McKinsey Telecoms. RECALL No. 13, 2010 - Leveraging IT
Transcript of McKinsey Telecoms. RECALL No. 13, 2010 - Leveraging IT
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Title
RECALL Noxx
Telecommunications, Media, and Technology
Leveraging Technology
RECALL No13
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3RECALL No 13 Leveraging Technology
Welcome ...... to RECALL No 13. For the first time, we are issuing an
electronic version of RECALL, our publication for lead-
ers in the telecommunications industry. Paper copies
are available on request. The individual articles can also
be found in McKinseys Telecommunications Extranet.
The current issue focuses on the huge potential that still
remains to be captured in the IT and technology arenas.
Our first ar ticle synthesizes the results of our interna-
tional Telecoms IT Benchmark surveys most recent
wave and dispels a number of myths about whether and
how IT and performance are correlated. We then show
the structured application of lean techniques that can
deliver significant performance improvements across
key business areas.
We start by illustrating how telcos can unlock signifi-
cant productivity gains in their field force by using
smart simulation across their entire operating model.
Next, we discuss how IT-enabled lean transformation
can boost performance in application development
and maintenance along all aspects of the organization.
In another dimension of lean, we look into the service
delivery chain for B2B information and communication
technologies, where lean can tap productivity improve-
ments of some 40 percent.
The fifth article describes a deeper, more collaborative
approach to outsourcing and offshoring that can achieve
radical transformation of an operators IT landscape.
Such an approach also makes it possible to realize high
incremental cost savings. We then move on to next-generation IT architecture management, revealing the
best practices of top performers. Our final article drills
down from this broad view to a specific, yet vital facet:
customer lifecycle management. Here, the right infra-
structure can greatly reduce churn and lift revenues.
In closing, we hear from Fernanda Torquati, Global CIO
of Telefnica. She shares with us the unique story of her
companys IT transformation journey in an interview.
She believes they will achieve a uniform global IT at the
end of this journey, while ensuring local demand man-
agement and an overarching country interface. But
such journeys dont happen overnight.
We hope this issue of RECALL sparks insights and dis-
cussion as you navigate your own technology journey.
As always, we look forward to your feedback on these
articles, as well as your thoughts on topics you would
like to see covered in the future.
Jrgen Meert
Leader o McKinseys
EMEA TMT Practice
Fabian Blank
Leader o McKinseys EMEA
Mobile Operations Service Line
and Editor o this RECALL issue
Klemens Hjartar
Co-leader o McKinseys
Operations and Technology
in TMT Practice
Tomas Calleja
Co-leader o McKinseys
Operations and Technology
in TMT Practice
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5RECALL No 13 Leveraging Technology
Contents01 Money or management? The true driver of telco IT performance 7
02 Sweating your assets: Riding the next wave of savings in the field force 13
03 Lean on the line: Improving ADM in telecoms 19
04 Fixing break-fix: The power of lean ICT transformation 25
05 Outside in: Leveraging outsourcing and offshoring to transform IT 31
06 Fast forward to success: Managing next-generation IT architecture 37
07 Turning customer insights into income: The architecture is key 45
08 Transforming IT: An interview with Fernanda Torquati, Global CIO, Telefnica 53
Appendix
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7RECALL No 13 Leveraging Technology
Money or management? The true driver of telco IT performance
01 Money or management? The true driverof telco IT performance
Conventional wisdom dictates that greater IT spend
leads to improved performance. Results of McKinseys
Telecoms IT Benchmark, however, show that the secret
to IT eff iciency and effectiveness lies in its management.
Since 2008, McKinsey & Company has been conduct-
ing an IT benchmarking effort in telecoms. The exercise
not only aims to measure and compare IT efficiency
(i.e., how much do I spend on IT?) and effectiveness
(i.e., how well does IT support my company?) but,
most importantly, to identify key performance dr ivers.
The survey has highlighted substantial differences
across participants in these efficiency and effective-
ness categories.
McKinseys IT effectiveness index defines performancealong three dimensions that are crucial for every tele-
coms operator:
Time to market for new products/services
Functionality coverage by business activity
Availability of business-critical IT services.
The higher the score, the better the telcos IT supports
the organization. Comparative analysis of results em-
phasizes time to market as the dimension that explains
most of the difference between best and poorest opera-
tors. This is highly significant, since top performers can
be up to five times faster in bringing new customer price
plans to the market.
IT efficiency is simply the ratio of IT spend (capex plus
opex) to company revenues. The two years of this study
have revealed that what typically differentiates more
efficient from less efficient operators is their spending
in application development.
With the IT benchmark, McKinsey has been able to
identify the areas that drive excellence in IT manage-
ment (i.e., the key management practices that dist in-
guish top performers) and to dispel some myths, while
highlighting several realities.
Drivers of excellence in IT management
In this study, McKinsey examined IT management
practices of operators and identified the factors that
differentiate the most efficient and effective operators
from the least. The best operators excel mainly in thefollowing three areas:
Demand management. Top telecoms performers strictly
adhere to demand management processes, and this
holds true both for application development and for
application maintenance. Some examples of best-in-
class demand management are (Exhibit 1):
Deploying and adhering to a stringent, gated pro-
cess to review the demand, facilitating focus and
accountability of stakeholders, and establishing a
more efficient and effective decision making process
Creating a yearly IT capacity plan by segmenting
the demand along two dimensions business lines
and demand type (i.e., projects, small demands, and
maintenance)
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The best operators adhere strictly to ormal demand
management processes01
Appointing a set of sufficiently senior and knowl-
edgeable relationship managers from IT to the
business to help steer their business counterparts
toward the optimal functionality cost versus time-
to-market trade-off.
Top performers are also more advanced in having
defined an infrastructure serv ice catalog. This allows
them both to standardize the factory (in terms of pro-
cess, services, technologies, etc.) and to have the correct
demand management dialog with users. These activities
ensure that the service level provides adequate quality
at the right cost.
Vendor management. IT purchasing represents 60 to
70 percent of the total IT spend for telecoms operators.
This means that vendor management is a top priority.
The first lever for successful vendor management is ven-
dor consolidation. McKinseys Telecoms IT Benchmarkshows that top performers have far fewer overall IT ven-
dors than do the poorest performers. Top fixed-line per-
formers, for example, have 60 vendors, while operators
coming in at the bottom of this category have 133.
It is not unusual, in fact, to find the following situation
at a telco: a plethora of both large and small vendors
in application development and maintenance (ADM)
and infrastructure, multiple contract models, limited
service quality targets, no vendor risk of losing business
continuity, limited application of contract penalties,
lack of cost transparency mechanisms, and hundreds of
RFPs to purchase IT products and services.
IT vendor consolidation represents a formidable oppor-
tunity to achieve a substantial reduction in IT spend
and a significant improvement in service quality. Top
McKinseys Telecoms IT Benchmark
In 2008, McKinsey conducted its first IT bench-
marking study in telecoms with a sample of 19
European operators, including 6 integrated players,
3 fixed-only operators, and 10 mobile-only opera-
tors. The 2009 survey has seen participation grow
to a total of 27 participants in Europe and the first
set of benchmarks in North America. The study par-
ticipants are typically f ixed incumbents and large
mobile players (i.e., no mobile virtual network oper-
ators). The benchmark measures both IT spend as a
proportion of revenue as well as IT effect iveness to
put IT costs in the context of service levels, time to
market, and the functionality that IT systems offer
to the business.
MOBILE OPERATORSSOURCE: McKinsey 2009 European Telecoms IT Benchmark Survey
Applications going through formal demandmanagement processPercent
Development
Maintenance
100
100
87
76
Operatorslagging behind
Bestoperators
How is the chargebackmechanism used?
To what extent are accountmanagers vs. the business involved
in demand management?
What is the involvement of thebusiness in approval of IT projects?
Is there an infrastructure productcatalog (excluding storage)?
