Telecommunications, Media, and Technology

RECALL No18

Boosting performance in B2B: More opportunities, new challenges

RECALL No18

Boosting performance in B2B: More opportunities, new challenges

RECALL No 18 Boosting performance in B2B

Welcome ...
to the 18th issue of RECALL, a publication for leaders in the high-tech, media, and telecommunications sectors. The TMT B2B space is expected to continue its rapid growth. In fact, the trajectory foreseen for the coming five years would mean B2B would surpass B2C globally for the first time. This trend is an industry-wide game-changer, and for this very reason we are dedicating an entire issue of RECALL to the subject. Powering this latest rise in B2B activity are cloud and mobile enterprise services. Even though these solutions are leveling the playing field, giving smaller businesses unprecedented competitive opportunities, questions remain: Are they a disruptive force? Are cloud services a threat to major software providers and ICT players who have, up to now, built their business models on license fees? Or is cloud an opportunity for these same providers to reach new customer segments with dedicated solutions that have historically been cost-prohibitive? The opportunity question is just as real for telcos as it is for software players. The software business in general is global, and cloud services solidify this fact, making software even easier to access anytime and from anywhere. But telcos tend to be local and regional players. Will they have a role to play or will software players dominate? The picture is similar for mobile enterprise where telcos, end-user device manufacturers, and software providers are fighting to capture the most value. Another challenge in this changing environment is the level of customer interaction. Many ICT offerings are commoditizing, but many others remain highly sophisticated. On the telco side in particular, there is a proliferation of service offerings. Providers are constantly broadening their portfolios, but not necessarily managing the end of life for existing solutions. These trends put a major burden on the sales force, who are often not up to speed on the latest offerings, employing old portfolio capabilities as they try to sell customers on the newest solutions. These are the operational issues that complement the strategic challenges mentioned above. Industry leaders, however, are managing to create a targeted services portfolio, build and sustain superior skills within their workforces, and provide superior customer experience. This is the triple play that is enabling them to capture the growth opportunities ahead. It is highly unlikely that all players in each realm of the ecosystem will get equal pieces of the B2B pie. Some will fare better than others, but opportunities exist for all who play their cards right. In this issue of RECALL, we describe the trends and opportunities in the TMT B2B space while looking through different lenses from the perspectives of the various players at the table strategic and operational. We hope these articles give you an idea of which opportunities are best suited to your business and how to take full advantage of them. As always, we welcome your feedback on these articles and ideas for topics you would like to see covered in future issues. To download a PDF copy of the articles or the entire brochure, please register at http://telecoms.mckinsey.com.

Jrgen Meffert Leader of McKinseys EMEA Telecommunications, Media, and Technology Practice

Julie Avrane-Chopard Leader of McKinseys EMEA TMT B2BService Line

Homayoun Hatami Leader of McKinseys EMEA TMT Marketing and Sales Service Line

Rene Langen Leader of McKinseys EMEA TMT B2BService Line

RECALL No 18 Boosting performance in B2B

Contents
01 02 03 04 05 06 07 08 09 10 Outlook overcast and bright: How the cloud is transforming IT for SMBs Size is not destiny: How smaller cloud providers power up small business The silver lining: Large enterprises venture into cloud computing Parting the clouds: An interview with Caroline Keene The second IT revolution: Enterprise mobility Sales growth: Mining the wisdom of leading sales executives The performance imperative: Transforming sales operations Profitable at scale: Managing services portfolios successfully Putting SMB churn on ice: Integrated Customer Experience Change isnt always a breeze: An interview with Silvia Rapallo 9 15 23 29 33 39 45 51 59 65 69

Appendix

RECALL No 18 Boosting performance in B2B Outlook overcast and bright: How the cloud is transforming IT for SMBs

01 Outlook overcast and bright: How

the cloud is transforming IT for SMBs

Cloud computing ranks near the top of the most floated buzz phrases in the world of IT and telecoms. While the concept has certainly taken the entire industry by storm, it is set to have a uniquely profound effect on the way small and medium-sized businesses consume IT. For quite some time now, small and medium-sized businesses have been a relatively difficult segment for the leading IT vendors to serve, leaving this particular market to indirect channels (e.g., value-added and local resellers). McKinsey research reveals that as SMBs increase in size, they aspire to establish a closer, more direct relationship with their IT vendors. The resulting situation has generated several pain points ones that cloud computing is exploiting in order to gain market traction: Lack of scale in operations, which prevents SMBs from becoming cost-competitive and from having access to enterprise-class functions and features Need for flexibility in deployment and scaling up or down as business evolves Limited financing capacity and flexibility Low level of internal IT capabilities to integrate and maintain IT systems and applications. In this context, SMB has proven to be the most dynamic segment. It amounts to a two-thirds share of the total public cloud market and is growing at 25 to 35 percent per year, outpacing the growth of large enterprises in this arena (approximately 20 to 25 percent). By 2014,

SMB cloud computing is expected to represent a global market of USD 30 to 40 billion (Exhibit 1). To better understand this trend, McKinsey conducted a survey on cloud computing with 1,160 SMB IT leaders in France, the UK, Germany, Spain, and Poland in October 2010. The survey revealed insights into SMB cloud users along four major themes and these insights could prove invaluable to providers.

SMBs already adopting cloud solutions

Evidence for significant cloud adoption is apparent, with all surveyed SMBs declaring awareness of cloud infrastructure or application options and nearly half of them already having multiple solutions in use. Geographic variations can also be observed, with relatively mature countries such as the UK exhibiting a lower appetite for cloud (only 64 percent of respondents having expressly considered purchasing a cloud solution), in contrast to countries like Poland, where 79 percent of respondents indicate explicit consideration and 59 percent have adopted multiple cloud-based solutions. Regions with such leapfrogging profiles could offer providers the opportunity to hone their cloud competencies in markets that are more readily open to IT innovation (Exhibit 2). Interestingly, survey responses also reveal that more than 80 percent of SMBs that have adopted at least one cloud solution continue to do so and become multiple adopters. This result suggests that once a company makes the decision to give cloud technology a try, the practical benefits gained along with positive user

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01

SMBs are expected to keep dominating the public cloud marketplace SMBs are expected to keep dominating the public cloud marketplace
Global market USD billions 75 - 95 20 Large enterprises Public 30 - 40 SMBs ~ 25 - 35

CAGR Percent ~ 20 - 25

20 7 9 4 2009 Worldwide enterprise IT spend

SOURCE: Gartner; IDC; Forrester; McKinsey

25 - 35

Private

~ 25 - 50

2014 6.3%

1.8%

experiences lead the organization to feel much more comfortable migrating subsequent applications to the cloud. Securing a successful initial adoption may, however, require more careful customer preparation on the part of the provider. Sometimes brand-new, most often a replacement. McKinseys survey shows that two-thirds of the cloud purchases made by SMBs are meant to replace an existing application or solution. This pattern clearly positions the cloud as an alternative to on-premise IT solutions in place. The remaining one-third is geared toward market expansion, reflecting SMBs desire to access applications they could not afford in-house (for example, CLM or disaster recovery). It also signifies their shift toward new business models, which are mostly based on collaboration across enterprise boundaries. Examples of such cloud solutions include a system for an OEM to collect inventory information from distributors and a mechanism by which different trucking companies can share capacity to reduce costs based on high-load factors. Other examples leverage various characteristics of the cloud. A large beverage retailer, for instance, provides all of its employees with deskless e-mail via Web mail, hence establishing a more effective way to communicate with its employees who do not work directly at a computer.

Storage space and data backup top the list of cloud solution needs. When asked in which application areas they could see these solutions being used within their organizations, survey respondents expressed the greatest need for storage space and data backup/resiliency. Over 65 percent indicated potential demand for such cloud-based offerings (Exhibit 3). In terms of actually purchasing cloud products, storage and backup still lead the pack, with more than 20 percent of respondents currently using cloud solutions in these domains. Strong uptake can also be seen in cloud-based server capacity, information and database management, security, system management, enterprise resource management, data access, and collaboration. Location-based services and vertical-specific applications are the least favored for cloud adoption, possibly due to lower demand (in general) from SMBs for such services. Overall, respondents claim willingness to consider purchasing cloud solutions for a broad range of IT infrastructure and business application needs. Actual consideration levels, however, remain at just over 50 percent. Beyond the comfort level of decision makers with new technological innovations, important barriers to adoption still need to be addressed by cloud solution providers particularly concerning network security, network reliability, and data management.

