Sustainability: Why it’s good for business

Introduction

In the last year, businesses all around the world underwent unprecedented changes and had to adapt to the most challenging of circumstances. Priorities shifted for all stakeholders with telcos operating in an increasingly complex world and having to rethink how they do business.

The world is connected digitally now more than ever. With office closures and working from home, Zoom calls with loved ones having been the only way to socialise and to carry out online schooling, telecoms and technology have become even more relied upon industries in the last 18 months.

The idea that a strong corporate social responsibility and sustainability strategy is good for business has been around for decades. This report outlines how telcos can evolve their purpose beyond just being profit driven by aligning core strategy with sustainability initiatives and a sustainability policy, and in doing so benefit their business and add ‘society’ or ‘the world’ to their stakeholders.

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Scope of Research

The modern concept of ‘sustainability’ is composed of three components: economic, environmental and social. This is also sometimes called the ‘triple bottom line’ of business – stating that businesses should commit to measuring social and environmental impact, as well as financial performance, rather than focusing solely on profit. The ‘triple bottom line’ theory states that businesses should focus on the “three Ps”: people, profit and planet.

The three components of sustainability

three-components-to-sustainability-stl-partners

Source: STL Partners

Modern discussions of ‘sustainability’ refer to the economic, environmental and social effect an organisation has on the societies or markets in which it operates. It is an umbrella term that covers issues such as diversity and inclusion, energy usage, human rights and supply chain management.

Through this research we sought to understand if there is a business value to incorporating sustainability into a telecoms operator’s purpose and strategy. Speaking to seven operators across the world, some of whom are named in this report (Telstra, Globe and Orange), we wanted to know how telcos are thinking about sustainability, and to learn more about the following:

  • Telcos’ perception of the impact of sustainability initiatives in wider stakeholder groups e.g. employees, customers, shareholders, society
  • Which sustainability issues telcos are focusing on
  • The business benefits of sustainability initiatives
  • Case studies of companies that have incorporated sustainability into their company strategy
  • The effect the markets in which a telco operates in has on its sustainability initiatives (e.g. developed vs developing)

To gain an idea of how sustainability affects all aspects of the business, we interviewed employees in telcos’ sustainability and CSR teams, as well as in corporate strategy and product management.

All interviewees were asked largely the same questions, covering topics including: the initial motivations for engaging with sustainability; the effect of sustainability on multiple stakeholders (including customers and employees); if being sustainable puts telcos at a competitive advantage; important sustainability issues and solutions; successes and challenges of different sustainability initiatives; adapting sustainability strategies in different regions and the selection of their term for what we are calling ‘sustainability’.

Notably, some of the telcos we reached out to were not willing to participate in interviews because they were in the process of revising, changing, or updating their position on sustainability. In itself, this tells us that sustainability is an important and topical issue that many are still figuring out how to “get right” and how to incorporate it into their company strategy.

Sustainability is a cornerstone of the Coordination Age

As we outlined in The Coordination Age: A third age of telecoms, we believe that the telecoms and the wider digital economy is in its third age, ‘The Coordination Age’, which builds on ‘The Communications Age’ and ‘The Information Age’.

The three ages of telecoms

coordination-age-basic-stl-partners

 

Source: STL Partners

The Coordination Age is a result of the changing needs and demands of the world’s people, businesses, and governments, evolving technological solutions and possibilities, and the need to preserve the most habitable possible future environment for the world’s population.

To create major growth and advance as a telco, operators need to help solve some of the world’s biggest problems. We believe some of those major problems are:

  • A desire for greater business efficiency and productivity
  • The distribution and availability of human resources and services such as healthcare, education, employment, and entertainment
  • Mitigating climate change and minimising its effects
  • Reducing the amount of waste and harmful by-products polluting the environment
  • Concerns over employment due to automation and global economic changes

These major problems can and are starting to be addressed through sustainability initiatives set out by companies in their agendas and policies.

In addition, telcos have important and unique assets, as well as specific resources and capabilities, such as access to data, technology and their prevalence in the everyday lives of their customers, that can enable them to contribute to tackling some of the world’s problems and ‘help make our world run better’. A specific common problem is to help companies and people coordinate their resources in or near to real-time.

For example, a major problem in delivering sustainable energy is ensuring that the variable demand of populations is coordinated with supply. Wind turbines and solar panels cannot be relied on to produce at peak capacity at exactly half-time in sporting events, when the audience goes to make a cup of tea by boiling their electric kettles. As such, supply needs to be very flexibly managed in relation to demand.