Question
Advanced/highBasic/low
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9RECALL No 13 Leveraging Technology
Money or management? The true driver of telco IT performance
1 Including internal onshore and offshore plus staff contractors
SOURCE: McKinsey 2009 European Telecoms IT Benchmark Survey
MobileFixed
APPLICATION DEVELOPMENT AND MAINTENANCE
FTEs1 per EUR billion in revenues
R2 = 0.21
Percent of outsourcing
0
100
200
300
400
500
600
700
800
900
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
More outsourcing does not necessarily mean ewer in-house FTEs02
performers are able to reduce IT purchasing spend by
up to 25 percent (15 to 20 percent of total IT expendi-
ture) by transforming their vendor management model.
Operators should, however, be careful that they do not
become too dependent on one service provider, espe-
cially for ADM. With only one provider, what were once
benefits could turn into liabilities, since the operator
becomes locked in. This is why companies should pur-
sue vendor consolidation while maintaining a multi-
sourcing strategy.
The second lever of vendor management is a telcos
outsourcing strategy. Outsourcing application develop-
ment is often seen as an easy means of reducing ADM
costs, but operators that outsource more dont neces-
sarily have fewer non-outsourced staf f (Exhibit 2).
McKinseys Telecoms IT Benchmark has clearly high-
lighted that this is true only if the operator has mature
vendor management practices, such as using detailed
service definitions during negotiation, frequent con-
tract reviews, time-to-market KPIs, and active vendor
cost management.
IT architecture. The third area of IT management is
architecture, and McKinseys benchmarking study
shows that top performers have a much more consolidat-
ed application landscape. As an example, operators at the
top of the mobile list have an average of around 100 appli-
cations, while the poorest performers have about 170
(Exhibit 3). Even if application does not always mean
the same thing across companies, these figures clearly
indicate that a lower number of applications is a key per-
formance driver in IT both in cost and effectiveness.
Top performers also adhere much more to standard pack-
age functionality to avoid falling into the common trap of
adapting them too much, thus turning them into another
in-house development legacy. Fixed-line operators are
much less advanced in using standard packages, mainly
due to the large legacies in this particular business.
As another example of best-in-class architecture, a high
consolidation level of corporate databases (product
catalog, installed base, etc.) enables operators to reduce
ADM spend and improve time to market. Some opera-
tors, for example, have run projects to build an inte-
grated product catalog and to implement new product
development through simple parameterization. This
allows them to drive down the time to deploy new price
plans to as little as just a few days.
The truth about IT in telecoms
McKinseys Telecoms IT Benchmark also helped dispel
some myths and highlight several of the realities of how
IT supports telecoms operators. The key findings from
our survey are the following:
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10
85
105
145
50
49
90
Mobile
Number of applicationsFixed
Number of applications
SOURCE: McKinsey 2009 European Telecoms IT Benchmark Survey
Poorestoperators
168103
Overall 14485
Bestoperators 9765 16
407172
320166
276141
Operations support systems
Business support systems
Enterprise resource planning
29
39
30
26
16
The best operators have simpler application landscapes03
Telecoms operators can deliver high IT effect iveness
with limited IT spend, i.e., 3 to 4 percent of their rev-
enues. The myth of needing to spend more to raise IT
effectiveness has been refuted. What really moves
the needle is management practices, and this holds
true for both mobile and fixed-line operators as well as
in other industries.
Size does not necessarily help. Small operators can be
efficient and the bigger ones too. But we believe that
large operators are not fully capturing the benefits of
being large, resulting in some missed opportunities.
This situation is often driven by the excessive complex-
ity of the IT landscape.
High levels of outsourcing do not necessarily imply
low IT spend. In fact, operators whose IT spend is a
large percentage of their revenues often outsource a
great deal of their IT functions without bringing theirIT spend to below-average levels at least in the short
term. As outlined before, to capture the potential of
outsourcing and offshoring, telcos must have mature
capabilities in these areas.
Standardization of technologies and interfaces
improves time to market. The focus of time-to-market
strategies tends to be on outsourcing, but poor out-
sourcing management can actual ly worsen the situ-
ation. Telcos who focus on IT standardization are the
ones who see positive results in their time-to-market
improvement efforts.
Top performers are characterized by fewer, more
productive human resources. This is not to say that a
reduction in headcount improves performance. It does
appear, however, that telcos that have been able to elimi-
A cross-industry perspective
While McKinseys Telecoms IT Benchmark offers
insights within the telecoms industry, our work
with other sectors confirms these learnings. In par-
ticular, top telco managers especially CIOs often
ask how their organizations compare with banks in
terms of IT spend and IT effectiveness. McKinseys
telecoms and banking benchmarks indicate that
contrary to popular belief banks are not much
more advanced than telcos, even though they spend
much more on IT (i.e., 7.5 percent of revenues versus
4 percent on average in telcos). Banks application
development practices are also no more advanced
than those of telcos, even though banks in general
do have better performance management systems
(e.g., using function points much more frequently).
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11RECALL No 13 Leveraging Technology
Money or management? The true driver of telco IT performance
nate unnecessary complexity have smaller but more
productive workforces.
An overview of telecoms operators across type and over
time confirms that outdated thinking regarding invest-
ment in and the handling of IT is not serving telcos well.
Among others, the myths of more money equals betterperformance and greater outsourcing means lower
costs have been dispel led. Operators who get the most
bang for their IT buck place strategic focus on manage-
ment, not money.
Duarte Begonha
is a Principal in McKinseys Lisbon oice.
Stphane Rey
is a Principal in McKinseys Zurich oice.
Javier Garabal
is a Principal in McKinseys
Barcelona oice.
Giuliano Caldo
is a Senior Expert in McKinseys
Rome oice.
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13RECALL No 13 Leveraging Technology
Sweating your assets: Riding the next wave of savings in the eld force
02 Sweating your assets: Riding the nextwave of savings in the field force
Under pressure from ever fiercer competition and
greater product complexity, telcos are seeking further
technology potential to enable the next wave of field
force productivity improvement. Leaders are finding
that smart simulation across their entire operating
model can reap swift gains without new investment.
Many telecoms operators have implemented broad pro-
grams to enhance the end-to-end productivity of their
field forces in the recent past. However, the battle for the
wireline arena continues to rage, markets are matur-
ing, and customers are demanding ever more complex
products and networks. Telcos are faced with a dilem-
ma. They urgently need to unlock further productivity
to keep pace with customer and capital market expecta-
tions without increasing their budgets. A sophisticatedtechnique involving lab-based simulation can unleash
an additional 15 to 20 percentage points of further pro-
ductivity from telco f ield forces without the burden of
additional capex.
A new mode of technology-enabled operations
Over the last five years, many major telcos have turned
to technology enablement to improve the productiv-
ity of their network field force. In most cases, this has
involved expensive up-front investment in tools such as
automated dispatching systems, GPS, wireless hand-
helds and laptops, and other field tools. Such resource
intensity has frequently led telecoms operators to
neglect additional incremental investment in other
areas ones that are crucial in maximizing the return
on their technology investment.
What went wrong? Many telcos added this new layer of
technology without aligning the new systems to their
core processes. The high pressure to deliver meant they
often sacrificed functionality or focused on driving
value in only one dimension. Insufficient investment in
the alignment of systems and processes has left users
either unable or unmotivated to tap the systems full
savings impact. Some field organizations, frustrated by
the perceived lack of value their GPS implementation
offers, simply switch off their systems. Failure to pro-
vide targeted capability building and interlink the new
technology with performance improvement and incen-
tives has been an added stumbling block.
However, driven by the need to mine further potential
a few years on, telcos are now revisiting the sacrificesmade during implementation and searching for ways to
unleash additional value without significant additional
investment. To do this, telcos must focus on the entire
operating model (Exhibit 1), scrutinizing all their tools,
data inputs, and core business processes and particu-
larly the interactions between them.