RECALL No 18 Boosting performance in B2B Outlook overcast and bright: How the cloud is transforming IT for SMBs

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02

Adoption of cloud solutions by SMBs varies across countries Adoption of cloud solutions by SMBs varies across countries
Percent of respondents Maturity level Have a need for an IT solution and are aware that cloud solutions are available France UK Germany Spain Poland

100 73%

100 64% 64 77% 50 85% 42 68 88% 60 82% 49

100 68%

100 82% 82 77% 63 80% 50

100 79% 79 83% 66 89% 59

Have considered a cloudbased solution

73 79%

Have adopted at least one cloud-based solution

58 84%

Have adopted multiple cloud-based solutions

49

SOURCE: McKinsey

Four segments, differentiated opportunities

McKinsey asked survey respondents to rate the importance of a number of factors when considering the adoption of a cloud-based IT solution. While aspects such as superior security were seen as crucial across the board, SMBs can be grouped into four needs-based segments according to the properties they ranked highest: Functionality-oriented SMBs prioritize superior security, ease of use, ease of access, and vertical specificity when considering cloud-based solutions. Flexibility-oriented SMBs rank usage-based pricing, ease of customization/integration, and scalability of user numbers as their top concerns. Support-oriented SMBs favor quality end-user/ aftersales support and maintenance, the ability to upgrade frequently, and ease of purchase. Value-oriented SMBs consider total cost of ownership (TCO) savings, deployment speed, and limited up-front capex to be the most important. The functionality-oriented SMBs that were surveyed exhibit a number of desirable characteristics as a mar-

ket segment. These include having made more cloud purchases to date than other SMB segments. A good 58 percent of the functionality-oriented SMB segment has already purchased at least one IaaS (infrastructure as a service) solution compared with less than 50 percent for the other segments. This segment also expressed higher levels of satisfaction with their current cloud solutions (59 percent of functionality-oriented cloud users being very satisfied compared with 45 percent of users as a whole). When it comes to IaaS cloud solutions, functionalityoriented and flexibility-oriented SMBs show almost the same explicit consideration levels (77 and 78 percent of respondents per segment respectively). Despite this, actual purchasing levels differ dramatically between these segments (58 percent in the functionality and 36 percent in the flexibility segment). The survey did not specifically ask respondents to indicate why noncloud-based options may ultimately have been chosen. Still, results do reveal that flexibility-oriented users are among the least satisfied with their cloud experiences overall. Only 29 percent of respondents in this segment were very satisfied on average. Furthermore, flexibilityoriented respondents stated that they are least satisfied in a dimension of greatest importance to them the ease of customizing their cloud solutions.

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03

SMBs express strongest need for storage space along with data backup SMBs express strongest need for storage space along with data and resiliency cloud solutions backup and resiliency cloud solutions
Percent of respondents Level of adoption of cloud solutions among companies having expressed a need for them Cloud computing solution IaaS SaaS Storage space Server capacity Data backup and resiliency Information and database management Customer lifecycle management Security System management Enterprise resource management Data access, analysis, and delivery Collaboration Content Human capital management Application development and deployment Information marketplace Supply chain management Engineering Location-based services Vertical-specific applications Would not consider a cloud solution 18 16 17 15 16 15 16 15 16 14 13 17 15 15 14 14 14 14 Considering or using a cloud solution 48 43 50 47 41 42 40 39 38 39 40 35 34 34 35 35 31 32 Respondents expressing a need for the solutions 66 59 67 62 57 57 56 54 54 53 53 52 49 49 49 49 45 46

SOURCE: McKinsey SMBs Cloud Computing Survey, October 2010

Savings expectations dont always materialize

Regarding post-sales aspects, the survey results highlight a critical area where improvement is clearly needed. SMBs were asked to compare the actual capture of TCO savings with their expectations, and more than 40 percent of respondents report that they never saw even half of the expected savings. Some 27 percent did indicate that they captured at least 50 percent of the savings they expected. Respondents primarily IT decision makers attribute the lower levels of savings capture largely to labor, integration and customization, and transaction-related costs. What the survey also revealed is that this savings disappointment does not result from outsized or unrealistic expectations. SMBs whose TCO savings fell far short of expectations in past cloud implementations did not necessarily have the highest savings aspirations. This feedback has a number of important implications: Both providers and users need to work harder on managing integration and customization costs. Usage-based pricing arrangements should be revisited after deployment to adjust for unpredictable changes in transaction volumes.

Providers need to work closely with users to more accurately estimate post-deployment costs and avoid disappointment. Users must be especially realistic about attainable savings on internal labor costs.

Large independent software vendors preferred

Comparing different classes of vendors, SMBs from all segments prefer working with large incumbent independent software vendors (ISVs) the most when rolling out new cloud deployments 19 percent of respondents selected ISVs such as Microsoft, Oracle, or SAP as either the most or second-most preferred cloud solution providers, while 15 percent chose large integrated software businesses such as EMC or IBM. Some 13 percent decided on IT services companies such as Capgemini, HP-EDS, or Atos Origin. Web-based service providers such as Google and Amazon came in next at 12 percent. The preference bias in favor of larger providers may reflect SMBs fears of entrusting their data over the longer term to potentially unstable solution partners. To delve deeper into SMB perceptions of potential solution providers, respondents were also asked to comment on their awareness of and willingness to buy offerings

RECALL No 18 Boosting performance in B2B Outlook overcast and bright: How the cloud is transforming IT for SMBs

13

from a wide range of cloud vendors. Across the board, the survey finds that 20 to 25 percent of respondents who are aware of a cloud providers offerings have purchased one of their solutions, regardless of vendor scale or brand strength. A few providers with particularly strong reputations do stand out particularly Microsoft, Huawei, and TietoEnator with purchasing rates nearing 30 percent of offering-aware respondents. The survey results also demonstrate that overall awareness of cloud product and service offerings varies dramatically from one player to the next. With awareness being a key driver behind purchasing, it is crucial for vendors to get their brands linked to the cloud in the hearts and minds of the SMB segment. In terms of willingness to consider, a slight preference is given to those vendors having more established brands,

namely those enjoying a higher overall awareness of their cloud offerings. At equivalent awareness levels, willingness to consider and actual past purchasing rates are similar to a large extent. The cloud is rapidly becoming the destination for SMBs to source their IT. Given their dynamic nature, smaller scale, and often limited financial and IT resources, small and medium-sized businesses are looking to the cloud with a unique set of needs, expectations, and preferences. Cloud service providers will have to become well attuned to the nuances of the SMB segment in order to build a new, fast-growing, and lucrative customer base in a segment that historically has not been well served by the major IT providers.

Julie Avrane-Chopard is a Principal in McKinseys Paris office. julie_avrane-chopard@mckinsey.com

Christophe Meunier is an Associate Principal in McKinseys Paris office. christophe_meunier@mckinsey.com

RECALL No 18 Boosting performance in B2B Size is not destiny: How smaller cloud providers power up small business

15

02 Size is not destiny: How smaller cloud

providers power up small business

Cloud computing is no longer on the horizon and is particularly attractive for SMB customers. To compete in this large and rapidly growing market, providers dont need to have scale on their side. The market will remain fragmented with opportunities for smaller cloud computing providers to be successful players. Limited access to financing and a lack of scale in operations have long meant that IT capabilities among SMBs paled in comparison with those of their large enterprise counterparts. Cloud computing is offering SMBs a way to circumvent these challenges. And just as size is less of a defining factor for businesses that make use of cloud solutions, those who provide cloud services to SMBs are finding that bigger isnt necessarily better. Large technology companies such as Google, Cisco, Amazon, Microsoft, and EMC are investing billions of dollars in an effort to create offerings that will define the future of cloud computing. With such large investments, it might seem that this could become a winner-takes-all marketplace. The reality is that small cloud providers have major opportunities to do more than merely survive instead, they can be active, thriving participants.

Cloud resellers and solution providers act, for the most part, as consultants, providing Web services and cloud migration, or as value-added resellers (VARs) for large players such as Cisco, HP, and IBM. They may also build small-scale data centers and sell microvertical applications to specific SMBs. Mass-market hosters offer Web hosting, domain registration, and other services. Larger players build their own infrastructure instead of leasing it, so they can provide higher customization and better service levels, while operating at lower costs. Managed hosting providers have invested large sums in expanding their physical assets such as data centers, dedicated and virtual server offerings, and storage configurations. They build sophisticated infrastructure that they then lease out based on collocation or dedicated hosting arrangements. Telcos and hyperscale providers have made very large investments in building out their cloud infrastructure. Companies such as Verizon with its early 2011 acquisition of Terremark, or Amazon with its cloud storage and computing offerings are pushing the envelope on scale for cloud through the aggressive acquisition of capacity and greenfield buildouts. Given the huge bets that the larger players are placing, it is natural to wonder whether the cloud market will consolidate to include only a few large providers. An analogous example from the retail industry may help put this matter into context. As in the cloud market, the retail landscape is diverse (e.g., players of different sizes, com-

The cloud landscape: Consolidation and fragmentation

The cloud player landscape is already diverse. As technology evolves, this diversity grows. Cloud players of all stripes have a seat at the table from those with hundreds to those with hundreds of thousands of servers and spanning infrastructure investment types from basic reselling to hyperscale provision.

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panies that play across multiple categories versus those with a single format). Like the cloud market, retail also has scale advantages (e.g., purchasing power, sophisticated distribution, and logistics) and its own examples of players making mega investments to change the competitive dynamics (e.g., Walmart). Although some consolidation certainly has taken place, fragmentation remains over 80 percent of revenues across one million retail establishments remain heavily fragmented. There are three primary reasons fragmentation persists in a marketplace: disintegration in an effort to reduce costs, industry standardization resulting in lower barriers to entry, and demand-side diversity. All three factors will play a part in keeping the cloud landscape fragmented with issues related to the diversity of demand being particularly relevant for SMBs.