This means sharing information about those resources and demands effectively, which in turn takes modern communications in some shape or form (although connections may not always need to run through a telco network, for example Bluetooth, WiFi, etc.) Given his common need, telcos are well-equipped to help enable sustainability.

The motivating value of a compelling purpose

Protecting the future of the planet and society is a compelling purpose, and one which is progressively becoming part of our daily lives.

Our research on sustainability found that that there are a number of benefits for different stakeholders when telcos incorporate sustainability into company strategy, including increasing employee engagement. Sharing a mutual goal or purpose unites a team and creates value, which is important for business performance, and thus a business benefit of sustainability.

How a unifying purpose helps create value

unifying-purpose-CSR-stl-partners

Source: STL Partners

A clear unifying purpose applied successfully creates a virtuous cycle:

1. Clarity of direction: A clear purpose can provide direction for people at all levels. E.g. incorporating the UN Sustainable Development Goals, such as Goal 7 – Affordable and Clean Energy, into company strategy and developing processes around it that involve employeesat all levels.

2. Energising work: Most people work for money, to a greater or lesser extent, and a range of other drivers: status, socialcontact, etc. However, work with a clear purpose is much more energising, especially if (like sustainability) it has some broader merit or meaning. It can make work ‘worth getting up for’. All the telcos we spoke to said that their employees are motivated by the sustainability work their company does.

3. Switched on people: If a telco is full of people that care about what they are doing, and know what they are trying to do, it will be a much more enjoyable and attractive place to work for everyone. Telcos we spoke to also said that sustainabilityis beneficial for talent attraction and retention, as employees want to work for a company that they feel is making a positive impact on the world

4. and 5 – Compelling offer and support, and attracts and satisfies customers: The combination of engaged people in the company and a compelling offer will be attractive to customers. Telcos we spoke to also referenced the need to be attractive to and satisfy different types of customers through their sustainabilitywork, such as the socially conscious Generation Z, and the older generation who can be engaged through digital inclusion

6. Feeds the business: The combination of internal clarity and alignment, motivation, and external attractiveness creates a virtuous circle that benefits telcos and drive business growth.

We think that engaging with sustainability and incorporating it into company strategy is a crucial part of operating in the context of the Coordination Age, and fundamental to operating in this way successfully. To support our hypothesis that having a clear and motivating purpose (in this case sustainability) can help to enhance currant performance, engage its employees, and find and nurture new areas of growth, we interviewed telcos to better understand how they define and measure the benefits of sustainability for their business. The research conducted for this report further validates our belief that commitment to sustainability is crucial to telcos’ success and growth in the Coordination Age.

Table of Contents

  • Executive Summary
    • Context
    • Key findings from research
    • Recommendations
    • Next steps for research
  • Introduction
    • Scope of research
    • Sustainability is a cornerstone of the Coordination Age
    • The motivating value of a compelling purpose
  • Defining and contextualising sustainability
    • ‘Corporate social responsibility’ vs. ‘sustainability’
    • The United Nations Sustainable Development Goals
    • Where are telcos focusing their efforts?
  • What are the business benefits of sustainability?
    • Employee benefits
    • Customers and government
    • Shareholder benefits
    • Challenges of sustainability
  • Conclusion
    • To what degree are telcos taking a holistic approach to CSR and sustainability?

STL Partners’ telecom sustainability hub:

Related Research:

Europe’s brutal future: Vodafone and Telefonica hit hard

Introduction

 

Even in the UK and Germany, the markets with the brightest future, STL Partners forecasts a respective 19% and 20% decline in mobile core services (voice, messaging and data) revenues by 2020. The UK has less far to fall simply because the market has already contracted over the last 2-3 years whereas the German market has continued to grow.

We forecast a decline of 34% in France over the same period.

In Italy and, in particular, Spain we forecast a brutal decline of 47% and 61% respectively. Overall, STL Partners anticipates a reduction of 36% or €30 billion in core mobile service revenues by 2020. This equates to around €50 billion for Europe as a whole.

 

Like the medical profession, we don’t always like being correct when our diagnoses are pessimistic. So it is with some regret that we note that our forecasts are being borne out by the latest reports from southern Europe. Vodafone has been forced into a loss for H1 2012, after it wrote down the value of its Spanish and Italian OpCos by £5.9bn. Here’s why:

eurobloodbath.png

The writedown is of course non-cash, and those of us who remember Chris Gent’s Vodafone will be familiar with the sensation. But the reasons for it could not be more real. Service revenue has fallen sickeningly, down 7.9% across Europe, 1.4% across the group.

