Mobile operators show evidence of positive effects from outsourcing

Posted by Gareth Willmer Tuesday, March 3rd, 2009

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There was unsurprisingly a large amount of talk at the Mobile World Congress the other week on the effect of the economic downturn on the mobile industry. While the general message from operators was that mobile is more resilient than other industries, the industry’s players will clearly be keen to do as much as they can to keep costs under control.

Away from the main announcements in Barcelona on application stores and mobile broadband, it was therefore interesting to hear a couple of Europe’s smaller operators talk about how outsourcing had helped turn them into profitable businesses. This is particularly true because it seems likely that an increasing number of operators will strike outsourcing deals this year.

In an interview with Finnish operator DNA, Pekka Vaisanen, vice president of the consumer business, said that the company’s policy of outsourcing has been one of its cornerstones over the last few years, helping to turn around the business and make it cost-effective and profitable.

Previously, in 2004 DNA had been in rapid decline. At that point the operator was unprofitable and shedding customers, with Informa figures showing a net fall of well over 100,000 subscriptions in the nine months to end-3Q04. Since then, the operator’s outsourcing strategy has been significant in helping it out of its predicament.

DNA outsourced its customer service business in 2007 and has done the same with other assets, including network operations, marketing and most of its sales. “During the last two years we have outsourced everything,” said Vaisanen. “We are pretty satisfied with the results and are now doing the same thing with the fixed-line business.”

The operator has also maintained a small workforce of about 200 on the mobile side, compared with several thousand for Finnish rivals TeliaSonera and Elisa. According to Vaisanen, this has made DNA not only the most cost-effective operator in Finland, but possibly the world.

The company succeeded in raising its operating profit 75% between 4Q07 and 4Q08, to €14 million, despite heavily subsidizing mobile broadband in an attempt to capitalize on the market. It is difficult to isolate the exact impact of outsourcing on DNA’s figures, but the strategy has helped the operator to focus on growing its customer base. Indeed, DNA has been gaining more subscriptions than its competitors in recent years.

Another of Europe’s smaller operators similarly spoke of its success with outsourcing at an MWC roundtable event on the credit crunch, organized by pricing and rating company Highdeal. Akan Ismaili, CEO at Kosovan operator Ipko Net, said that his company had succeeded in becoming EBITDA-positive in its first year of operations.

Ismaili said the company, which launched in December 2007, had started outsourcing from day one and had a policy of developing nothing in-house. “We get more from working with contractors,” he said. “We have stuck with what we know best.”

In its financial results for 2008, Belgian operator Mobistar also produced revealing figures on the savings it has made since it outsourced network activities in 2006. The company says that the strategy led to savings of 35% on capex and opex in 2008 on its 3G/HSDPA network roll-out, larger than the 27% savings the previous year.

Mobistar’s building and operations costs per site have also fallen by 37% and acquisition costs per site by 54%.

It is unclear exactly what these results could signify for larger pan-European players that choose to outsource operations. Tier one companies with long-standing legacy systems have a different model to smaller players and are likely to be less willing to relinquish control of certain operations. Nevertheless, the experience of these smaller players is an indication of the potential cost-saving benefits of outsourcing.

Operators must however be careful to select the right partners in order to ensure that the quality of their product remains at the same level.

Meanwhile, one operator that has faced difficulties despite following a policy of outsourcing is Spanish 3G player Yoigo. Parent TeliaSonera announced EBITDA losses of well over SEK1 billion at Yoigo in its annual report for 2008 and is reportedly now in talks to sell its stake in the company.

These developments are in spite of the fact that Yoigo has carried out a policy of streamlining operations since launching in December 2006. The company has outsourced many of its operations to third parties, with an array of partners responsible for sales, distribution, IT, customer services and network maintenance and rollout.

Yoigo has said that one option for trimming opex could be to reduce its number of partners. However, the Spanish mobile market has faced particularly tough economic conditions and this example shows that in a harsh environment even outsourcing may not be enough.