One area of particular importance is data center operations. It contributes significantly to the breadth and quality of a cloud offering. McKinseys conversations with both large and small providers give reason to believe that operational efficiency innovations are not driven by provider scale. The clearest demonstrations of such innovation indeed come from hyperscale players, but research shows many examples of small providers managing operational costs very creatively. Capturing vendor discounts on OEM hardware and software. Small players often negotiate discounts that approach levels that OEMs give to hyperscale providers, in particular by purchasing more standardized systems. Growing anecdotal evidence indicates that OEMs in their rush to gain market share have been selling to hyperscale providers at or even below cost. If this is true, the ever-smaller price advantages on OEM equipment that hyperscale providers have negotiated are bound to evaporate completely. Taking creative approaches to facilities and energy. Many smaller cloud providers have begun to perform sophisticated analysis concerning build-versus-buy decisions. Along the way, they are making some interesting discoveries. In some cases, it is cheaper for them to build and own data center facilities than to contract out for them. Innovations in modular data center design allow for more cost-effective facility construction. Better availability of next-generation cooling technologies coupled with heightened awareness regarding the importance of managing energy costs have enabled a number of these players to rival the energy efficiency of bigger organizations. Small players are also increasing their sophistication in negotiations with utility providers to achieve lower energy costs. Maximizing the useful life of equipment. Some SMB cloud providers explained novel strategies for stretching the useful life of their infrastructure. To accomplish this, they redeploy machines creatively. Repurposing old PCs as low-end servers is only one example. Making operations lean and nimble. Finally, a number of cloud providers indicated how increasing the level of standardization allowed for heavy automation and other tools to manage their operations. The result: they were able to operate much more efficiently than before and could drive administrative support ratios to levels comparable with (and sometimes even exceeding) those of hyperscale providers.

Capitalizing on the small provider advantage

Recent McKinsey research into IT decision making among SMBs reveals: the larger the organization, the more likely they will leverage external partners either for full IT service or to support internal IT teams. Around 60 percent of companies with 10 to 49 PCs and 75 percent of those with 50 to 250 PCs see some sort of IT partnership as desirable. Their counterparts with fewer than 10 PCs prefer a self-service approach to IT management. Most of the larger SMBs favor smaller, local providers over large ones. A number of perceived advantages support this preference: Better service levels and support easier access to representatives and a dedication to faster, quality problem resolution; even if it costs a little more than the larger companies Local relationships personal, face-to-face engagements, engendering trust and confidence Flexibility and customization the belief that smaller providers aim to meet their customers individual needs, particularly surrounding compliance and the unique requirements of each industry. Given these dynamics of demand-side diversity and the importance of local support, fragmentation among providers to SMBs is likely to remain high in the foreseeable future. This is a good starting point for small providers, but to truly compete in this space, they will need to optimize their business in several areas.

RECALL No 18 Boosting performance in B2B Size is not destiny: How smaller cloud providers power up small business

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01

Infrastructure costs are only a fraction of overall IT spend Infrastructure costs and applicationTCO are only a fraction of overall IT spend and application TCO
Infrastructure as a service only addresses a small portion of enterprise IT spend Typical IT spend in a global company, 2010 Indexed to 100 Labor ADM labor Hosting labor Help desk labor Software App license and maintenance fees Infrastructure software Servers Storage Facilities End user Network Devices Transport Network hardware Total
SOURCE: Gartner; McKinsey

and infrastructure is only a small portion of the customers application TCO Components of overall customer TCO 5-year CRM TCO (200 seats), indexed to 100 41 25 2 12 4 4 1 3 3 1 4 100 Software 35 12% of budget 25 Ongoing maintenance/ support Hosting labor Hosting (HW, facilities) 6 15 Implementation 19

Hosting

While these strategies do not fully eliminate the economic advantages of hyperscale providers, they narrow the gap significantly. What ultimately matters to customers is total cost of ownership (TCO). Infrastructure costs ostensibly where the biggest economies of scale exist make up just over 10 percent of overall TCO (Exhibit 1). In other words, hyperscale cost advantages of 40 to 50 percent only translate into 4 to 5 percent in cost savings. Many other costs, such as data migration, customization, and training, are service types most often provided by smaller, more localized providers.

Increasing ARPU by up-/cross-selling. ARPU is a critical metric for tracking the health of cloud services organizations. The best-performing companies know the importance of increasing ARPU: being able to drive higher revenues from existing customers affords them the luxury of spending little to attract new customers. The key to increasing ARPU effectively is to understand customers and tailor offerings to their needs. Players that do so can reap huge rewards (Exhibit 3). Payoff in ARPU could be dramatic for providers that can capture customers by hosting infrastructure, e-mail, PBX, and providing SaaS applications and Web hosting. Encouraging customers to use more and varied services significantly impacts the overall revenue. Thus, cloud service players should consider adding more offerings. If multiple services are offered, but customers dont subscribe to them, the company will need to check if services need improving or sales efforts should be revamped. Driving loyalty and stickiness. Successful providers use a second major economic lever that comprises driving loyalty and retaining customers by actively managing churn. Variation in churn is dramatic. Top providers have churn rates 60 percent lower than the poorest performers. For a typical provider, reducing churn by 1 percent can translate into a 3 to 5 percent increase in

Playing to win in a fragmented cloud landscape

Based on both historical analogues and economic principles, it is likely that the cloud services market for SMBs will remain fragmented for the next five to ten years. Some consolidation will certainly take place, but the market will range from asset-intensive players such as hyperscale providers to asset-light players such as VARs and solution providers with every variant in between. McKinseys research into various smaller cloud solution and mass-market hosting providers reveals that smaller players can make healthy profits with a variety of business models (Exhibit 2), achieving operating margins of 15 to 20 percent or more by applying four main levers:

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02

A variety of business models can generate attractive margins A variety of business models can generate attractive margins
Cloud solution provider Percent Net revenues Equipment DC facilities (e.g., power) Ops labor Energy Other (e.g., SW licenses) Gross margin SG&A Operating margin
SOURCE: VAR/SP interviews; McKinsey

Mass-market hosting provider Percent 100 25 - 35 2-7 10 - 15 5 - 10 8 - 10 10 - 15 25 - 50 10 - 30 15 - 20 P&L EXAMPLE 5 - 10 15 - 20 100 10 - 20

10 - 15 30 - 50 10 - 25 20 - 25

profitability. McKinseys conversations with providers with very low churn unearthed a few common themes. First, these providers have a disciplined approach to customer lifecycle management. It focuses on understanding customer lifetime value and identifying behavioral cues (e.g., purchase decisions and support calls) that might help to predict churn. Second, many of these low-churn providers have guided customers toward stickier services. Stickiness applies to services where cancellation would cause the customer significant disruption or inconvenience. A number of companies have discovered, for example, that providing backup services and customized solutions drive both stickiness and, consequently, ARPU. Third, retention superstars prevent churn by ensuring their support desks reach out proactively to all customers. They establish strong churn management programs with save desks that act as last-resort line when a customer is about to leave. Individuals on these desks have greater flexibility to try to either resolve customer concerns or offer preferential pricing as a way to persuade customers to stay. Several players are even identifying serial churners before acquiring them as customers; in some cases, choosing not to do business with them.

Pursuing operational excellence. As mentioned, one key success factor for a number of SMB cloud providers has been to take novel approaches to managing costs. Managing facility and energy costs are another component in operational excellence. Some smaller cloud providers have been even more creative here. Leasing facility space from managed hosting providers is one avenue some companies take, but many examples show that small service providers can run their own facilities cost-effectively. One provider in North America built two 6,000-square-foot data centers that were collocated with the companys office space. In the winter, the waste heat from the data center is used to heat the office space. Another company offshored its data center to a different country to take advantage of significantly lower electricity costs and the environmental benefits of being near a riverbank. Beyond this, it could occupy an old tobacco factory at attractive rates and repurpose it as a data center. Access to naturally cool water meant its data centers could run with a power usage effectiveness rating lower than the level Google considers best practice. Most successful smaller providers also use automation technologies extensively to reduce the amount of labor necessary to operate and manage their facilities.

