Top 10 risks in telecommunications

About this report

As the increasingly diffuse yet interdependent ecosystem of telecoms, technology and media continues to evolve, the risk universe for communications operators is changing rapidly. As they formulate and execute their strategies to target and occupy parts of this ecosystem, operators have to ensure that their understanding and management of the risk to their business keeps pace.

To help companies gain and apply the necessary risk insights, our Global Telecommunications Center has developed Top 10 risks in telecommunications 2014. This is the latest in our ongoing series of periodic reports designed to pinpoint the most critical risk issues in the sector, analyze the industry’s evolving responses, and highlight elements of emerging best practices in addressing these risks.

As in previous reports, we do not claim that the list of risks we present here is comprehensive. Also, by its nature, it can provide only a generalized snapshot of the risks that we — and the industry as a whole — see at this time.

During the process of compiling the report, our professionals were asked to take two steps: first, evaluate the most important strategic challenges for global businesses in their industry; and second, rate the severity of these risks for their sector. This study reflects the findings from our telecoms sector practitioners.

The evolving industry ecosystem presents many major opportunities for operators. However, each individual company’s ability to understand and manage the corresponding risks will be critical to identifying and seizing those opportunities. Unless an operator’s growth strategy has a solid underpinning of risk management, it will never be robust or sustainable. This publication aims to help operators build and reinforce that sound platform.

The EY risk radar 2014 – telecommunications

The EY risk radar presents a snapshot of the top 10 business risks in an industry sector by dividing risks into four quadrants that correspond to EY’s Risk Universe™ model. These quadrants are:

• Compliance threats - originating in politics, law, regulation or corporate governance
• Operational threats - impacting the processes, systems, people and overall value chain of a business
• Strategic threats - related to customers, competitors and investors
• Financial threats - stemming from volatility in the markets and in the real economy

The radar below plots the top 10 risks for telecoms operators on the 2014 risk radar and lists the risks that are currently just “below the radar.”

