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Job Cuts at Telcos: Balancing Tactical and Strategic Needs
Just as some economic commentators are beginning to gain the confidence to state that the worst of the downturn is, if not over, then not far off, in the telecoms industry we can look back on a first quarter that has delivered sharp declines in revenue and profitability. Analysys Mason notes that most of the major operators have announced their results for the first quarter of 2009, during which the effects of the recession appear to have been much more pronounced than they were in the fourth quarter of 2008 - the fourth quarter being one in which operators usually enjoy some seasonal uplift.
Telecoms services are, to some degree, protected from some of the worst effects of the consumer retail slowdown because of their utility nature, but are not entirely immune from pressure on revenue. Company failures, job redundancies, fear of unemployment and broader worries over financial security have all made an impression on the revenue lines – and hence the profitability – of the major operators.
Most telcos have attempted to streamline their businesses in recent years, and have used headcount reductions as a fundamental part of their strategy to improve operational performance. During 2004–2008, revenue per employee generally increased (see Figure 1), while salary costs as a proportion of revenue tended to remain steady or decline (for larger telcos, they are usually between 15% and 20% of operating costs).
However, during the past eight quarters, growth in revenue per employee has flattened out among most of these operators, and the decline in revenue that most operators experienced in the first quarter of 2009 has resulted in a corresponding reduction in productivity. TDC, which is in private equity hands, provides a striking counterpoint to this general trend.
As a result, operators have had to reduce costs to bring them back in line with revenue, and workforce reductions are one method of achieving this.
However, operators need to ensure that workforce reductions are handled in such a way that:
- one-off costs do not become a burden: Restructuring and cost transformation are already the norm among telcos, so it is prudent to regard socalled ‘one-off costs’ as part of the ongoing costs of a business
- staff redundancies and the outsourcing of certain functions does not create a business whose operational gearing is too low: Insourcing and outsourcing trends have tended to be cyclical in the telecoms industry. Outsourcing can leave a business exposed to inefficiencies in operating costs and over-dependence on key suppliers when they re-enter a growth phase or when competition between suppliers is less intense.
- the slimmed down company is not left without the skills it will need to grow when the economic environment improves: It may not be sensible to make staff reductions only in those areas that make the heaviest losses during a recession.
One of the most dramatic recent examples of job cuts was BT’s announcement, after publishing its fourth quarter of financial year 2008/2009 figures (March 2009), that it would shed 15 000 posts, of which 5000 posts were among directly employed staff and a further 10 000 were among third-party contracted staff. These 15 000, in addition to 10 000 announced a year previously, represent 16% of the operator’s total direct and indirect workforce at the end of 2007. The context was a sharp decline in profitability in the group, driven almost exclusively by the loss-making BT Global Services unit, which focuses on global enterprise ICT services.
Although BT explicitly identified its Global Services unit as the culprit for the group’s woes, it did not make clear the breakdown of the job cuts between its four main units (BT Retail, BT Wholesale, BT Global Services and Openreach), its corporate and back-office functions and its main engine(s) BT Design and BT Operate. All that was indicated was the direct/indirect mix and that the job cuts would be spread across the group.
For BT Global Services, the problem lies not in revenue growth – the unit demonstrated a higher rate of revenue growth than BT’s other business units in the 2008/2009 financial year – but in profitability, and in particular the relation between replicable costs and costs that scale to size and revenue. Essentially there is too little of the former and too much of the latter in BT Global Services, and the unit finds it difficult to grow without increasing costs. The corollary of this is that if BT reduces the unit’s cost base, it also runs the risk of decreasing its revenue and diminishing its capabilities – and its potential to grow when market conditions are better – in what it still considers its engine of growth. Therefore, it is more difficult to streamline a unit such as Global Services, whose growth has been fuelled by the acquisition of skills, than it is in the mass-market areas. There is simply less opportunity to separate production functions, de-skill, outsource and so on without having a negative impact on revenue. In the final analysis, job cuts have to be part of a strategic plan, not simply a tactical cost realignment.
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Analysys Mason’s report, Planning for the upturn: recession strategies for telecoms operators, answers the questions that most operators will need to address in order to emerge from the recession with an enhanced competitive advantage. The report was published as part of Analysys Mason’s Industry Strategy research programme, which provides business leaders with unique analysis of underlying intra- and inter-industry dynamics, as well as their relation to macro-economic and social factors at a country, region and global level.
Posted to the site on 26th May 2009