Vodafone has enjoyed a decent performance from the company’s assets in Africa, Asia, Turkey, and the Pacific, and a hefty dividend from Verizon Wireless. It is the performance in Europe which is dreadful and the situation in southern Europe especially bad.

For while service revenue in Gernany was up 1.8%, it was down a staggering 12.8% in both Spain and Italy. And margins were sacrificed for volume; EBITDA was down 16.6% in Italy, and 13.8% in “Other Southern Europe”, that is to say mostly Greece and Portugal. Even the UK saw service revenues fall -2.1%, while the Netherlands was down -1.9%. Vodafone’s investments across Europe seem to have landed in an arc of austerity running from the Norwegian Sea to the Aegean, the long way around.

Vodafone’s enterprise line of business has helped the Italian division defy gravity for a while. Until recently, OneNet was racking up the same 6% growth rates in Italy that it saw in Germany and contributing substantially to service revenue, even though the wider business was shrinking. In Q2, service revenue in Italy was down 4.1% but enterprise was up 5.8%.

But strategy inevitably beats tactics. Tellingly, the half-year statement from Vodafone management went a little coy about enterprise’s performance. Numbers are only given for Germany and Turkey, and for group-wide One Net seats. They are good, but you wonder about the numbers that aren’t given. We are told that One Net is “performing well” in Italy, but that’s not a number.

Meanwhile, Telefonica saw its European revenues fall 6.4% year-on-year. The problem is in Spain, where the plummet was 12.9%. Mobile was worse still, with revenues thumped downwards by 16.2%.

The damage, for both carriers, is concentrated in mobility, in southern Europe, and in voice and messaging. Telefonica blames termination rate cuts (as does Vodafone – both carriers are big enough that they tend to terminate more calls from other carriers than they pay out on), but this isn’t really going to wash. As Vodafone’s own statement makes clear, MTRs are coming down everywhere. And Telefonica’s wireline revenues were horrible, too, down 9.6%.

But the biggest hit to revenue for Vodafone was in messaging, and then in voice. Data revenue is growing. In the half to 30th September 2011, Vodafone.es subscribers generated £156 million in messaging revenues. In the corresponding half this year, it was £99 million. Part of this is accounted for by movement in the euro-sterling exchange rate, so Vodafone reports it as a 30% hit to messaging and a 20% hit to voice. Italy saw an 11.4% hit to messaging and a 16% hit to voice. The upshot to Vodafone is a 29.7% cut to the division’s operating profits. Brutal indeed.

Obviously, a lot of this is being driven by the European economic crisis. It is more than telling that Vodafone’s German and Turkish operations are powering ahead, while it’s not just the Mediterranean economies under the European Union’s “troika” management (EC, ECB and IMF) that are suffering. The UK, under its own voluntary austerity plan, was down 2.1% for Telefonica, and the Netherlands, having gone from being the keenest pupil in the class to another austerity case in the space of one unexpectedly bad budget, is off 1.9%. Even if you file Turkey under “emerging market”, the comparison between the Mediterranean disaster area, the OK-ish position in North-Western Europe, and the impressive (£2.4bn) dividend from Verizon Wireless in the States is compelling.

But disruption is a fact. We should not expect that things will snap back as soon as the macro-economy takes a turn for the better. One of the reasons for our grim prediction was that as well as weak economies, the Southern European markets exhibited surprisingly high prices for mobile service.

The impact of the crisis is likely to permanently reset customer behaviour, technology adoption, and price expectations. The Southern price premium is likely to be permanently eroded, whether by price war or by regulatory action. Customers are observably changing their behaviour in order to counter-optimise the carriers’ tariff plans.

Vodafone observes plummeting messaging revenues, poor voice revenues, and heavy customer retention spending, specifically on handset subsidies for smartphones. In fact, Vodafone admits that it has tried to phase out subsidy in Spain and been forced to turn back. This suggests that customers are becoming very much more aware of the high margin on SMS, are rationing it, and are deliberately pressing for any kind of smartphone in order to make use of alternatives to SMS. Once they are hooked on WhatsApp, they are unlikely to go back to carrier messaging if the economy looks up.