RECALL No 18 Boosting performance in B2B Size is not destiny: How smaller cloud providers power up small business

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03

Anticipating customer needs is the key to boosting ARPU Anticipating customer needs is the key to boosting ARPU
Average spend by offering (SMB survey respondents) USD per month per SMB 276 232

128

Key findings < 3% of SMBs adopting 4 or more services ~ 14% adopting 3 services (majority Web, infrastructure, and e-mail) ~ 35% adopting 2 services (majority Web and infrastructure)

35

36

Web hosting

Hosted infra- Hosted structure e-mail 17% 14%

Hosted PBX

SaaS apps

SMB adoption

64%

7%

~ 30% DISGUISED EXAMPLES

SOURCE: VAR/SP interviews; Parallels SMBs Research; US Small Business Association; Gartner; McKinsey

In some cases, automation even influences product decisions. Some providers do not offer any products or services unless they are fully automated. This is often in stark contrast to several telcos local and even national which still run on non-automated infrastructure built years ago. This makes it difficult for them to rapidly provision new computing environments and deliver a variety of services invoiced with a single bill. Minimizing customer acquisition costs. In many conversations with providers, the simplest approach McKinsey has identified is to offer existing but noncloud customers risk-free 30- to 60-day trials to migrate to cloud services. These players typically start with basic offerings such as Web hosting, then add hosted e-mail, remote data storage and archiving, and ultimately, various lines of business applications. Customer acquisition costs for this path are extremely low. For companies not in a position to leverage their existing user base, establishing partnerships with other players

in the cloud landscape often proves to be an effective approach. One solutions provider works with independent software vendors (ISVs) that provide software for microvertical markets specific areas in healthcare, for example. The solutions provider bundles the ISVs software into a cloud-based offering with add-on services and then leverages the ISVs established connections to the microvertical. Still other providers relied on mergers and acquisitions to buy customers. These companies spent the majority of their customer acquisition budgets on purchasing companies that fit with the customer demographics they were targeting. In the cloud, small just may be the name of the game. SMBs are the fastest adopters of cloud solutions, and small providers are poised to be very active players. To stay competitive, these smaller participants should focus on managing the top and bottom lines, using traditional and creative means to accomplish both.

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Zo Diamadi is an Associate Principal in McKinseys SanFranciscooffice. zoe_diamadi@mckinsey.com

Abhijit Dubey is a Principal in McKinseys SanFranciscooffice. abhijit_dubey@mckinsey.com

Darren Pleasance is a Principal in McKinseys SiliconValleyoffice. darren_pleasance@mckinsey.com

RECALL No 18 Boosting performance in B2B The silver lining: Large enterprises venture into cloud computing

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03 The silver lining: Large enterprises

venture into cloud computing

Cloud computing has become a real option for many organizations seeking greater efficiency and more flexibility from IT. Even large enterprises stand to benefit greatly from adopting cloud services, but many will need to navigate a challenging transition in the face of complex legacy IT systems and regulations. Cloud computing has deservedly garnered a lot of attention recently from both small and medium-sized businesses and large enterprises. Often referred to as simply the cloud, in many respects cloud computing resembles a utility that supplies water or electric power. The model allows users to purchase IT resources as a service, taking a pay-as-you-go approach. Users can access these resources at any time and from multiple locations, track their usage levels, and scale up their IT capacity as needed without large up-front investments in software or hardware. By enabling this flexibility, cloud computing improves IT efficiency and makes entire organizations (beyond just IT) more agile. Potential savings amount to 20 to 30 percent across the entire IT budget (including facilities, telecommunications, infrastructure, software, labor, and external services).

tively high degree of regulation and are challenged with significant complexity and data interdependence across their legacy IT application domains. These factors mean companies are treading more lightly into the cloud domain. They also mean that there is no one size fits all approach to enterprise cloud computing. The mix of cloud service and deployment models, overall adoption rate, business case, and implementation approach will be determined in large part by industry type. High regulation, high complexity. Large enterprises in industries such as banking, insurance, and healthcare have to contend with significant government regulation along with data and application domains that are highly interdependent. These big players are turning to cloud computing largely in the pursuit of platform standardization and efficiencies in new application development. These companies tend to have an extensive portfolio of custom applications and a large number of developers devoted to producing these applications. McKinsey expects these organizations to adopt private cloud platform as a service (PaaS) for a material fraction of their application portfolio and very selectively leverage public cloud software as a service (SaaS), infrastructure as a service (IaaS), and PaaS for non-core, non-missioncritical applications. Low regulation, low complexity. In contrast, manufacturing, distribution, transportation, and high-tech businesses, for example, are relatively unencumbered by regulation or complex legacy environments. For these large enterprises, cloud computing represents the ability to scale IT to keep pace with business requirements. Toward this end, McKinsey considers it likely

Enterprise trepidation more than hype

Large enterprise CIOs broadly recognize the value in cloud computing and anticipate deploying a growing share of their applications via cloud models (Exhibit 1). SMBs are already adopting cloud solutions at a furious pace. In contrast, McKinseys observations and conversations with large enterprise decision makers indicate that their trajectory for adoption will be significantly less steep. Many large enterprises are subject to a rela-

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01

The cloud is expected to be the primary deployment mode for approximately The cloud is expected applications by 2014 70% of large enterprise ITto be the primary deployment mode for around 70% of large enterprise IT applications by 2014
Share of applications by type of primary deployment Percent, n = 216 Public PaaS Public IaaS Public SaaS 4 9 14 16 Virtualized or private cloud ~ 70% 31 38 10 7 100%

On-premise traditional

42 29

2011
SOURCE: McKinsey Enterprise CIO Survey, April 2011

2014

that these organizations will adopt public cloud SaaS for as much as 20 to 25 percent of their application portfolio. As these companies tend to favor business agility over customization, they will probably rely less on PaaS, instead running 50 to 60 percent of their application portfolio on private cloud IaaS. Despite the general consensus regarding the benefits of cloud computing, barriers to adoption remain significant. Security and manageability top the list of those reported by CIOs. These concerns are not just an issue of public versus private cloud environments. Security and manageability issues inhibit enterprise CIOs from adopting cloud technologies even within their own internal IT environments. Almost half of enterprise CIOs surveyed listed security as one of the top 3 barriers to virtualizing the remainder of their Windows- and Linux-based server environments. Other key barriers include building a compelling business case, performance concerns, and internal IT staff with a vested interest in internal solutions.

cloud environment and which service model to use. There is no single answer. The optimal service and deployment model depends on the specific requirements of each workload within an organizations IT environment (Exhibit 2). Here, workload means the integrated set of demands on IT, generally fulfilled through one or more applications. Enterprise CIOs appetite for cloud computing is workload-specific. Most indicate a strong interest in the cloud when it comes to mature, non-mission-critical workloads. Mail/collaboration, customer relationship management, and e-commerce are usually the first workloads considered for transfer to a cloud model. Increasing corporate emphasis behind business analytics and data management is also driving more CIOs to consider cloud solutions for analytics, dashboards/ KPIs, and reporting. In contrast, there is little to no movement on core transaction processing systems, at least within developed countries. Some CIOs in emerging markets are exploring cloud-based solutions for transaction processing systems specific to their region. Once CIOs determine that a workload is suited for the cloud, they must next determine the appropriate cloud service model for that workload. There are three options for cloud service models: IaaS, PaaS, and SaaS.

Adopting a case-by-case approach

Confronted by an extensive legacy IT environment, many CIOs find themselves asking Where do I start? when considering which IT resources to migrate to a

RECALL No 18 Boosting performance in B2B The silver lining: Large enterprises venture into cloud computing

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02

Overall, cloud deployment will outweigh on-premise services 2 to 1 by 2014, Overall, cloud deployment will outweigh but the model mix will vary by workload type on-premise services 2-to-1 by 2014, but the model mix will vary by workload type
Split between deployment models across workloads by 2014 Percent, n = 250 On-premise traditional Engineering applications Supply chain management Operations and manufacturing Enterprise resource planning Customer relationship management E-commerce and Web presence Mission-critical custom line of business Non-mission-critical line of business Data warehouse, business intelligence, and decision support Document and content management Communication and collaboration IT management and security Development and testing
SOURCE: McKinsey Enterprise CIO Survey, April 2011

Virtualized or private cloud 36 50 39 41 38 37 38 38 34 45 37 44 42 31 32 25 25 31 40 39 27 28 29 30

Public cloud 14 17

50 33 32 29 24 25 35 23 38 31 27 33 33

Selecting the appropriate cloud service model especially for large enterprises is typically based on a combination of economics, solution viability, and business acceptance of the model in question. Infrastructure as a service offers organizations dynamically-provisioned virtual servers, storage, and networks. It addresses IT spend on hosting assets and infrastructure software an average of 12 percent of enterprise IT spend but not labor. Private cloud IaaS offers a reduction potential of 35 to 40 percent of spend, achieved primarily through asset pooling site consolidation, standardization, and virtualization/abstraction. Key efficiency levers include implementation of a service catalog and demand management through chargeback. As-a-service technologies dynamic allocation, real-time provisioning, end-user device independence, metering bring additional business agility benefits, but not material incremental efficiencies. McKinseys experience suggests that for 50 to 80 percent of enterprise applications, the net present value of migrating from a non-virtualized environment to private cloud IaaS is positive, even with some code rewrite. The two- to three-year outlook: the majority of enterprises will develop capabilities to manage and administer virtual images across private and public cloud environments.

