Introduction: Why do metrics matter?
Driving business model change
This report discusses the key metrics that telcos are using and developing to track the progress and success of their transformation initiatives. The report builds on a substantial body of work by STL Partners on the role that metrics can play in driving operators’ efforts to develop digital-service businesses. This previous work has taken the form of reports and case studies, as well as a number of bespoke consulting projects designed to support operators with their digital transformation strategies.
In essence, our work and expertise in this area leads us to the conclusion that metrics and an associated governance process are an integral component of telcos’ digital and overall transformation. This is not just because metrics help to gauge the progress of operators’ initiatives throughout the period when the metrics are recorded, but because they define and embody the very purpose of telco transformation: to drive and manage activity on operator networks, and maximize the potential for that activity to be monetised, whether on- or off-net.
In this introduction, we outline how:
- The focus of performance metrics is different between new and existing business models
- Telcos need new measures to track organisational, operational, process and culture transformation in the face of a new focus on service innovation and flexibility, and a changing competitive landscape
- The report addresses these issues
A shift from financial to customer enagement (and potential opportunity)
This essential function of Telco 2.0 metrics is markedly different from that of the financial and operational metrics that operators have traditionally employed which focus on revenues, costs, number of customers, and volume and price of megabytes and voice minutes carried and consumed. The business model these metrics correspond to is relatively simple and static: value is generated from monetising as much as possible the consumption of voice minutes and data packets, while reducing the cost to produce them. The metrics allow you to analyse past trends, and project future production capacity and earnings; but they are not a forward-looking tool enabling operators to respond dynamically to changing market conditions, to evolve the product offering, or transform the business model.
By contrast, digital services derive value from the specific content or application functionality they deliver to the user, and the ability to monetise that in a variety of ways: not always through direct, usage-based fees and billing. And, although digital services can of course enhance existing products (as in the case of entertainment bundled with connectivity, for instance), they often treat network and connectivity services merely as the enabling infrastructure or asset, rather than the product itself. This means that for the digital telco, the emphasis of metrics changes to measuring usage of its digital services and the quality of the user experience, along with other indicators of future direct or indirect revenue growth.
Digital businesses often go through different stages of progress toward monetisation, and metrics are important in driving this development. The key idea is that if you drive usage and customer satisfaction, you create more opportunities to monetise the services involved. So you need a new, flexible set of metrics to capture the success, and inherent value, of the new business models as they evolve. The same is true of new telco services enabled by SDN and NFV (as discussed further below): there is not always an immediate direct revenue uptick; but the new capabilities and services are designed to attract new customers, and to generate usage and customer loyalty, which can be monetised in a variety of new ways at some future point. So it is critical to capture the revenue potential as well as revenue already achieved; and other metrics, which we discuss further below, should provide a measure of how fast or effectively a telco is evolving from the classic telco business model to the new state.
The contrast between the kind of metrics employed by the traditional and digital telco, along with those of digital start-ups and potential investors in digital services, is illustrated by the following table, taken from one of STL Partners’ previous studies on the question:
We will discuss some of the Telco 2.0 metrics further below. However, what this table illustrates is how the focus in Telco 2.0 metrics shifts from usage-based revenues (as in the case of the Telco 1.0) to usage per se, and the impact of that usage on customer loyalty, brand, partners and revenue opportunity, as opposed to revenue already banked. The metrics – around usage and customer engagement – encapsulate the business model, which we could express in the form of an equation: number of users (or site visits, downloads, etc.) + frequency / length of use = revenue (opportunity). So driving the metrics in the right direction is tantamount to steering the business as a whole toward becoming a digital brand capable of generating customer enagagement in a crowded marketplace.
A new focus on service innovation and flexibility…
Presently, the focus of telco transformation efforts has shifted to the drive to virtualize networking functionality through Software Defined Networking (SDN: the centralization and virtualisation of control functionality previously provided by dedicated routers) and Network Functions Virtualisation (NFV: the virtualisation of a whole array of functionality in the edge and core networks hitherto provided by dedicated hardware appliances).
One of the primary aims of this transformation is to enable operators’ primary network and connectivity services to also be created, delivered and consumed in the manner of digital services: in and from the cloud / over the Internet; on demand; and as a software-based service. In the enterprise market, for example, leading SDN / NFV players are already rolling out Network as a Service (NaaS) and virtual CPE (vCPE) offerings that enable clients to customize their WAN connectivity and network features on demand via web portals, and pay for services on an ‘as-ordered’ basis as they scale bandwidth and networking parameters up or down. In the consumer market, SDN / NFV similarly offers the prospect of enabling users to customize their connectivity and communications services more extensively and instantaneously than has hitherto been possible.
These characteristics of virtualised networks present a massive opportunity to telcos, as well as an enormous risk. On the one hand, SDN and NFV create the potential for operators to develop innovative, flexible combinations of communications and digital services in a more agile and cost-efficient manner, enabling them to compete more effectively with OTT players and accommodate massive growth in network usage generated by digital services.
