to new employees as they came into the company, beyond the perfunctory induction training & some technical training. This is fine for old established trades, with established learnings and processes, and in-built mechanisms at team level. This was a disastrous decision for a new trade with none of these. These first two factors taken together sowed the seeds for disaster, as we shall see how they connected years down the line to create hell.  As a matter of fact, in a brutal indictment of the Telecom & Handset Trades, these two trades stand as the only trades where I have not received extensive training on joining the company. s

Yes- there were other problems, as we shall see. You could make the case that the major issue was the investments are not justified by the market or its size. There may be some truth to this; an analysis of this is, however, not on the menu for this article. That too will be attended to, in the fullness of time. Please bear with me, as the aspect of the quantum of investments into the industry is deep, has many parameters, and ramifications in addition to a massive scandal associated with it from our past. So, let us leave that aside for the moment. My point is to first of all identify the systemic risks in the model of business as it was practiced on the field. This is because systemic issues create insolvable long terms, and become critical only over a long period of time.

So what do you do, once you have invested in the business? For starters – you are stuck with that decision, and then it is upto you to make the best you can out of it. And this is where the second phase of problems started, and right at the beginning. Mobile Telephony was a new concept to India; and the implied assumption might have been that customers don’t need education. This was especially so in the period prior to internet on mobile. You were in a new market, in a new industry, selling a new product. And when Data happened – this fledgling problem became a full-scale crisis…

The focus should have been on developing the market, deepening it; opening new customer lines; new markets; investing in finding new usages and the market sizes of these new usages {think data here}; studying how it can be a game-changer. If any of this happened-  it certainly didn’t percolate to the field levels, and most certainly did not show up in the customer communications. There was little effort to educate the customer, to create the market. The emphasis was always on acquiring new customers. That is by itself a laudable objective; the problem was that this  was the only present objective. By the time the realization sunk in that merely acquiring new customers is useless if they don’t contribute to the bottom and top lines of your company, the rot had set in.  

By this time, unfortunately, the teams were accustomed to getting customers by any means at their disposal – leading to a Brain Drain from the trade as well, as Channel Partners as well as elite employees realized early on that this was wrong, and quit back to their original trades. This was to hurt, and hurt the trade very badly indeed in the time to come. The complete absence of checks and balances to check misuse, {including out-and-out unethical tactics & short sighted approaches to sales} and short term tactics, or profitability over the long term, meant these practices became systemic- giving rise to a fourth systemic risk in the practiced Business Model.

There was never any genuine focus on profitable customer acquisition; this is something I did point out, and in my first few months in the trade, as I could not see the point of having a customer who purchased nothing! That said – I readily admit I did not foresee this getting to be an endemic serious and crippling issue in the trade. When the trade did wake up, the solution proffered was wrong; they started tracking calls, in the sense that sales targets were accepted basis first and second calls and so on. Will 2 or 3 or even 25 calls give you a profitable customer? Obviously not! The only answer should have been to move to revenue targets and per customer revenue, and all along down the line. This was never done, at least not till very late.

The core challenge in this trade is  the nature of the cash flow from Telecom service products, which is a service, and a recurrent revenue source. The employees had no idea of the accounting involved in such a different trade; being from product sales, wherein profitability calculations are far simpler. In this trade, a customer registers a profit only after regular usage of the service over a period of time. This should have been clear right from the start  till the last level of the organization – it wasn’t. I had to educate myself regarding the concept of profitability in such a scenario. The companies did not invest in training employees. It is only after studying the theory myself, including case studies {something laughed at by most salesguys} that I came to the realization of the risk of taking a strategy that did not cater to the risk imposed by the nature of the cash flows that emanated from the Business.

The result of this was a front, second and third line totally disconnected with profitability from operations. In a product sales scenario, so long as the pricing decisions have been & and are properly made, inventories planned out, and an intrinsic demand generated, profit is almost a certainly so long as demand continues to arise, and the scalability of the business attended to. However, this is not the case in Telecom Services, which is a recurrent revenue model, involving very different profit concepts. Unless the profitability is built into the strategies, the processes and the systems at field level – disaster is a foregone conclusion, at least at an industry-wide level.

The inability to ensure sufficient revenue per customer is a problem that has roots in this simple issue; it has, of course, since then grown into gigantic proportions, and with many other, more serious parameters now involved. We shall look at them in later parts of this Telecom Series. The key issue here is, had this been built into the DNA of the organization and the industry at the beginning itself, this would have been hard-coded into the entire company. Working with only  profitable customers would, could and should have been the buzzword for the trade. That it wasn’t the case is a Manifest Truth.

Yes, there are issues of marketing strategies involved – wherein you spread the net wide and then draw it in; was this strategy the best one feasible? Yes, in a fast-growth market, you need to grow in tandem with the Market- But that does not mean you incubate a series of deep systemic risks in your business model for too long, which is what happened! We know now, with the benefit of hindsight, that it clearly wasn’t the best way to go about it. The industry numbers tell the tale. A check was badly needed; had this check – that of profitable customers only – been there at the start, with a proper process and strategy behind it – in all likelihood, the situation would not have been as bad. For Business is always a matter of choices – and in this case, the choice apparently was between scale or profit. No one thought that it was feasible to develop a strategy of Building-Scale-With-Profit. And that was the biggest industry failure.

In the next parts – I shall go deeper into these systemic risks, and identify the way forward now for the trade, basis hard-core case studies from other industries I have since worked in, as well as my extensive reading of Business Literature from across the world. Stay connected! Furthermore, at no point do I deny the external factors that were to buffet this fledgling trade. My point is simply that the internal systemic risks made the entire system more susceptible to external environmental shocks…. 

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