1	Failure to realize new roles in evolving industry ecosystems New growth opportunities require new value chain positioning A focus on new growth opportunities means operators must change their business models as well as adapt to new roles across a growing number of value chains. New digital growth opportunities are attracting a number of participants from different industries, ensuring that value chains are both volatile and rapidly evolving. This opens up opportunities for operators to extend their wholesale focus and engage in “white-labeling” of services and platforms for a wider range of customers. Sharing customer ownership with disruptive players The evolution of value chains also brings operators’ interrelationships with over-the-top (OTT) players to the fore. In many cases, OTT providers have created more appealing alternatives to traditional offerings. The question for operators is whether they should try to emulate these OTT alternatives by developing cross-platform apps in-house or partnering proactively with these players to deliver a richer customer experience.
2	Lack of regulatory certainty on new market structures Attitudes to consolidation and cross-sector relationships are in flux As market conditions remain highly challenging, stressed European operators see consolidation as a route toward more rational market structures which they hope will help justify higher levels of network investment. In emerging markets, more rational market structures are envisaged through consolidation or new wholesale mobile broadband networks. Although regulators recognize the need to reform existing rules to drive industry growth, attitudes to in-market consolidation remain unclear, as do policy approaches to net neutrality issues in Europe and the United States. Operators must help shape new regulatory attitudes Operators need to prioritize shared industry positions and re-evaluate the relative merits of in-market consolidation — including conditions attached to mergers — versus network sharing and other synergy drivers. Operators and regulators both need to focus on market structure-related issues such as wholesale mobile network provision. Other key areas include the provisions around spectrum release, licensing and sharing. Operators’ ability to innovate their business model will depend on new relationships with other industry entities.
3	Ignoring new imperatives in privacy and security Consumer trust levels are in decline as regulators revisit data protection guidelines The uncertainty and concern around data privacy and security are being exacerbated by an escalating political and industry debate, which is expanding into new areas such as data sovereignty and internet governance. Countries from Germany to Brazil are considering new ways of ensuring the integrity of national data amid a rising focus on cross-border collaboration to provide greater global consistency of cybersecurity policies. New opportunities are opening up for differentiation By adding enhanced privacy and security features to their service propositions while understanding the quid pro quo involved in the repurposing of big data, operators can reverse declining levels of trust among end users. At the same time, proactive stances are required on privacy and security issues with partners and policy-makers so that new demands for data sovereignty, personal data privacy and cybersecurity — which may vary according to geography — can be reconciled in the long term.
4	Failure to improve organizational agility Greater agility is essential in a more diverse industry ecosystem Operators have moved from network-centric to customer-facing structures. Simplifying and streamlining these structures while driving new forms of interaction within organizations will be vital if telcos are to cope with a range of escalating trends. Fostering flexibility and innovation from within Effective and committed leadership will be vital in overcoming entrenched, siloed attitudes. It’s important for operators to take a flexible approach to “how” and “where” innovation is housed in the organization. While changes to organizational structures and cultural mindsets form the basis for operators aiming to boost responsiveness, the evolution of systems and processes is no less important as telcos look to strike a balance in generating efficiencies and creating value.
5	Lack of data integrity to drive growth and efficiency Data integrity requires organizational integrity ... Early forays into the repurposing of various data sets reveal a number of challenges, with a lack of cooperation within the organization, lack of leadership understanding and commitment around the importance of data, and fragmentation of data sources all impeding progress. ... and moving from big data to better data While the proportion of IT budgets projected to be devoted to big-data solutions is set to expand significantly in the coming years, this alone is no guarantee that operators will generate value from big data: long-term benefits will require carefully delineated strategic visions to be balanced with operational excellence. 6 Lack of performance measurement to drive execution Turning digital strategy into business reality ... For operators, translating the strategy into actionable steps that deliver genuine business impact is especially challenging for several reasons: Lack of established internal metrics to measure progress against new digital objectives and targets Lack of external metrics that can communicate financial and operational performance in new ways Short-term business planning processes are often out of step with the long-term strategic visions These factors can combine to create an absence of accountability and of appropriate incentives to reach targets, with management frameworks detached from wider strategic initiatives ... requires new metrics to unlock measurable progress In order to prioritize effective execution, operators must overhaul their business planning and metrics — enabling them both to drive and also demonstrate measurable progress against their strategic targets. Metrics transformation is equally vital. This involves the creation of new internal metrics to track implementation of objectives within the organization, and new external metrics to communicate the positive business impact of transformation and innovation initiatives. 7 Failure to understand what customers value Customer confusion limits appeal of new services Operators seeking profitable growth must understand what customers want and then provide a better and more relevant end-user experience. If telcos fail to do this, the immediate adoption rate for new services is at stake, as well as operators’ long-term brand affinity with customers as fleet-footed OTT players continue to redefine customer expectations in new ways. Balancing simplicity with flexibility in the proposition While consumers want more choice, they also want to understand what they are buying. To bring these two objectives back into alignment and drive service take-up, operators need to balance simplicity and flexibility of tariff options as a gateway to new user experiences and assess customers’ propensity to aggregate different services from a single provider to maximize up-sell. 8 Inability to extract value from network assets Addressing a wider mix of network technologies — and of potential rivals Despite operators’ ongoing moves to share mobile network assets or jointly construct fiber networks, differentiation through network quality remains a vital differentiator. Wi-Fi technology is becoming an increasingly important part of the network technology mix for mobile players. At the same time, disruptive new entrants are using innovative business models to target gains in telcos’ traditional heartland of access infrastructure. Driving more value from a heterogeneous network landscape Greater focus is required to provide a seamless customer experience in a Wi-Fi environment, and to extend use cases for LTE beyond high-speed mobile data per se. Operators must ensure that they keep track of innovations from disruptive competitors seeking to bypass traditional telecoms infrastructure, while also monitoring emerging technologies. 9 Poorly defined inorganic growth agenda M&A needs are evolving in new directions ... Operators face growing challenges in managing their portfolios, as the legacy concepts of scale advantages — and of what constitutes “core” and “non-core” aspects of their businesses — continue to change. ... as operators seek to make the most of a wider partnering landscape Despite the return of transformational M&A, partnerships are more important than ever as operators seek low-cost routes into new market segments or build scalability into existing service propositions. In this regard, partnering needs are also becoming more diverse, with both horizontal and vertical partnerships evolving in a range of ways. 10 Failure to adopt new routes to innovation Sourcing innovation at an earlier stage Operators need to stand at the cutting edge of innovation rather than act as fast followers — and respond by engaging and interacting with the world of technology startups in new ways, while also looking to attract the best in new talent. Attracting and sustaining a wider range of talent Operators must draw a distinction between the need for external hires versus up-skilling the existing workforce in light of three imperatives: The need to align competencies and capabilities with future talent pools and ICT economies The need to align talent with the strategic vision The requirement for creative collaboration with suppliers and partners