Integrating operations around technology
McKinsey has tapped into a powerful technique for cap-
turing this next wave of savings with its OpsTechLab.
The key to keeping investment costs down and speed-
ing time to impact by around 50 percent is to conduct
IT-enabled simulations of client tools and process-tool
interactions. One dimension is to constantly optimize
the tools underlying algorithms to ensure greater
input data quality. Another is fully aligning these tools
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14
Coreoperatingprocesses
Data
Tools
Continuous improvement
Identifying/addressingsystematic hurdles to driveimproved performance
SOURCE: McKinsey
Performancemanagement
Measuring and man-aging performanceat an individual anda group level
Resource/capacitymanagement
Managing staffing anddemand levels toenable service deliveryat lowest cost
Service delivery andmanagement
Closely managing jobcompletion to ensureservice delivery
Workforce manage-ment
Work scheduling andtactical assignmentof engineers to jobs
Engineer data Job data Product data
Scheduling algorithm
Optimizing service andengineer utilization
Network dataCustomer data
GPS
Pinpointing real-timelocations
Forecasting model
Estimating futuredemand
Engineer/techniciantools
Issuing handhelddevices, laptops
Field orce perormance can be optimized via improved integration o core
operating model elements01
with core operating processes. Integrating continuous
improvement into these processes is also essential to
ensure sustainable change.
Priming system tools for new functionality. System
tools are only effective when data inputs are reliable and
relevant. Initial systems implementations often involve
a thorough review of key inputs. However unless
processes and resources are put in place to uphold data
accuracy over time system tools gradually lose eff ica-cy in line with the erosion of data reliability. Maximum
automation is required for timeliness and efficiency.
Two examples of high-impact improvement levers
include daily technician job scheduling or dispatching
algorithms and the automated infeed of updated techni-
cian skill profiles.
Complex scheduling tools require thoughtful initial
configuration and continuous attention to ensure their
optimal performance. In practice, however, awareness
of a scheduling tools true productivity drivers varies
greatly. Changes made to accommodate business needs
or specific regions also reduce a tools eff iciency over
time if its algorithms are not regularly re-optimized.
Simulation in McKinseys OpsTechLab serves to test a
scheduling engines performance, identifying areas for
improvement. Simulation tools use real data to create
optimized scenarios that can be compared to the histor-
ical baseline. This approach allows telco leaders to tune
up their dispatching tools by refining the algorithms
they run on. Algorithms in the scheduling engine must
be configured and weighted to reflect the true priority
of assignments. This optimizes job allocation to meet
service needs, reduces drive time, and maximizes tech-
nician utilization. Simulation bypasses the need to test
potential improvements live prior to implementation.This lowers the risk of service failures, while speeding
up implementation.
Ensuring that scheduling tools receive an automated
feed of skill profile updates is a second highly valu-
able but seldom used tweak to existing technology.
This boosts the f lexibility of resource deployment
and maximizes scheduling algorithm effect iveness.
It also increases the impact of training investments,
as it ensures the organization deploys technicians to
perform all the tasks for which they have been trained.
OpsTechLab simulations often demonstrate a potential
increase in jobs per FTE-day in the range of 8 to 10 per-
cent, with travel time reductions averaging 20 percent.
Integrating these smarter tools into core field force
operating processes. Ensuring that data and tool
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15RECALL No 13 Leveraging Technology
Sweating your assets: Riding the next wave of savings in the eld force
reconciliation and updating are state of the art is only
one side of the equation. Aligning processes to capture
their full potential is the other. Again, up-front simula-
tion of the impact is faster and far more cost-effective
than field testing would be. Three examples of where
the greatest benefits can be uncovered lie in the areas
of workforce, service delivery, and technician perfor-
mance management.
Dynamic dispatch is the use of scheduling algorithms
and GPS to drive workforce management. This enables
dispatchers to assign field workers one job at a time
throughout the day in the most efficient possible
sequence, rather than the traditional method of load-
ing them with a full days work up front. GPS gives
the scheduling algorithm a more accurate picture of
technicians real time locations compared with the
jobs requiring completion. Scheduling algorithms then
conduct multivariate optimization to deliver maximum
technician utilization and lowest drive time, corre-
sponding to serv ice at the lowest cost a boon for both
the company and the customer.
Compared with conventional full-day scheduling,
using dynamic dispatch typically yields improvements
in field productivity of 10 to 15 percent. This corre-
sponds to the impact telecoms players are capturing as
they implement real-world dynamic dispatch. And
surprisingly most field technicians like it once they
get used to it. A major source of stress for field techni-
cians who are front-loaded or bulk-loaded is that
one unexpectedly long job can upset their whole daysschedule. Dynamic dispatch enables an organization
to manage variability in task time completion using the
entire field force, rather than asking a single technician
to do this every day.
Beyond providing a telecoms operator with cost sav-
ings opportunities, implementing dynamic dispatch
also makes it possible to generate incremental revenues
by enabling telcos to both offer and deliver differenti-
ated service levels to their customers based on varying
response times. This is one example of fully exploiting
business processes to realize the return on systems and
tools investment.
Unlocking impact: A case example
The experience of one North American telecoms
player exemplifies the importance of optimization
across the entire operating model, using an inte-
grated approach.
This operator already had a good workforce man-
agement process in place. They had deployeddynamic dispatch techniques and an automated
scheduling algorithm. However, OpsTechLab simu-
lations revealed that they were missing out on 5 to
10 percent in productivity savings by not regularly
analyzing the effectiveness of their scheduling
algorithm. By improving their algorithm configura-
tion and allowing their technicians to perform all
the jobs they were capable of, they could shorten
driving distances between jobs and increase tech-
nicians value-added call time. The telco had access
to all of this data from their tool, but did not have
the simulation capability to interlink it and gener-
ate such savings opportunities. McKinsey helped
update their algorithm using the findings from the
simulation and also build the capability to regularly
update and improve it.
On the GPS front, managers were required to log
into the graphical GPS system each day to ascertain
the positions of their technicians and then cross-
reference with pages of data to spot any discrepan-
cies. This system had two issues. First, it was hard
for managers to determine whether technicians
were really where they should be there were novisual displays to indicate irregular activity.
Second, it required managers to sit at a computer
tracking their staff in real t ime all day, which didnt
happen in practice, given the many competing
demands on managers time. A simple custom tool
was created by the McKinsey team to highlight
technician behavior inconsistencies for the man-
agers attention at the end of each day, allowing
managers to spend time where they should be
coaching technicians.
Optimizing the interlinks between tools and
processes helped this telecoms player drive a pro-
ductivity improvement of 10 percentage points
while enhancing the return on their previous tech-
nology investment.
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16
Another area where few organizations are capturing the
full potential of tool/process alignment is the ability of
GPS to provide real-time visibility on service delivery
and service management. McKinsey has conducted
several recent systems implementations with clients
to define the requirements for installing real-time vis-
ibility of their serv ice delivery. Close cooperation with
vendors allows identification of the system require-ments for smart delivery of such visibility without over-
whelming managers and dispatchers. Real-time alerts,
for example, notify dispatchers when service delivery
is at risk, enabling them to contact technicians and
offer support, or escalate issues to field managers. This
gives dispatchers and the field a greater sense of shared
responsibility in service delivery.
Performance management is also greatly improved by
expanding GPS functionality. Coaching and perfor-
mance dialogs can be informed by richer data broken
down into time on site, driving, and unproductive time,
rather than by approximations and averages. Expected
job times can be refined based on actual rather than
estimated work times, providing standard task times or
norms for specific types of tasks. Above is an example
of a GPS-based scorecard that can be used by f irst-line
managers to identify drivers behind technician perfor-
mance. It serves as the starting point for performance
coaching with the technician and enables managers to
customize their approaches. A manager could, for exam-
ple, investigate high time away from task using retro-
spective location data. A manager might also recognize
the need for additional technical coaching for techni-
cians with high productive time but low task time.