…and new competition
On the other hand, as service and value creation is migrated away from dedicated physical facilities and hardware to software that can in theory be deployed over any physical network, this creates the possibility for third parties to develop OTT, virtual, on-demand network services from the cloud. This could result in telcos being disintermediated from their very core networking and connectivity services, as well as from the digital-service value chain. Software-Defined WAN (SD-WAN) is a practical example of this: third-party service providers install their own CPE and virtual network functions at enterprise sites, and connect them up to an SDN controller; they can then deliver flexible WAN connectivity services over networks of different types, and from different suppliers, relegating telcos potentially to the role of mere wholesale connectivity providers.
In this way, virtualisation creates a dynamic whereby, as services are migrated to virtual functions, value creation will also increasingly depend on these, while the value of physical networking and connectivity services will decline as virtualised service providers and customers alike pick from a range of alternative connectivity providers. Consequently, telcos’ ownership and provision of the physical networks that support virtualised services may become equally if not more important as a means to own the customer relationship than as a revenue driver in their own right. Retaining the customer relationship means operators hold on to the opportunity to deliver increasingly more valuable virtualised services to those customers.
Increased emphasis on offensive and defensive moves
More service flexibility for both operators and for new competitors means that telcos find themselves in both an offensive and defensive position in relation to virtualisation. Offensively, virtualisation presents the opportunity to drive revenue growth and market share from new services, while also reducing the costs, resources and time required to deliver, manage and update both new and existing services. Defensively, virtualisation offers telcos a means to bolster revenues from core connectivity and communications services (including by managing more efficiently the incremental traffic generated by virtualised services over their networks), while defending their existing customer base from competitive players’ virtualised service offerings. This in turn protects the platform that ownership of the customer provides to up- and cross-sell further value-added (and value-adding) virtualised services.
In this context, metrics can play a vital role in helping to monitor progress with the different offensive and defensive components of telcos’ virtualisation strategies, in particular:
- Tracking growth in revenues and number of customers attributable to new, virtualisation-enabled services.
- Assessing the impact of virtualisation on costs and profitability.
- Evaluating the impact of the new services on customer loyalty (particularly given the additional strategic importance of retaining the existing connectivity customer base).
- Measuring revenues and number of customers for the existing, core business (and so determining whether the new services are helping offset the decline in these).
In addition to these finance- and market-focused metrics, others around the production, performance and user experience of the new virtualised services become more important. This is in the light of the above remarks about the different operating model that applies to a digital services business, where the ability to quickly innovate and launch services that match changing and growing customer expectations and usage is key.
Organisational, operational, process and culture transformation
To achieve these gains, a considerable transformation of operators’ internal organisation, processes and indeed culture is required, and not merely a transformation of the network and the business model. To be successful, digital transformation – and transformation SDN, NFV and edge computing – requires the telco to become a different sort of organisation, more like that of other successful web and digital businesses. Specifically, the telco must be founded on agile, DevOps principles, and cross-functional product and project teams. Accordingly, new metrics are also required to monitor the progress of this overarching telco transformation.
In the remainder of this report, we will:
- Explain why operators seem so reluctant to talk about new metrics.
- Present and analyse the metrics we have uncovered through discussions with AT&T, Telstra and an European incumbent.
- Set out our view of the 20 most critical, top-level metrics for operators engaged in SDN / NFV-led transformation in its current phase.
 The drive to increase customer loyalty can also be part of an offensive strategy in that stickier services attract more usage and traffic, and hence have more long-term revenue potential
 This topic has been discussed in numerous previous STL discussions of telco transformation and will also form the focus of a forthcoming executive briefing on the topic of skills development and culture change. It is also discussed in further detail below.
- Executive Summary
- A reluctance to talk metrics
- Why metrics matter for the virtualised telco
- Conclusions and recommendations
- Next Steps
- Introduction: Why do metrics matter?
- Driving business model change
- A shift from financial to customer enagement (and potential opportunity)
- A new focus on service innovation and flexibility…
- …and new competition
- Increased emphasis on offensive and defensive moves
- Organisational, operational, process and culture transformation
- Why most operators hate to talk metrics
- Key transformation metrics of AT&T, Telstra and a major Western European incumbent
- The transformation metrics explained
- Evaluating the metrics used by European Incumbent (EI), AT&T & Telstra
- Transformation: The 20 Metrics That Matter
- The 20 Metrics that Matter: Description and analysis
- Conclusion: New metrics define the new model
- Figure 1: Different players’ metric requirements
- Figure 2: Phasing of transformation metrics
- Figure 3: Transformation metrics of AT&T, Telstra and a European incumbent (EI)
- Figure 4: Instant pricing on Telstra’s PEN platform
- Figure 5: The 20 types of metric that matter for successful telco transformation