Platform as a service addresses a larger portion of IT spend as much as 90 percent across software, hosting, and labor costs associated with application development, maintenance, and hosting. While the relevant spend is large, PaaS requires significant changes in developer and architect behavior to capture benefits. The PaaS value proposition is primarily an improvement in development productivity of 20 to 35 percent by addressing common challenges in application development and maintenance, including fragmentation, lack of platform standardization, and limited code re-use. PaaS is most relevant for new application development and legacy applications requiring material annual maintenance effort. Legacy application migration to PaaS will be a function of benefits derived and difficulty/rewrite effort. The business case to migrate applications to PaaS is difficult (up to an eight-year payback when rewrite is required), with exceptions for end-of-life applications or where significant functionality enhancement is needed. The two- to three-year outlook: a significant and growing share of new custom applications will be developed and deployed within a private cloud PaaS environment. Software as a service addresses the largest share of IT spend (95 percent of all spend other than end-user devices and end-user labor), replacing capital expenditure and reducing in-house operating expenditure,

26

typically in the form of monthly fees to an external SaaS vendor. Though technically a public cloud offering, SaaS is an increasingly viable model for large enterprises, with solutions available for many application categories. However, SaaS still has several limitations. It lacks solutions for all functions and reduces customization options for lines of business. SaaS also presents challenges in migrating certain applications with large existing data sets or several integration points with legacy applications. Another issue is that it forces customers to scrutinize compliance requirements. The two- to three-year outlook: SaaS will become a common choice for horizontal or non-core applications within the enterprise.

form, a new IT stack or architecture that must be managed. Each individual cloud model calls for substantial changes in the IT operating model, including talent, governance, and business engagement. In addition to this, integrated management tools are required to manage across physical and virtual, and private and public environments. To ensure organizations get the most out of cloud computing, McKinsey suggests moving from eventbased cloud adoption to a more purposeful, strategic approach. Enterprise CIOs should undertake a comprehensive planning phase in which they evaluate their entire enterprise application portfolio and determine a future-state platform for each workload. By adopting cloud services, enterprises will be able to free up IT spend for reinvestment in business transformation initiatives. With more agile systems and faster deployment times, the IT unit will be better at supporting key corporate imperatives and providing critical services to line-of-business stakeholders. However, just as the benefits are great, so are the challenges for large enterprises. An investment today in the tools, capabilities, and processes required to surmount the obstacles to cloud adoption is likely to yield significant long-term returns.

Defining the enterprise cloud strategy

Few large enterprises have truly assessed cloud strategy and posture end to end. Most consider the cloud only for specific workloads and as opportunities arise or pressures (e.g., M&A, new market entry) drive changes in or re-open decisions on platform/application architecture. This piecemeal approach avoids some tough decisions but ultimately introduces more challenges. Adoption of cloud solutions at scale requires organizations to completely rethink their enterprise architecture. Without proper planning, there is a high risk of enterprises increasing complexity in their IT environments in the short term. Cloud models are each, in their most basic

Prashant Gandhi is a Principal in McKinseys New York office. prashant_gandhi@mckinsey.com

Gary Moe is a Director in McKinseys SiliconValleyoffice. gary_moe@mckinsey.com

Kara Sprague is an Associate Principal in McKinseys SanFranciscooffice. kara_sprague@mckinsey.com

RECALL No 18 Boosting performance in B2B Parting the clouds: An interview with Caroline Keene

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04 Parting the clouds: An interview with

Caroline Keene
Head of Cloud Strategy for SMBs and Partners, Microsoft France

Microsoft is fully embracing cloud computing. It has launched a cloud version of its flagship products, such as Office 365, and opted for a very flexible approach. Users can select the classic product and/or the cloud version with a clear transition path. They can also back-track to classic products at any point in the process. Caroline Keene joined Microsoft in 2002, and has held various marketing and strategy positions in the SMB software space in both the UK and France, during which time she has developed a very robust understanding of B2B software marketing. Up to July 2007, she led small business sales and marketing in the UK. From 2007 to 2010, she was in charge of marketing Microsofts ERP and CRM brand, Microsoft Dynamics, throughout France. In August 2010, she was appointed Head of Cloud Strategy for SMBs and Partners at Microsofts French subsidiary. McKinsey & Company had the opportunity to speak with Ms. Keene recently in Paris, where she shared her thoughts on current and future developments in the SMB cloud space. McKINSEY: Cloud is a broad concept that encompasses many markets. How do you see opportunities across the different forms of cloud, both public and private? CAROLINE KEENE: The dynamic is indeed quite different depending on whether you are considering private or public cloud. Currently, private cloud is the logical evolution of a data center and remains reserved for large enterprises only. Research shows that even

with 1,000 servers, you can still be ten times more expensive with a private cloud than with public cloud. If we now consider public cloud, the adoption patterns are different for large enterprises and for SMBs. Large enterprises tend to be driven by rationalization, TCO optimization of their existing infrastructure, or by a change in the procurement model away from capex to opex. So ultimately, large enterprises will have a hybrid model composed of both private and public cloud. McKINSEY: What new delivery models and adoption rates do you foresee? CAROLINE KEENE: I see the most radical change taking place in the public cloud, especially for SMBs. For the first time, it is becoming possible for SMBs to gain access to the IT of large enterprises. As a result, its not surprising to see the strongest adoption in this field. In France, 50 percent of SMBs have adopted a form of cloud IT solution. When we launched Office 365, our productivity suite, 70 percent of the 5,000 launch customers were SMBs with fewer than 25 employees. This phenomenon is likely to be sustainable given the current underinvestment in IT: only 40 percent of SMBs actually have a Web site of their own in France, for instance. Surprisingly, medium-sized businesses are stuck in the middle and not adopting so much. Many have made recent investments in IT, but are not wealthy enough to conduct trials like large enterprises. They are waiting for the next replacement cycle to implement cloud. McKINSEY: Do you see varying adoption patterns by geography?

30

CAROLINE KEENE: Globally, the market remains driven by the US, representing 50 percent of the cloud market, followed by Europe with 30 percent, where the UK is the most dynamic market. For the rest of the world, cloud adoption is as good as the quality of the pipe. This remains a major issue in emerging markets. McKINSEY: Beyond the adoption figures, how are end users receiving the cloud offering? CAROLINE KEENE: End-user satisfaction with software as a service offerings is increasing. We often talk about the communality of enterprise IT. Employees find the features that they enjoy as a consumer: mobility, collaboration, and access to productivity tools. We have, for instance, implemented a solution incorporating deskless e-mail and collaboration for Picard, a frozen food retailer, enabling seamless communication with both its own employees and franchisees. In terms of applications, adoption is led by communication and collaboration tools, but we are starting to see more adoption in CRM, too, and even ERP. McKINSEY: Cloud is often credited with enabling new business models. What is your perception of this? CAROLINE KEENE: Absolutely. We are starting to see very interesting business models enabled by cloud, especially platform as a service. Service providers are developing new applications or transferring existing applications onto Microsoft Azur to benefit from the attributes of cloud, such as mobility, scalability, and ease of deployment. For instance, GFI is creating a cloud version of Chronotime to benefit from the elasticity and ease of cloud deployment. Online game developers are also transitioning to cloud to hedge their risks in terms of adoption. When developing games for Facebook, adoption can be either extremely fast or zero, so editors are reluctant to commit their own infrastructure. We are also seeing merchant sites developing new Web sites on Azur to better manage demand peaks during sales or Christmas periods. McKINSEY: What barriers still remain that block full implementation? CAROLINE KEENE: There appear to be three main roadblocks. The first relates to security. Increasing mobility is open to additional risk for the enterprise in terms of malware and data security. The IT organization needs to get equipped and trained to face these new

threats. The second issue is contractual complexity, which increases when transitioning from a license to a cloud offering. In effect, you enter into a service level agreement. The industry will have to define standards for service levels and liabilities for cloud service providers. We are actively involved with industry bodies to help shape these types of standards. The third obstacle is the CIO role, which needs to evolve to fully encompass cloud-related developments. Contrary to some common concerns, we actually see this role strengthening, as CIOs will have more time and resources to devote to true value-added business enablement and the creation of differentiating competitive advantage. McKINSEY: How is cloud impacting Microsofts core licensing business? CAROLINE KEENE: When we began reflection on cloud, there were concerns about the risk of cannibalizing the existing business, but early adoption has been reassuring. Where SMBs are concerned, we are actually seeing a lot of market expansion, including some reduction in piracy. For large enterprises, our contracts have been altered to make it easy and reversible to choose between desktop licensing and cloud services. We have adapted our range and product organization to achieve this, and rethought our partner channel. Our strategy is to propose the same breadth of applications that is available to license. Our product organization has been restructured to avoid silos between cloud and license offerings, and to align incentives especially via pricing. The substantial effort going into working together with our partners is now paying off. Since announcing our cloud offering in July 2011, we have already brought around 7 percent of our partners on board worldwide and 12 percent of our partners in France a significant share, considering the Office 365 offering has only been available since June 2011. McKINSEY: And how does this affect your partners? CAROLINE KEENE: For our partners, the move to cloud potentially represents a substantial shift in business model. Historically, they are accustomed to realizing most of their revenues in implementation, through margin on the product sold and associated services such as deployment and training. Now revenue generation will span the entire duration of the contract, and they need to ensure service delivery over time. We are working with them to make certain that the commercial argument is well communicated. We are also exploring

RECALL No 18 Boosting performance in B2B Parting the clouds: An interview with Caroline Keene

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a new commissioning structure to anchor the long-term sustainability in their model. McKINSEY: In conclusion, could you share a success story with us? CAROLINE KEENE: This is an exciting time for Microsoft: we have the opportunity to leverage our rich cloud experience in the consumer space to shape the way enterprises consume IT and help them better enable their business. One of the successes that I found illustrative of cloud was the case of Lokad. This company builds and runs predictive models to optimize retail inventory. They need high computing power for relatively short periods of time for their models to provide timely predictions. No wonder they were a pioneer on Azur, a platform-as-a-service offering. Microsofts Azur allows them to deploy thousands of servers concurrently for a defined period and to only pay for the time they use. The elasticity of the cloud truly enables their business model, and their success is also ours. Caroline Keene was interviewed by Julie AvraneChopard, a Principal in McKinseys Paris office, and Christophe Meunier, an Associate Principal in McKinseys Paris office.