Enabling sustainable change with continuous improve-
ment. Top telcos know that, with technology, stand-
ing still can mean falling behind. All elements of the
operating model require continuous improvement to
ensure maximum return on technology investments.
Historically, improvements have been made reactively
in isolation based on technical user group observations.
The imperative now is to drive continuous improvement
in an integrated way, using strong cross-functional
teams, regular review and maintenance cycles, and an
effective feedback loop from all stakeholders.
Most telecoms players have technical specialists
focused on a single aspect of the operating model: pro-
cesses, tools, or data inputs. Telcos need to augment this
domain-specific expertise with a small cross-functional
GPS-based scorecard
Scorecard with GPS data
Daily
productivity
Percent
Task time
attainment
Percent
Productive
time
Percent
Total worked
time
Minutes/day
Late start
Minutes/day
Early fnish
Minutes/day
Time away
rom task
Minutes/day
Tech 1 57 85 67 540 12 45 120
Tech 2 64 75 86 565 -10 32 59
Manager1 61 80 76 553 1 40 90
Defnitions
Productivity Task time attainment x productive time, as a percentage
Task time attainment (actual time to execute assigned tasks) / (standard task time or assigned tasks), as a percentage
Productive time (Total worked time (late start + early fnish + idle time)) / total worked time, as a percentage
Total worked time Average time worked during the given period, in minutes per day
Late start Average delay in departure time vs. expected start time, in minutes per day
Early fnish Average early return to overnight location vs. expected completion time, in minutes per day
Time away rom task Average stationary time away rom expected job location, in minutes per day
1 Managers metrics are the average o all assigned technicians
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17RECALL No 13 Leveraging Technology
Sweating your assets: Riding the next wave of savings in the eld force
Brant Carson
is an Associate in McKinseys
Toronto oice.
Todd Scheidt
is an Associate Principal in McKinseys
Toronto oice.
Kelli Fairbrother
is an Associate Principal in McKinseys
London oice.
leadership team that has a mandate of year-on-year
improvement in overall systems performance. These
systems optimization leaders must bring a specific set of
capabilities to the organization. First, they need to have
a leaders understanding of the business and its perfor-
mance aspirations. They must have the problem solving
capability to optimize both within and across domains
using simulation tools, user group feedback, and regu-
lar system diagnostics. Finally, they need the programmanagement skills to steer maintenance cycles and con-
struct and orchestrate feedback loops.
To start, these leaders need to develop regular mainte-
nance and review cycles for their information systems
algorithms, data input quality, and process-tool interac-
tions with clear expectations for target system per-
formance and the associated field productivity levels.
Weekly, monthly, and quarterly maintenance sched-
ules can be defined in detai l, with clear responsibility
assigned. Reviews can be incorporated into software
release cycles to ensure quick responsiveness when
additional development is required. In addition, vendor
reviews and technology forums can be incorporated
into an annual cycle to ensure the organization keeps
abreast of external technology tips and trends.
Such leaders also need to build effective feedback loops
from a broad cross-section of the user population. Real-
time issue reporting from technicians, dispatchers,
and management should accompany more formal user
panels and lead user feedback. User feedback can serve
as a source of ideas to be tried and tested using simula-
tion. Regular feedback also ensures the organization is
always learning ways to improve the effectiveness of its
people through the intelligent adaptation of technologytools to better suit their needs.
The leaders driving this next wave of field force cost
savings are doing this by squeezing the maximum out of
assets they already have. Telcos are repeatedly finding
they can quickly unlock 15 to 20 percentage points of
additional productivity improvement from their exist-
ing technology investments. Simulation across multiple
dimensions in a risk-free environment with a focus on
better integrating data, tools, and processes is the fast-
est and most reliable way to deliver on the full promise
of technology enablement.
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19RECALL No 13 Leveraging Technology
Lean on the line: Improving ADM in telecoms
03 Lean on the line: Improving ADMin telecoms
Once the domain of automotive manufacturing, lean
is now transforming telecoms. Fine-tuning a telcos
innovation engine can lead to big competitive gains in
productiv ity, time to market, and quality.
Given the current challenges of the telecoms industry
(e.g., creating new services, improving quality of exist-
ing services), IT-enabled business innovation is becom-
ing more and more important. However, the speed,
cost eff iciency, and quality of the innovation channel
at many telcos leave significant room for improvement.
Boosting performance in application development and
maintenance (ADM) now tops the management agenda.
McKinsey experience indicates that ADM performance
improvements can have a significant impact. First,productivity gains in ADM of more than 30 percent are
possible (equal to 1- to 3-percentage-point increases
in company profit margins), leading to lower costs or
greater capacity to deliver on business requirements.
The impact of performance improvement, however,
reaches beyond the ADM activity itself into the entire
organization. As a result of their ef forts, telcos have
enjoyed time-to-market improvements of 10 to 25 per-
cent for changes in price plans, bundles, and new de-
velopment projects, and have seen reductions in defects
in delivered software of 20 to 45 percent.
These benefits apply to both IT departments as well as
to separate business-to-business ICT services units that
provide ADM services directly to customers. In the lat-
ter case, we have observed EBIT increases of around 5 to
7 percentage points for the ICT services unit.
A lean overview
While the manufacturing industry originally pioneered
lean management concepts, other industries have fol-
lowed and implemented these principles in their own
business contexts. Lean management transformation
is very practical as it invests 25 percent of the time on
analysis and 75 percent of the time on implementation.
The transformation is based on an iterative learning
process where new ideas are tested, feedback is gath-
ered, and improvements are implemented immediately.
Over the past several years, application of lean manage-
ment concepts to ADM has gained momentum. More
and more companies are implementing lean manage-
ment concepts in their ADM departments. Lean man-agement focuses on five interlinked elements to improve
overall performance, and these elements can be applied
to ADM in much the same way as their traditional indus-
trial application.
The first two principles of lean management as they
relate to ADM speak to the organizations systems.
First, process eff iciency is the way processes and re-
sources are used and configured to create value while
minimizing the cost to serve. Second, performance
management comprises the processes, systems, and
infrastructure needed to manage performance across
ADM activities.
The next principles relate directly to the human element
of the organization. Mindsets and behavior describe the
way the staff of the organization think, feel, and act both
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20
individually and collectively. Organization and skills
are about the extent to which processes are managed
and supported by a skilled base of workers.
At the heart of lean management the element that
links all of its principles is the voice of the customer.
This means the services that come from ADM activities
are aligned to real customer desires.
A lean management journey typically consists of
three phases:
Diagnostic phase (two to three weeks). This phase
begins by generating an initial hypothesis regarding
the main improvement levers. A fast scan of current
working practices on the work floor (called a walk-
through) combined with high-level benchmarking
serves as the basis. After that, a deep dive with lean
management techniques to better understand root
causes and solution directions begins.
Future state design phase (two to three weeks). Here,
several lean management solution archetypes (e.g.,
business requirements, iterative development, per-
formance management, and testing efficiency) lead
the organization toward a new way of working. The
advantage of having lean management archetype
solutions is a steep acceleration of implementation
and impact.
Implementation phase (around eight weeks).The new
way of working is established and then refined over
the given time period. The first v isible elements that
teams will encounter are whiteboards and daily briefingmeetings. The daily briefing is a 15-minute, stand-up
meeting that takes place in the morning, in which the
team discusses the previous day, plans the coming day,
and raises challenges/problems. During this phase, tac-
tical implementation plans are also further developed.
In general, about 10 percent of the expected benef its
can be captured by the end of the f irst eight weeks of the
implementation phase, which will continue for another
nine to twelve months.
Lean ADM in telecoms: A case study
One telco with whom McKinsey has worked has an ADM
department with more than 1,500 FTEs. The organi-
zation is now well on track to reaching (and even exceed-
ing) its improvement targets. The following recounts
their lean ADM journey.