Another customer optimisation Vodafone encounters is that the customers love their integrated fixed/mobile plan. Unfortunately, this may mean they are shifting data traffic off the cellular network in the home-zone and onto WLAN. Further, as Vodafone is a DSL unbundler, the margin consequences of moving revenue this way may not be so great. In Italy, although the integrated tariffs sold well, a “fall in the non-ULL customer base” is blamed for a 5.6% drop in fixed service revenue. Are the customers fleeing the reseller lines because Vodafone can’t match TI or Fastweb’s pricing, or is it that the regulatory position means margins on unbundled lines are worse?

Vodafone’s response to all this is its RED tariff plan. This essentially represents a Telco 2.0 Happy Pipe strategy, providing unlimited voice and messaging in order to slow down the adoption of alternative communications, and setting data bundles at levels intended to be above the expected monthly usage, so the subscribers feel able to use them, but not far enough above it that the bandwidth-hog psychology takes hold.

vf-red.png

With regard to devices, RED offers three options with tiered pricing: SIM only, basic smartphone, and iPhone. The idea is to make the subsidy costs more evident to the customer, to slow up the replacement cycle on flagship smartphones via SIM-only, and to channel the smartphone hunters into the cheaper devices. Overall, the point is to drive data and smartphone adoption down the diffusion curve, so as to help the transition from a metered voice-centric to a data-centric business model.

The CEO, Vittorio Colao, says as much:

The reason why the whole industry is on a difficult trend…is because we historically voice priced really high and data priced really low.

Vodafone’s competitors face a serious challenge. They are typically still very dependent on prepaid voice minutes, a market which is suffering. Even in Northern Europe, it’s off 10%. Telcos loved PAYG because everything in it is incremental. Now, the challenge is how to create a RED-like tariff for the PAYG market.

Euro Voice Brutal Image 2 Chart Euro 5 Oct 2012.png

Those in North and South America, MENA and Asia-Pacific may be looking at Europe and breathing a sigh of relief. But don’t fool yourself. SMS revenues in the US are down for the first time driven by volume and price declines. One rather worrying outcome of last week’s Digital Arabia event was that operators in the region seem to be under the impression that the decline for them is still several years out and destined to be a relatively gentle softening of the market. There’s more here on our initial take on what they need to do to avoid complacency and start to build new business models more quickly.

Full Article: Triple play, go away

We were running through four case studies from our new Broadband Business Models 2.0 Report looking at how the content aggregation and distribution businesses interact with one another. The four products we picked on are Joost, Iliad’s Free service, Sky Anytime and BT Vision, but of course we’ve been following many others. We’re seeing some common themes, plus some ideas of our own, that we thought we’d share with you:

  • You have to match the right content to the right distribution system. Get it wrong, for example by picking mass market content when you should be deep in the long tail, and you’ll fail. Get it right, for example by giving user generated content equal footing in the distribution system, and you’ll be rewarded.
  • Two-sided business models (with payment from users as well as merchants) generally beat one-sided models.
  • Scale matters in both content aggregation and distribution. Sponsors and advertisers demand it, and distribution efficiency needs it. Few businesses have both. Telcos trying to build both capabiliies as a “triple play? will mostly fail.
  • Indeed, always carry a wet fish with you. Whenever you hear someone say “triple play? (or “Quad? or “Quin? Play), slap them across the face with it until they wake up. It’s nonsense. A dream. If anything it’s “multiplex play? — how do I use my customer relationship and distribution assets to market and deliver content from relevant aggregators to targeted users? For example, how does an ISP serving the small business market offer multicast video from a business newscast partner?
  • The triple play is a vestige of what Umair Haque calls the “massconomy? — mass production of a standardised product, versus the “edgeconomy? where everything is personalised and also understands the user is a critical producer as well as consumer of value. Iliad’s TV Perso is a classic example here of going beyond bundling, by allowing users to create their own TV channels, including their own content.
  • Telcos have a cultural handicap: they’re obsessed with billable events. Consumers want bundles. The marketing skill is how to build and break bundles.
  • Speaking of bundling, consumers want to buy product and delivery together as a package (“FREE delivery!?). They also dislike endless small charges for calls and content — there’s a large “certainty premium? that they pay for bundles. However, the classical consumer surplus analysis of bundling only applies when you group dissimilar but complementary goods (e.g. TV and phone service). And it only works to reclaim some market power for yourself. If your basic product isn’t very good, because you’re stuck in a “massconomy? mindset, it doesn’t help.
  • That means operators need to open up their assets (network, logistics, customer data) to upstream partners to help them bundle the retail proposition.
  • Most vendors have nothing like the offering that the operators need. Nowhere near. Sorry.
  • Content still isn’t king. If you really want to make money, go re-invent the freephone number business.