RECALL No 18 Boosting performance in B2B The second IT revolution: Enterprise mobility

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05 The second IT revolution:

Enterprise mobility

Advanced mobile technology is poised to radically improve workplace productivity. A few key issues, however, are standing in the way of widespread adoption. When PCs replaced typewriters in the workplace in the 1980s, this marked the first IT revolution, leading to a breakthrough in productivity. Right now, a second IT revolution is underway as another round of innovation drives productivity even further, making IT more usable with fewer errors, providing shorter transaction time, and lowering TCO. Smartphones and tablets are facilitating the rise of the mobile work environment, transcending the confines of the traditional classrooms, offices, and examination rooms. A wide range of applications are already out there, including encrypted corporate e-mail, horizontal solutions that can be used across different industries (e.g., sales force management, customer relationship management, and enterprise resource planning), and vertical solutions tailored to specific industries (e.g., e-textbooks).

vided an alternative for purchasing textbooks. Now, it is the book itself that is undergoing transformation. Many US universities are currently making moves to replace all existing paper textbooks with e-textbooks using tablets. Unlike earlier versions, innovative technology players such as KNO and Inkling offer e-readers that support note-taking just like paper textbooks and also have interactive multimedia. Without intermediaries (brick-and-mortar bookstores) in the purchasing chain plus reduced publication and shipping, e-textbooks cost about 30 to 50 percent less than paper textbooks. CourseSmarts e-textbooks use digital rights management technology to further reduce purchasing costs and offer 180-day rental services. Some research institutions forecast that 58 percent of all US college students will own a tablet by 2015. They also expect e-textbooks to further skyrocket, reaching a volume around USD 1.5 billion in 2015 with a 17 percent share of the entire US textbook market (Exhibit 1). Insurance is another industry typically characterized by paper particularly the paperwork involved in claims processing. Mobile IT solutions are changing the face of this industry as well. Among other things, tablets are reducing paperwork for both sales and claims. Replacing manual paperwork processes with e-applications dramatically increases accuracy, significantly lowering the cost of errors. Thanks to tablets, insurance agents working remotely gain immediate access to required information. E -signature solutions round out their mobile repertoire. Together, these functions virtually eliminate the costs associated with mailing documents to and from the home office and shorten pro-

Mobile IT enterprise solutions

Around 35 percent of smartphones are currently shipped to enterprises. This figure includes prosumers consumers who purchase electronic devices from personal funds, but intend to use them primarily for business. Beyond this, 50 percent of tablet products are in use by organizations in a wide array of industries. Academia is probably best symbolized by the image of the book from endless volumes in university libraries to the iconic university bookstore. This second image began changing years ago as various online outlets pro-

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01

The e-textbook market is expected to account for 17% of the entire E-textbook market expected to account for 17% 2015 UStextbook market, reaching about USD 1.5 billion in of the entire US textbook market, reaching about USD 1.5 billion in 2015
US textbook market size Percent 100% = 8.62 8.62 8.62 8.60 8.64 USD billions

98

96

93

87

83

Traditional textbook

2 2011
SOURCE: Xplana; McKinsey

4 12

7 13

13 14

17 2015

E-textbook

cessing time. Finally, tablets are quite literally lightening the load for sales and claims agents. These all-in-one solutions can replace the multiple devices that claims employees have to carry around, such as laptops, digital cameras, and smartphones.

Healthcare can use mobile IT to combine administrative efficiency with enhanced direct patient services. Tablet-based applications greatly simplify the search for patient documentation by giving providers immediate access to electronic health records (see text box).

Canada connected: Enterprise mobility at the Ottawa Hospital

Sometimes adopting one digital solution leaves users in predicaments they didnt face before taking that technological step in the first place. One Canadian hospital provides an example of how enterprise mobility can further build on an organizations other IT improvements. The Ottawa Hospital found itself running out of space for its patient medical records. Their solution was to develop an electronic patient record system. What they discovered, however, was that usage of this new system was quite low. It seems that this digital advancement successfully addressed the physical storage issue, but it ultimately resulted in a dilemma: mobile access versus security. Specifically, providers found it difficult to refer to the medical records during patient treatment while ensuring that information remained secure. In 2010, the Ottawa Hospital resolved this problem. It introduced tablets to access electronic patient records stored in the back-end system. Thanks to these tablets, both doctors and nurses can access patient records almost instantly. They can also share treatment records including relevant images with patients and their families. During the entire process, high-security connections ensure that patient confidentiality is never compromised.

RECALL No 18 Boosting performance in B2B The second IT revolution: Enterprise mobility

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Tablets also allow physicians to easily bring X-ray results into patient consultations. In the operating room, tablets offer enhanced functionality based on zoom features to view images in detail. Given the productivity impact, the Yankee Group projects that the enterprise mobility user base will grow by around 10 percent each year with approximately 130 million mobile IT business users worldwide by 2013. Over half of them will use mobile enterprise solutions beyond simple corporate messaging.

the employees mobile device within 24 months, and the most critical reason to deploy the custom images is better security. Addressing these barriers requires the efforts of various players. Carriers, hardware and software vendors, OS platform providers, and CIOs need to join forces. By strengthening product and service features, building ecosystems, and developing clear business cases, stakeholders can ensure that enterprise mobility options fully satisfy the needs of their end users. First, products and services should be enhanced to suit the enterprise environment. To maintain the security of internal communications, software providers should develop and enrich solutions to manage mobile and resource security along with the mobile virtual private network. Mobile OS providers also need to step up the security level of the operating systems themselves, while simultaneously providing support to ensure these enterprise solutions function optimally. Then, applying mobile solutions to enterprises means developing suitable software solutions and IT service capability. This makes it possible to customize the solutions in line with a particular enterprises unique requirements and integrate these with the current backend systems. To accomplish this, an enterprise ecosystem based on partnerships with independent software vendors (e.g., Oracle, SAP) and IT services providers (e.g., IBM, HP) needs to be established. Three types of players need to contribute specific capabilities to building such an ecosystem: Hardware providers (e.g., RIM, Apple) contribute hardware-optimized software solutions. Mobile OS providers (e.g., Google, Microsoft) establish a software development platform. Carriers and IT services providers offer end-to-end services to enterprise customers. In parallel to addressing these technical matters, CIOs need to develop compelling business cases and generate clear cost-benefit analyses (e.g., cost savings). This detailed basis will accelerate investment in building up mobile systems within enterprises. A process like this requires the support of the sales and marketing functions of mobile OS platform providers and carriers.

Barriers to adoption
The benefits of enterprise mobility are clear. Currently, more than 50 percent of companies in developed countries have approved two or more mobile OS platforms for enterprise use. However, deficiencies in some current mobile OS platforms present several hurdles to realizing the full potential. Three issues in particular make for the greatest barriers to widespread adoption. Individual enterprise mobility leaders may excel in one area, but their shortcomings in another severely limit their market share. Functionality. Many large enterprises find that todays mobility options fall short of their needs. Basically, current software features make mobile IT impractical. An example: RIM is the leader in enterprise smartphones with the industrys best security technology (with 450 IT policies managed centrally). However, it could not provide this level of security on its tablet e-mail system because it requires tethering to the phone. Integration. Another challenge for some mobile operating systems is their inability to seamlessly tie in with the enterprises back-end systems. Many CIOs are finding it difficult to integrate legacy software (e.g., insurance claims management system) with current tablet offerings. As a result, they are relying on simple browser-based access or desktop virtualization. The introduction of a Windows tablet, however, may change this, due to the fact that much of the legacy software runs on Windows. Security. For some large enterprises, the need for virtually impenetrable systems is key to business success. Perception from CIOs is that todays offerings lack enterprise grade security. In fact, 71 percent of US CIOs are planning to deploy custom images standardized OS and software versions with patches installed on

36

Enterprises are on the brink of yet another IT revolution. Just as PCs changed the business landscape in the 1980s, 21st century mobile IT is taking enterprise productivity to new heights. The student, the patient, and the customer stand to reap the rewards of enterprise mobility and the bottom lines of the universities, insurance companies, and hospitals that adopt these solutions will reflect this. How the persisting technology barriers are addressed will determine whether enterprise mobility remains little more than an interesting tool or if it launches a full-scale business revolution.