Diagnostic.The diagnostic began with a top-down
performance review (benchmarking and walk-through
technique) to generate an initial hypothesis on pro-
ductivity, throughput time, and quality improvement.
Subsequently, the diagnostic deep dives focused on
validation of the initial top-down view, better under-
standing of root causes, solution directions, and achiev-
able impact in the short to medium term.
McKinsey used many different lean management diag-
nostic tools. A subset of the main ones used is included
here. For the process area, the focus lay on time spent on
value-added versus non-core activ ities (overall process
efficiency analysis), reduction of work inflow (value-
added work analysis), and process mapping to discover
rework loops and waiting time (value stream mapping
analysis). For the performance management area,
emphasis was placed on assessing KPIs, visual aids
(within lean management also referred to as Kanban),
and review cycles. The organization angle looked at gaps
between employee skills required and those available.
To diagnose mindsets and behavior and the voice of
the customer, employee surveys helped evaluate how
staff acts and feels, whereas a process maturity assess-
ment focused on the quality of the customer interactions
and on talent management.
The diagnostic revealed that project and support eff i-
ciency could be increased by 22 to 45 percent based
on the actions listed in Exhibit 1. The diagnostic also
indicated potential to lower the share of projects with
budget overruns from 45 percent to between 20 and
35 percent, while cutting the cost price of resources by
around 15 percent to bring it in line with market levels.Finally, the diagnostic identified potential to double
the current ratio of people working offshore versus
onshore and cut throughput time by about 15 percent.
As a realistic goal, the organization committed itself to
reduce costs by 25 percent over 18 months.
Future-state design. Based on the diagnostic, this
phase focused on four large design archetypes: business
requirements, testing, management and support, and
performance management.
The business requirements archetype was employed to
reduce rework, prevent budget overruns due to incor-
rect scoping, and drive down non-productive develop-
ment hours of analysts, while enhancing the quality of
handover when work moves offshore. This design arche-
type focused on the full process chain from customer
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21RECALL No 13 Leveraging Technology
Lean on the line: Improving ADM in telecoms
SOURCE: McKinsey
Efficiency improvement initiatives for average and top performers Waste as a percentage of total time
Reduce time focused on non-core production activities
Prevent rework resulting from unclear and changingbusiness requirements
Lower support staff efforts like administration, finance, and HR
Increase testing efficiency
Ensure sufficient scope of control for project management
Raise utilization by ensuring staff is working on projects
Total efficiency improvement
5
22 - 45
0 - 7
2 - 6
3 - 6
3 - 6
9 -15
Eiciency improvement potential ranges rom 22% or average to 45% or
top perormers01
insight research and collection to change management
in requirements after initial sign-off. Here, use cases
were selected as the method for business requirement
design. The main rationale for choosing use cases was
that, when applied correctly, this forces completeness
and a proper level of detail and it is easily understand-
able for business. It also immediately feeds into the
performance management initiative through use case
points a metric to measure productivity output.
Testing to reduce non-productive hours and enhance
overall efficiency was the second archetype that the
telco used. This design phase focused on improving the
interaction between development and testing activities
through tighter quality control of unit testing output.
It also concentrated on shift ing large portions of sys-
tem testing to earlier points in the development cycle
(instead of a big-bang testing approach at the end of the
development cycle) to enhance feedback to the develop-
ers. Another important focus of this phase emphasized
improvements to the testing activity itself based on
automation of integration/regression testing for parts
of the system code that remained relatively untouched
over the different releases. In further improving risk-
based testing, the telco ultimately will decide on the
amount of testing effort to invest based on the codes
functional and technical risk profile.
The management and support archetype was employed
in order to achieve a reduction in the number of support
staff and project managers. The main reason for the large
numbers of support staff was the abundance of manual
finance and administration tasks. To drive efficiency, one
objective of the design was to implement a project man-
agement automation tool and consolidate the remaining
support work. For project managers, the design focused
on increasing efficiency in communication interfaces
with other parties within the organization (primarilyparticipating in meetings and preparing reports).
Finally, the performance management archetype was
used to buttress the lasting impact of all initiatives. On a
project management level, the design consisted of a large
whiteboard that showed planned versus realized work
on a person-by-person basis (visual work flow board) as
well as a burn-down chart that visually tracked overall
team progress over time. Each morning, team members
would discuss outcomes of the prior day and plan for the
day ahead. On a weekly and monthly basis, a richer set of
KPIs showed progress on other dimensions such as uti-
lization, fully-loaded cost per FTE, defect density, effort
overruns, and span of control. On a management level, a
series of review meetings across the organization was set
up to discuss the KPI reports and served as a forum for
management to decide on actions based on facts.
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22
A very conscious decision was reached to make the
detail design of these archetypes line-led, meaning that
line management drives the design choices described
above supported by lean management experts. This
ensures better organizational acceptance for the solu-
tion and a smoother subsequent implementation.
Implementation. The telco implemented its lean pro-
cess in three distinct stages. The first implementationstage was to test the design. To ensure the perfect fit,
McKinsey worked with the organization to implement
the full future-state design in a project launched recent-
ly. After some marginal f ine-tuning to accommodate
organization-specific requirements, the solution was
ready for full rollout.
The second stage of implementation was to develop the
organizations capabilities. The telco started its capa-
bility-building effort based on adult learning doctrines
under the guiding principle that it is important for
people to first understand the reason for change before
training them in new skills. The business requirements
and performance management initiatives required the
greatest training effort given the use of new tools like
use cases, use case points, burn-down rates, and visual
work flow boards. To develop the necessary capabilities,
the telco conducted workshops for analysts and project
managers to build awareness of the gap in the quality of
current versus best practices this, for them to inter-
nalize the importance of change. The telco also offered
e-learning and selected expert classroom sessions to
educate employees on the new way of working as well
as to develop internal coaches who could continue the
training efforts beyond the individual sessions.
The third and final implementation stage was to rapidly
scale up the solution. After testing the design, McKinsey
worked with the telco to finalize the blueprint design
material. It is important that this blueprint consists of
practical material that people will use daily (like stan-
dard operating procedures and quick reference guides)
rather than lengthy manuals that are hardly ever used.
In only a couple of waves, the capability-building pro-
gram covered the entire organization. At the end of eachwave, everybody immediately adopted the new way of
working. Rolling out the new approach rapidly ensured
that the full organization works uniformly.
The results generated so far have boosted confidence
throughout the organization that the lean ADM journey
is indeed a very rewarding one. It also remains very high
on the top management agenda and visibly so. All of
these elements are important in ensuring that impact is
sustainable and the organization steadily moves toward
continuous improvement, even after the initia l effort.
For this telco, the lean ADM journey has just begun.
Telcos can obtain faster and cheaper innovation capa-
bilities with better output, leading to a competitive
edge. Applying lean management principles to their
ADM activities is a tried and true means to this end.
Lean management focuses on process and the associ-
ated performance management optimization, but goes
even further to develop capabilities, alter mindsets, and
ensure continuous improvement.
Joris Hppener
is an Associate Principal in McKinseys
Tokyo o ice.
Kevin Wei Wang
is a Principal in McKinseys Shanghai oice.
Stphane Rey
is a Principal in McKinseys Zurich oice.
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25RECALL No 13 Leveraging Technology
Fixing break-x: The power of lean ICT transformation
04 Fixing break-fix: The power of leanICT transformation
Operators focused on the business-to-business ICT
space can benefit significantly from lean transforma-
tion of their field force operations.
In recent years, the field force has become a critical
competitive element in telecoms players high-volume,
standardized customer service operations. Operators
have learned to leverage this element to also drive value
based on cost efficiency and quality. But a very dif fer-
ent situation persists today for most players serving the
large B2B information and communication technolo-
gies (ICT) customer segment.