Anupam Banerjee is an Associate Principal in McKinseys Stamford office. anupam_banerjee@mckinsey.com

Joowan Kim is an Associate Principal in McKinseys Seoul office. joowan_kim@mckinsey.com

Richard Lee is a Principal in McKinseys Seoul office. richard_lee@mckinsey.com

RECALL No 18 Boosting performance in B2B Sales growth: Mining the wisdom of leading sales executives

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06 Sales growth: Mining the wisdom of

leading sales executives

Any company looking to boost sales can learn from the experiences of the worlds best sales organizations. In a recent research effort, McKinsey has interviewed more than 110 leading sales executives who represent companies that have collectively outperformed their industry peers over the last five years in terms of both revenue and EBITDA growth. More than 40 of these sales leaders were from the high-tech, media, and telecommunications sectors. The seasoned executives who took part in McKinseys recent study shared a wealth of insights on identifying and pursuing growth opportunities. In all, ten ideas for powering sales growth emerge and they are highly relevant to telcos and high-tech companies. Here, we offer a glimpse into three of those ideas: managing sales performance for growth, guiding the interplay of direct and indirect channels, and honing the skills required to hunt new customers.

sales staff performance diverged widely. The number of customer meetings per account manager, for example, varied by a factor of 10 across the company. In some districts, reps had failed to call up to 60 percent of accounts, leaving the field wide open for the competition. Not surprisingly, results fell short of management expectations. Coupled with this, sales force morale and motivation were low. In response, the head of B2B sales launched a set of 14-week pilots to see how the company could perform better and more consistently at both the team and the individual rep levels. Pilot teams were set up with ten sales reps, a team leader, and representatives from customer care and consulting. Each team received a toolkit of ten ideas for raising sales performance to use in its day-to-day work. These approaches included daily hands-on coaching by the manager, standard operating checklists, and frequent discussions of team and individual performance. In addition, the teams tracked each reps weekly performance against targets on a large board. Weekly statistics such as the number of customer meetings, the value of new contracts, and the ratio of offers made to offers closed were clearly documented and visible to all. To help reps focus on the new tools, sales managers committed to removing any obstacles to selling. Every morning during the pilot, managers would run through the days priorities with each rep, and together they would brainstorm solutions to any challenges. In weekly meetings, managers provided additional coaching, and the team plotted its strategy for the week ahead. The results of the first pilots exceeded all aspirations.

Manage performance for growth

Rigorously managing sales force performance provided the key to success for one large European telecoms player: TDC. As the telecommunications incumbent in its home market of Denmark, the company enjoyed a strong position. Yet TDC was struggling to grow. One cause was obvious: aggressive attackers were making serious inroads. Less obvious was the internal roadblock to growth a sales organization that was increasingly ineffective in fending off these attacks. TDC examined its sales performance to discover the root causes behind these problems. In its B2B division,

40

Sales calls per rep rose 40 percent. When the company mandated daily call reporting in its remaining locations, calls there jumped 17 percent. In the pilot territories, the number of offers closed per sales team rocketed by 75 percent, while average deal size rose by 80 percent and by as much as 150 percent for new deals. Beyond this, the variability in customer meetings per account manager shrank from a factor of 10 to one of just 3.5. These results were achieved with the same sales reps and managers. What had fundamentally changed was the companys approach to managing sales performance. In light of these extraordinary results, the head of B2B sales decided to roll out the program across all districts over the course of six months. The impact was similarly impressive: in a challenging market, total contract value per week rose 30 percent and customer satisfaction improved by 6 percentage points. Perhaps more important for sustained success, salespeople felt they had a better sense of direction and were more engaged with the top managements vision. They said that the pilots had inspired them to work to their full potential, and therefore they felt greater job satisfaction and earned more money. The B2B sales team became the poster child for TDCs new way of working, inspiring the B2C sales group and teams across the company. Other leading sales organizations have pursued initiatives similar to TDCs to manage performance for growth. They understand the root causes of variations in sales performance, and they recognize the sales force members potential to succeed individually and as a team. These companies also leave nothing to chance when it comes to performance management and do four things particularly well: they transform rookies into rainmakers through coaching, they set the tempo of performance, they measure success, and they recognize that motivation involves more than pay. Turning rookies into rainmakers. Coaching lies at the very heart of success in leading sales organizations. Companies with any aspirations of excellence must move from seeing it as a nice to have to establishing it as a core component in their sales management efforts. But turning sales managers into coaches necessitates a change in behavior. At TDC, managers went from spending two to three hours a week on coaching to devoting around ten hours to it. In other top sales organizations, coaching accounts for upwards of 60 percent of managers time.

Setting the tempo. Regular reporting can be immensely powerful, ensuring that the sales function is operating as effectively as possible from top to bottom. At one successful high-tech company, performance management has a weekly rhythm. Frontline sales reps call managers, managers call sales executives, and the top sales executive reports to the CEO every week. And calls trigger action. Sales management scrutinizes performance and intervenes to coach, problem solve, or raise a forecast week in, week out. Measuring success. Beyond setting the pace, sales leaders also use analytical tools and metrics to identify and address obstacles to sales success and to manage performance at a very granular level. Best-practice sales organizations use simple but comprehensive reporting that allows them to drive performance at several levels: by account, consumer segment, individual sales unit, or product. The data brings accountability to performance and takes the guesswork out of steering sales activities. Motivating the sales force. There is more to sales motivation than money. Many sales executives agreed that while a company must get compensation right, pay alone is not enough to drive lasting performance. One telco explained that it motivates and inspires its star performers not by paying them more they already make plenty but rather by inviting them to share their lessons from the road with the entire sales organization. As part of its annual sales conventions, the company asks these top salespeople to give a plenary speech and to facilitate breakouts for colleagues. Such visibility seems to inspire the stars to return to the podium next year they become the best coaches and motivate others to learn winning behavior.

Orchestrate direct and indirect channels

Companies can find it difficult to hand valuable customers over to indirect channel partners, such as resellers. However, outstanding sales organizations also recognize that a direct model is not always appropriate for all accounts. They excel at getting direct and indirect channels to work together harmoniously. In particular, they manage partners as an extension of their sales force. In contrast to the hire and forget approach to channel partners of some companies, leading sales organizations work as hard to better their partners performance as they do to improve their own. They dont see profits as a finite sum to be divided across the

RECALL No 18 Boosting performance in B2B Sales growth: Mining the wisdom of leading sales executives

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value chain. Instead, they view them as a rising tide that can lift all boats. Furthermore, they confront channel conflict head on. Sales leaders spend considerable time engineering the right balance of competition and collaboration between channels. They also continuously challenge partners to raise their games or be cut from the program, while rewarding those who succeed with more support and training to propel them to the next level of performance. Managing partners. What does it mean to manage partners as an extension of your sales force? It means treating your indirect and direct organizations as interconnected resources and managing partners like they are your direct sales counterparts. In practical terms, it implies that you should know the strengths and weaknesses of your partners, make sure your partners bottom line is healthy, and manage their performance as rigorously as that of your own sales team. The head of channel sales at a high-tech industry leader, for example, decided to mix direct and indirect resources, taking into account its partners capabilities in specific market segments. The handful of European countries where this was tested achieved a growth rate 50 percent higher than the countries without this model. Analysis revealed that a lot of in-house direct sales reps were working midlevel accounts, and the company wasnt making the most of its partners reach. Some partners tended to lack sufficient technical skills, while direct reps did not always have time to cover their wide territories. As a result, the sales executive in charge adopted two simple ideas. The first was to get partners more involved in midrange segments, using in-house sales support to help close deals and provide technical resources. Phone-based sales reps and technical experts worked with partners, creating a hybrid direct/ indirect model whereby in-house sales reps generated leads, which they passed on to partners to close. The second idea was to stop setting a quota of closed deals for reps and instead define a number of partners for them to manage and support. With this model, reps spend their time helping partners to close deals instead of pursuing prospects themselves. Channel choices can also change according to product life cycles. One hightech company uses a hybrid model: when a product is new, it is sold by the direct sales force, which is in a better position to educate the public. Later in the life cycle

when adoption is high and there is more competitive pressure the product is handed off to partners. Confronting channel conflict. Virtually all of the highperforming sales executives described channel partners as perennially paranoid about their vendors shifting business to their own direct sales forces or to another channel. A degree of channel conflict is inevitable and this can breed healthy competition. Too much, however, is both distracting and destructive and the effects can be long-lasting. With this in mind, sales leaders at a global IT hardware company treaded carefully when they added an online channel to reach the small business segment its reseller partners served. To allay partners fears, it marshaled data showing that very few partners sold to the subsegments targeted by the online channel very small businesses that typically bought from retailers rather than from resellers. The hardware company further showed that those customers valued the convenience of purchasing online and would likely switch to online competitors if it didnt address their needs. Finally, the company identified the small subset of partners who would be affected and calculated their importance to the company. It then provided training, sales support, and marketing to help the best performers in this group refocus on other opportunities; lower-priority partners who werent affected and/ or were unable to hurt business were left to move on. It was clearly a smart move to acknowledge and communicate the risks and benefits of the new channel and help vulnerable partners that were worth retaining. The online channel now accounts for more than 10 percent of sales and the company has retained its excellent relations with resellers remaining a vendor of choice, according to third-party surveys. The objective is neither to eliminate cross-channel conflict nor to overmanage this tension. Instead, the best companies provide clarity and incentives to keep each channel focused on the areas where it can contribute most. They also take a pragmatic approach to recognizing where conflict is inevitable and thoughtfully mitigating the impact for those partners that have earned protection (see table on following page).