The service delivery chain in B2B ICT differs from B2C
telco service operations in several respects. First, ser-
vice level agreements (SLAs) for large accounts usuallyencourage customization. This means that attempts to
standardize the process are often thwarted from the
outset. Another factor is that service delivery windows
are much shorter: most repair tickets involve turn-
around within 8 or 24 hours. Beyond this, the work
requires a higher share of specialized skills. The B2B
ICT segments broad hardware portfolio also leads to
greater logistics complexity, which the field force has
to support alongside same-day service provision. For
all these reasons, lean transformation has traditionally
been considered less applicable.
This belief, however, is a fallacy. To demonstrate the
power such a transformation can have, this article
presents a sanitized case study. It involves a leading
integrated EU telecoms/ICT player with an enterprise
business unit that also installs and maintains the ICT
systems of large B2B customers. The company aimed
to improve profitability and customer satisfaction in
its ICT hardware repair operations by boosting the
productivity and quality of its service operations. To
accomplish this, company managers decided to adopt an
end-to-end (E2E) focus on the delivery chain for repair
activities conducted at the customer site. The results
demonstrate that lean transformation in this area can
raise productivity by some 40 percent and at the same
time realize quality improvements of around 10 percent.
Working end-to-end to maximizeimprovement potential
The lean field force transformation focused on five areas
(Exhibit 1): contact center, service qualification, plan-ning, field engineers, and logistics. These areas consti-
tute the core E2E process for on-site ICT repairs (mainly
hardware). The company exhibited all the typical differ-
entiating characteristics outlined earlier. About 40 per-
cent of the tickets were for same-day repair (a maximum
service window of 8 hours); another 40 percent were for
resolution within 24 hours.
Despite the challenges, the company achieved sig-
nificant impact during an eight-week pilot phase. The
results were measured using a detailed dashboard,
which also showed that these results were being sus-
tained over the long term as well. Field engineer pro-
ductivity, for example, increased by nearly 40 percent
and quality measured in terms of the share of repair
tickets fixed right the f irst time rose by over 11 percent.
Planning effectiveness the number of tickets per
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26
SOURCE: McKinsey
Internal process(~ 75 FTEs)
Customerinteraction
E2E hardware ICT repair service process
Open ticket
Complete customerserial number, etc.
1
Contactcenter
6 FTEs
SLA check
Matching ticket withtechnician and parts
Delivery speed mgmt.
3
Planning 6 FTEs
Completeness check
Technical diagnostic
Contract check
Vendor warranty
2
Servicequalification
6 FTEs
Travel
Parts pickup
On-site execution
Return of parts
4
Fieldengineers
37 FTEs
Procurement
Stock management
Transport coordination
Warranty claims
5
Logistics 18 FTEs
Parts advice Parts confirmation Depot/courier (handshake)
Activity
Function
Customer reportsincidentTelephone, e-mail, EDI,portal)
Diagnostic contactcustomer or sendtechnician
Contact customer tomake appointmentif requested
Execute repair atcustomer site
The end-to-end (E2E) on-site repair process addresses ive key areas01
engineer per week climbed by nearly 35 percent and
overall productivity went up by roughly 36 percent (sug-
gesting very similar latitude for FTE reduction).
Getting started: A two-week lean diagnostic
Field force transformation begins with a diagnostic
phase. An effective diagnostic surfaces a wide variety
of issues that the transformation teams need to work
through in all these areas. Key diagnostic tools used
include value stream mapping, field observation, andvariability and disruptions assessment (also across
peers). The main findings in each area were revealing.
Contact center/service qualification. The company
discovered that the customer information collected
was often either incorrect or incomplete (e.g., end-user
workstation identification and customer serial num-
bers) and that agents were not always making direct
contact with end users. More effective remote diagnos-
tic scripts and tools were needed. The contact center
and qualification also lacked a clear process for perfor-
mance reporting, such as the number of clean tickets
passed on to planning and field engineers.
Planning. Direct observation showed: engineers spent
less than 20 percent of a typical day on value-added
ticket time (Exhibit 2). Around one-fourth of their time
was dedicated to administrative tasks. The main down-
time in the process was for travel, administrative activi-
ties, waiting, and searching for the client manager or
exact workstation location on the customers premises.
Field engineers. The diagnostic spotlighted issues in
both field engineer support and peer performance.
Field engineers faced irregularities in over 80 percent
of total tickets received. These mainly related to logis-
tics (over 60 percent) and planning (around 10 per-
cent). On average, this already represented 35 minutesof waste per ticket, equal to around 15 percent of the
organizations total daily field engineer capacity. The
quality of this support definitely required significant
improvement effort.
Where productivity was concerned, a peer comparison
diagnostic revealed a large spread. The top 25 percent
were completing roughly twice as many tickets per day
as the lowest quartile. One of the drivers was admittedly
the geographic concentration of tickets within a region.
Many low performers were in more sparsely populated
regions, resulting in increased travel downtime. But
even within the top quartile, the spread between the top
and bottom 25 percent amounted to 2.4 successful tick-
ets per day. High variability in ticket completion times,
even when the incidents reported were very similar,
suggested significant optimization potential.
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27RECALL No 13 Leveraging Technology
Fixing break-x: The power of lean ICT transformation
Logistics. Logistics encompasses procurement, stock
management, transport coordination, and warranty
claims. Around 60 percent of correct ive actions in logis-
tics were courier-related (such as the courier arriving
too late), with couriers accounting for about 25 percent
of total logistics costs. Waste from frequent logistics
disruptions included parts not delivered to the right
local inventory locations or not assigned to a ticket
(PDA synchronization problems, etc.). Some 5 to 8 per-
cent of parts were defective on arrival. Around 50 per-
cent of parts shipped to engineers on site are returneduntouched, a sure sign of overqualification. Another
area requiring optimization was stock turn: analysis
showed that over 90 percent of stock-keeping units were
only used twice a year at the most.
Powering up for higher performance
The company used the detailed insights of the diag-
nostic phase to develop improvement initiatives based
on the lean philosophy along four productivity levers:
capacity management, planning management, coach-
ing for results and performance, and reducing disrup-
tions within the E2E service delivery chain (Exhibit 3).
Ultimately, the team identified more than 40 initia-
tives during the two-week diagnostic, spread across all
five areas (contact center, qualification, planning, field
engineers, and logistics), as well as ideas to streamline
the E2E nature of the work f low.
Boosting contact center/qualification quality.At the
contact center, one initiative was to review and optimize
the scripts used for capturing critical customer data,
such as the end users mobile number, customer serial
number, location, and the key contact. In the qualif ica-
tion phase, initiatives included reducing follow-up tick-
ets by enhancing attention to detail and keeping staff up
to date on newly introduced contracts and models.
Optimizing planning and capacity management.
Numerous proposals were generated to improve field
force planning and capacity management. Every detail
of next-day tickets was set up the day before. The plan-
ning team mapped all tickets and to dos on a planning
board that they checked regularly at noon and at the end
of the workday. Unproductive time was balanced out
with much more precision: engineers not fully sched-
uled for the following day were assigned to a f lexi-
pool for either part of the morning or afternoon. One
productive use of their time is to inspect repair parts
at the warehouse to check quality and to give suppliers
feedback. Initiatives for field engineers included intro-
ducing a normed ticket time based on performance
management to reduce variability in ticket completion
times. This encouraged an effective decrease in average
1 Assigning ticket and allocating tasks to specific minutes
1.0
Work-hometravel
1.0
1.5
8.0
Value-addedticket time
Waste inprocess
0.5
Lunch
0.5
Admin
1.0
Travel time
1.0
Gross timefor tickets
4.5
Non-flexibleplanning
1.5
Warehouseadmin
-81%
Fromhome toware-house
Find andcheckparts forthe day
Checkand cor-rect ticketfor theroute day
Ticketsfinishedat2:00 p.m.,but noadditionalworkpossible
Fromlocalware-house tocustomerlocation
Betweencustomerlocations
Closingcalls
Loggingdata1
Search-ing for/callingcustomer
Phonecalls dur-ing ticketexecution
Lunch atnon-clientlocation
Diagnos-tic
Repair
Testing
Descrip-tion
Non-value-added activitiesbefore/after tickets
Non-value-added activitiesduring ticket execution
SOURCE: McKinsey
Time spent on 1 day, based on observations during go and see field visitNumber of hours (rounded)
Value-added time accounted or less than 20% o an engineers day02
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28
ticket time. With 50 minutes estimated as the weighted
average time achievable, the team determined it could
generate a 25 percent reduction in average ticket time.
An alternative planning and dispatching method is
based on a dynamic approach. Here, field engineers are
assigned one job at a time throughout the course of the
day. This method makes it possible to manage variabil-
ity in ticket completion time across the entire f ield force.
However, when highly specialized hardware is involved
that has to be taken to the site by the field engineers,planning a day ahead is required to distribute the appro-
priate parts to the field engineers.
Streamlining logistics. Logistics initiatives focused on
aspects such as improving the coordination of parts
sourcing and transportation by courier, in alignment
with field engineer planning. The parts drop was orga-
nized at a single location and bundled into a single
role. Previously, this had been organized across differ-
ent teams at separate physical locations. Other ideas
generated were to invest engineer time into ensuring
that parts receiving at local warehouses was optimally
orchestrated. A 6:00 a.m. check was conducted on parts
that had been delivered overnight and central pickup
was organized. Prior to this streamlining, field engi-
neers would pick up parts individually at non-assigned
warehouse locations.
SOURCE: McKinsey
Increasefield forceeffectiveness
4 productivity levers Examples of initiatives
Capacitymanagement
Balance number of available field engineerswith expected ticket volume
Minimum number of FTEs in fixed pool of engineers
Flexi-pool to buffer peak load
Engineers shifted from FTE pool to flexi-pool
Planningmanagement
Fill each engineers free time with produc-tive tasks
Reduce travel time
Next-day tickets planned at end of day
Planning team checks scheduling board every dayat noon and end of day
Coaching forresults
Reduce variability in engineer performancevia coaching and performance management
Norm time reduction
Weekly performance review between field managerand team
Field manager coaches worst performer individuallyat least once per week
Reducedisruptionswithin chain
Reduce disruptions in ticket execution
Reduce follow-up tickets
At least 1 contact with end user during E2Eticket delivery
Planning and logistics team sit together in open-space setup
ILLUSTRATIVE
Several speciic initiatives resulted in signiicant impact03
Nurturing lean thinking for sustainable change
Beyond optimizing processes, aligning staff mindsets
and behavior is just as important, anchoring the con-
cepts and philosophy of lean continuous improvement
from an E2E angle. Opportunities for manager role
modeling were set up alongside a constructive coach-
ing environment in which staff could refine their skills
and capabilities. This skill building dovetailed with
performance management, helping drive long-term
sustainability. One initiative was to introduce an inte-grated E2E dashboard that tracked progress on a weekly
basis together with weekly meetings that addressed any
E2E issues. Other actions focused on improving team
interaction. A 15-minute get-together at the beginning
of each shift provided a daily update on team productiv-
ity, quality, and morale, while offering a forum to handle
any outstanding issues and gather new team ideas on
performance improvement. At the end of each week,
half-hour team discussions were held to maintain the
momentum, while benchmarking quality and produc-
tivity performance against past results.
The companys successful lean field force transforma-
tion taught a number of important lessons on how to
best tap into the innate but often latent power of the
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29RECALL No 13 Leveraging Technology
Fixing break-x: The power of lean ICT transformation
field force organization. Where scope and setup are
concerned, it is essential to work end-to-end to avoid
misalignment on KPIs and SLAs at the subunit level. In
execution, identifying the right drivers and breakpoints
is crucial. Linking thresholds and targets to real finan-
cial impact as well as customer excellence is also a
strong enabler. And ultimately, imprinting lean princi-
ples on the companys DNA by refining employees soft
skills is perhaps the greatest differentiator: this is thekey to a continuous improvement culture.
Bart Delmulle
is an Associate Principal in McKinseys
Brussels oice.
Matthias Winter
is a Director in McKinseys Zurich oice.
Peter Verboven
is an Associate Principal in McKinseys
Brussels oice.
Leon de Loo
is a Principal in McKinseys
Amsterdam oice.
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31RECALL No 13 Leveraging Technology
Outside in: Leveraging outsourcing and offshoring to transform IT
05 Outside in: Leveraging outsourcing andoffshoring to transform IT
Many operators outsource and offshore their IT, but few
capture the value that a full-scale transformation can
unleash. How to become one of the few.
Conventional IT outsourcing and offshoring (O&O)
can deliver significant medium-term improvements,
but benefits ultimately flatten out because companies
retain the same legacy IT platforms. Implications are
severe, including longer time to market and growing
operational risk. Industry players have begun to address
this issue using innovative O&O models where vendors
drive, co-invest in, and accelerate modernization in
the process realizing incremental cost savings of around
20 percent. These models require a different O&O
mindset that builds on shared objectives, employs joint
telco/vendor implementation roadmaps, and engages incommon value tracking. First, however, it is important
to see where conventional O&O setups often go awry.
The downside of conventional O&O
Well-structured and well-negotiated arrangements can
yield cost savings of some 20 to 30 percent over three to
five years. Primarily, transferring activities offshore,
capitalizing on vendor process improvements, access-
ing larger resource pools, and upping infrastructure
asset utilization serve to achieve this. Generally, con-
tracts also include well-designed demand management
mechanisms for telcos to capitalize on stricter, more
professional project and service level prioritization.
However, when one examines these deals two to three
years after the ink on the contract has dried, quite often
little in the way of real IT transformation has tran-
spired. While these players may enjoy highly competi-
tive unit prices and good utilization levels, they continue
to operate in their accustomed environment: their deliv-
ery models, their systems, their data models, and their
technical architectures remain pretty much unchanged.
Companies at this stage of O&O maturity often find that
burdensome legacy has begun to consume the benefits
of their O&O arrangements. Expenditure on their IT
operations keeps rising because each dollar of new
functionality adds roughly 10 to 15 cents in additional
annual maintenance costs. This means they have less in
their wallets to develop innovative, business-enabling
IT solutions given the resulting cash f low constraints.
They also have to contend with an increasingly complex
time- and money-consuming design and testing pro-cess which typically leads to slower time to market and
less project delivery predictability.
These serious repercussions can ultimately jeopardize
an operators competitive posit ion. However, while the
need for additional investment in IT transformation is
clear, circumstances can make it impossible for CIOs to
release the cash needed. First, the business case even
for evolutionary IT transformation is relatively chal-
lenging since the payback horizon may extend beyond
the CEOs mandate period. Second, funds for capex
are still scarce in the current business environment,
and customer-facing projects wil l inevitably receive the
capex green light first anyway. And third, vendors in
most existing O&O contracts often f ind it advantageous
to maintain the status quo rather than contributing to
removing complexity.
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Applicationdevelopment
Applicationmaintenance
Applicationoperations
Infrastructureoperations
Businessprocessing
Valuechain
Business domains (examples)
Enterprise resourceplanning
Group functionsBilling
1 2
3
45 5
6
7
Service architecture Sourcing strategies (examples)
1 Preferred offshore vendors
2 Two prequalified niche providers
3 Software as a service
4 Business process outsourcing
5 Single-vendor co-financedmodernization
6 Single-vendor data center/servers
7 Single-vendor end-usercomputing services
SOURCE: McKinsey
A service architecture view helps translate objectives into the right
transormation path01
The power of O&O to drive and accelerateIT transformation
A multi-lever transformation is required to crack the
curve described above and move to the next level of
IT performance. Telecoms players need to move from
ad hoc processes with vague contours to well-defined
services, using configurable standard packages rather
than customized (largely unsupported) software. This
will result in a gradual shift f rom fragmented data mod-
els, tailor-made application programming interfaces,and logic-heavy middleware to modular, services-
based architecture. The landscape morphs from dozens
of legacy technology platforms to a handful of standard
technology stacks.
To achieve this type of true IT transformation without
significantly increasing their IT spending, operators
have to take a much deeper and more collaborative
approach to O&O. Instead of merely pursuing tacti-
cal business objectives like cost, f lexibility, or quality,
participants need to share and agree on business priori-
ties regarding the future evolution of each IT domain.
To capture the maximum amount of value, manag-
ers should step beyond attempts to squeeze margins.
Instead, they should ensure common understanding
of the detail the new platform will entail, with exact
itemization of the implementation plan, KPIs, and
resources, for example. This allows them to fully gauge
the impact of individual transformation initiatives.
Conventional O&O tactics regarding the deal itself tend
to be static, such as one five-year deal for all application
maintenance: they do not reflect the varying priorities
required in specif ic IT domains. Instead, telcos need to
tailor their sourcing strategy to fit domain-specific pri-
orities (multi- versus single-sourcing, for instance, and
transformation versus pure offshoring), creating the
right incentives both internally and externally.
How to set up a joint operator/vendor model
The first step is to develop an internal perspective,
identifying where pursuit of IT transformation via O&O
would make sense. Telcos need to recognize that objec-
tives such as cost efficiency, competitive price develop-
ment, or fast time-to-market performance will translate
into different transformation paths depending on which
part of their IT landscape is in focus. Taking a service
architecture perspective will help teams analyze this
issue in a highly structured manner (Exhibit 1 ).
A comprehensive sourcing strategy then needs to be
developed that aligns with these objectives. The founda-
tion should be a credible economic model that assesses
modernization priorities per domain, establishes a
baseline, estimates the financial impact, and designs
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33
Radically reducing complexity withoutincreasing spend: An O&O case example
One operator collaborated with preselected ven-
dors to rst create domain-specic evolutionary ar-
chitecture roadmaps. Then, they asked the vendors
to design a model that maximized their ability to
execute their roadmaps at minimum cost. Vendors
competed on multiple dimensions: price, quali-
ty, credibility, and timing. The winning plan wascontracted together with a long-term application
maintenance agreement so that a signicant share
of the transformation was funded by the vendor.
This operator is on track to see signicant IT
savings of well over 20 percent by fully leveraging
offshoring and lean savings that go beyond the
30 percent already achieved from the previous O&O
setup. Since the transformation modernizes the ap-
plication architecture, the company can shut down
several expensive legacies, beginning its move from
proprietary vendor stacks to open platforms. The
knowledge offshore vendors gain from maintenance
and transformation work will also ultimately lead to
a far better offshore application development ratio,
cutting time spent on design and testing.
RECALL No 13 Leveraging Technology
Outside in: Leveraging outsourcing and offshoring to transform IT
KPIs to quantify the effects. A telco will aim to concen-
trate volume with fewer providers, with niche vendors
managed by the prime vendor in the domain.
The heart of the strategy needs to be maintenance con-
tracts with shared transformation: long-term mainte-
nance is tendered to vendors, with the vendor co-invest-
ing in a shared modernization plan that locks in the
transformation objectives. This will involve negotiating
a joint roadmap with vendors that maximizes offshor-
ing, operational excellence, and scale levers. It is vitalto provide incentives for vendors to remove complexity.
The provider may, for example, take over legacy systems
from the clients technology platform. In this situation,
the client should in addition to negotiating prices for
specific services also create incentives for reducing
the cost base. Awarding a long-term commitment that
involves the maintenance of systems, once installed
(rather than just a delineated project), is often a major
incentive in itself. The clear scope and in-depth involve-
ment of participating in an operational transformation
in a strong relationship also gives the vendor greater
assurance of capturing profitability over time.
A further crucial negotiating point is the deal duration
and financing to trade off up-front capex against long-
term opex, making use of all value drivers (Exhibit 2 ).
The running costs of a simpler, harmonized system are
100
Years0 1 2 3 4 65 7
Cost/price developmentPercent of baseline
Build your internal view of the transformationroadmap and economics
1
Negotiate joint roadmap with vendors,maximizing offshoring, operationalexcellence, and scale levers
2
Agree on deal duration and financing to tradeoff up-front capex against long-term opex
3
1
2
3
SOURCE: McKinsey
Cost/price development should decrease to below the baseline within a
relatively brie period i careully architectured02
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34
of course far lower than those of a legacy platform later
down the line, which benefits a provider in a long-term
contract just as much as the operator.
Signing the contract with the vendor is just the begin-
ning of the journey: the deal structure and governance
of this type of multi-vendor landscape need careful
planning to lock value into the application maintenance
setup. The roles assigned to prime vendors, niche ven-dors, and operations require overall supervision by a
coordinator acting as a single point of contact, with a
clearly defined role. The added challenge is that this is
not one overall transformation so much as the execution
of many intricate mini-transformations, and requires
leading-edge implementation. It is important, however,
that the operator always retains the strategic and archi-
tectural prerogative, setting and monitoring the direc-
tion of the transformation.
Pursuing a deeper, more collaborative approach to O&O
can give operators the opportunity to achieve a funda-
mental transformation of their IT environment. Their
O&O involvement should always be seen as part of anoverall business transformation, led ideally by their
business rather than their IT community. Operators are
outsourcing ever more of their operations as they prog-
ress up the value chain. Transformational O&O enables
and accelerates this process, but it also moves providers
work up the value chain, creating a win-win situation for
both operator and vendor.
Andr Christensen
is a Principal in McKinseys Toronto oice.
Tor Jakob Ramsy
is a Director in McKinseys Oslo oice.
Martin Lundqvist
is an Associate Principal in McKinseys
Stockholm oice.
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37RECALL No 13 Leveraging Technology
Fast forward to success: Managing next-generation IT architecture
06 Fast forward to success: Managingnext-generation IT architecture
Common pitfalls in telcos IT architecture management
are all too often a serious roadblock to superior business
performance. Operators can bypass these by applying
learnings from their most successful peers.
Telecoms operators are among the highest IT spend-
ers across all industries, relying heavily on IT to enable
their existing business as well as to open up new revenue
streams. However, the impact of IT-related factors on a
telcos business performance often remains unquanti-
fied in the breakneck race to stay ahead.
McKinseys annual telecoms IT benchmarking survey
provides strong empirical evidence of how dramatically
telcos IT architecture impacts their business perfor-
mance (Exhibit 1). Significant performance gaps areapparent between operators with lean IT architecture
and those with a highly complex and fragmented land-
scape. The difference in t ime to market, for example, is
striking: two weeks versus 32 weeks for a similar prod-
uct bundle. IT spend, too, is around 70 percent higher
for laggards than for best-practice mobile operators.
The survey revealed three key differentiators in top per-
former approaches to their IT architecture:
A consolidated application landscape per domain. The
number of applications per domain clearly appears to
influence an operators ability to drive the efficiency and
effectiveness of their operations. The survey showed
that operators with fewer applications perform substan-
tially better than comparable competitors with a large
number of applications. Best-performing mobile telcos
have 97 applications per domain on average, while lag-
gards have 168.
Use of standard software packages.Standard pack-
age functionality enhances business agility and drives
down operational cost. The IT architecture of best per-
formers is predominantly based on standard software
packages in key domains, whether billing, CRM, or ERP.
Mobile best performers spend 45 percent of their total
software budget on software packages, while the figure
for laggards is only 20 percent. These players rely on
proprietary solutions for the rest.
High level of data integration. Highly integrated archi-
tecture greatly enhances a telcos capability to drive
product innovation and successfully commercializetheir new products. The higher the degree of data inte-
gration (fewer customer databases, for instance), the
shorter the operators time to market. This translates
into a greater ability to push market innovation and gain
competitive advantage.
The large gap i