Hone hunting skills

Keeping their salespeople in the hunt is a perennial challenge that sales executives face. The majority of

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Ideas to mitigate channel conflict

Between direct sales and channel partners Between different channel partners

Value cutoffs: assign ownership accounts and deals above the Deal registration: specify that the first to claim the opportunity earns credit for the sale line to direct sales, below the line to partners Rules of engagement: clarify target segments, timing for hand- Exclusive hunting ground: provide high performers with focused geographies, products, segments, or programs ing off new accounts Incentives: provide referral bonuses, compensate everyone involved Level playing field: ensure direct and indirect channels offer same price to end-user customers Selective intervention: increase protection for priority partners

sales models eventually turn hunters into farmers, i.e., a sales rep lands a big account and then gets paid commission on the resulting business. Happy with the ongoing income, the sales rep loses the hunger that motivates true hunters. Compensation models frequently reinforce this behavior. Some companies attempt to counteract the hunter-tofarmer devolution by deploying dedicated hunters. One global technology services company, for example, has separate hunting and farming groups, each with different incentives. While the hunters report to the head of business development, the farmers are part of the account teams. A European telco utilizes a different hunter/farmer split: field reps focus on hunting, while the back office serves and farms existing accounts. To enforce this division of labor, inbound calls to field reps are routed to a customer support team. Access to their sales colleagues e-mail, customer history, and calendar allows the support reps to handle most questions regarding existing accounts. If the market opportunity justifies the extra cost of having dedicated hunters and the organization has the right skill sets, splitting the hunter and farmer roles can improve performance under some conditions: Market segmentation reveals hunting opportunities, e.g., prospect accounts, specific territories with untapped potential. Winning new customers requires different skills than maintaining accounts, e.g., closers versus relationship builders, broad versus deep knowledge of portfolio.

Economics support dedicated hunting roles that may not generate revenue for three to nine months. Account relationships do not significantly influence decision making, e.g., reps must compete for and re-win new business with existing customers. Sales management is committed to adapting internal systems, e.g., tailored incentives and career paths for hunters, clear rules on handoffs from hunters to farmers. But this solution does not work for every company. As the head of sales of one industrial company admitted, dedicated hunting is demotivating in the long run, as the overall win rate is naturally low. When splitting the sales force into hunters and farmers failed to bring the desired results, his organization instituted hunting days instead. Once a quarter, the entire sales force steps away from their existing accounts and devotes the entire day to calling eight to ten new prospects. Initial results were dramatic in just a single day, the sales force generated two months worth of leads. And since the model used the existing sales force, no fixed investment was required. The right incentives can also ensure that sales reps who act as both farmers and hunters dont neglect the prospecting side of the equation. One IT services provider, for example, bases 80 percent of rep bonuses on acquired revenues. The remaining 20 percent reflects their success in farming the existing customer base. In short, different situations require different sales models separate groups of hunters and farmers,

RECALL No 18 Boosting performance in B2B Sales growth: Mining the wisdom of leading sales executives

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hybrid teams, or a single group of reps performing both functions. But no matter which sales framework they work in, successful hunters are like big cats: they choose the best moment to strike and pursue their prey with passion. For a company, this means tracking developments at potential customers and in the market to gauge when opportunities are ripe and putting the full weight of their senior leadership behind big hunting efforts once the moment arrives. One technology manufacturer McKinsey interviewed has dedicated teams compile an outlook on industry trends for each of its hot targets, highlighting how it can help the customer meet coming challenges. The sales organization also keeps a close eye on whats happening with these potential customers: Is the company struggling? Has a new CIO come on board? Did a competitor botch a recent contract? When the moment is right, the hunters make their moves. And senior-level commitment is clear for all to see, since even the global head of sales has a list of customers to approach personally. Armed with the compelling arguments his teams have compiled, he relentlessly pursues the most senior manager relevant to the deal sometimes to the extent of camping out in the lobby until his target agrees to meet him for lunch. Not surprisingly, this combination of painstaking preparation and management enthusiasm yields extremely high conversion rates in new accounts. Occupying the hunting throne in a particular market also sends a powerful signal that reinforces sales efforts.

One high-tech company interviewed makes hunting a top-down priority by identifying highly desirable targets that are not only valuable in their own right, but serve as reference points for other potential customers. The sales organization then closely tracks these customers and rewards reps for winning them. These examples show that hunting is hard work. But the growth opportunity from winning new accounts is far greater than it is from further penetrating existing ones. While honing hunting skills is an investment, it is one that pays off. A recent McKinsey knowledge project distills ten big ideas from 110 leading sales executives on meeting the challenges that large global companies encounter in their quest for growth. The three discussed here managing performance for growth, orchestrating direct and indirect channels, and honing hunting skills can boost growth for telcos and high-tech companies. But the sales leaders who participated dont stop here. They also explained how to find growth ahead of competitors, engage customers with innovative direct and multichannel sales approaches, boost the sales engine with more effective operations and technology, and develop a culture and management approach that nurtures sales success. The book Sales Growth: Insights from Leading Sales Executives published in September 2011 explores all of these topics in depth.

Homayoun Hatami is a Principal in McKinseys Paris office. homayoun_hatami@mckinsey.com

Jigar Patel is an Associate Principal in McKinseys London office. jigar_patel@mckinsey.com

Jennifer Wickland is a Knowledge Expert in McKinseys Silicon Valley office. jennifer_wickland@mckinsey.com

RECALL No 18 Boosting performance in B2B The performance imperative: Transforming sales operations

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07 The performance imperative:

Transforming sales operations

Telecoms is an industry where performance pressure is constantly on the rise. Cutting costs is important, but boosting sales productivity is often overlooked on the path toward profit improvement. Telecoms operators, equipment manufacturers, and infrastructure providers alike face significant commercial challenges: low single-digit revenue growth, pricing pressure from new entrants, regulatory restrictions, and fewer loyal customers than ever before. At the same time, shareholders expectations remain unchanged, driving operators to take yet another look at opportunities to improve productivity. In the commercial arena, this tops the agenda at many telcos. Unbridled cost cutting, however, often leads to lower quality, lower customer satisfaction, and ultimately higher churn, making this approach unsustainable. In mature B2B telecoms markets, it rarely suffices to merely look at classic commercial levers such as pricing or product design. For operators and OEMs alike, McKinseys industry observations indicate that levers in sales operations are often overlooked. Herein lie the daily nuts and bolts of commercial processes, an area that could prove invaluable in boosting revenues while lowering costs.

ing sales support resources to prepare quotes, handling erroneous bids, and managing post-sales activities like order management or invoicing (Exhibit 1). Enormous productivity potential lies in designing an environment for sales reps where they can invest more time in active sales to current and prospective customers. Capturing such potential should thus be at the core of any sales operations transformation. McKinseys experience with telco sales leaders shows in most cases that operators can free up the equivalent of one additional day each week for reps to focus on direct sales.

The top-down and bottom-up approach

Many telcos attempt to raise productivity by focusing on structural levers only adding automation, outsourcing, offshoring, consolidating, or launching a business process redesign. While such technical optimization can significantly enhance performance, it rarely brings the lasting and next-level impact that translates into competitive advantage. Based on numerous engagements with market-leading telcos, McKinsey has found that successfully transforming sales operations requires a different approach one that focuses on both structural levers (top-down) and on team-level capability levers (bottom-up). While both types of levers are necessary, sequencing is key. A successful sales operations transformation will first address the organizations structural deficiencies. What follows is equipping and motivating managers and employees to bring impactful and lasting change by rethinking the thousands of actions and interfaces

An added day each week for selling

Sales productivity analyses done for McKinsey clients typically show that only one-third of sales rep time is invested in active sales generating, developing, and closing sales opportunities. A far larger proportion of their time is spent on operational tasks and activities not directly related to active sales. These include chas-

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01

Telco sales reps spend surprisingly little time engaged with current and Telco sales reps spend prospective customers surprisingly little time engaged with current and prospective customers
Sales productivity analysis Percent of time spent on different activities Total time Vacation, travel, training IT/tools Chasing internal sales support teams Rework due to errors Transferable sales support work Customer-facing time
SOURCE: McKinsey

100

15

10

10

Meeting coordination and support status follow-up (e.g., installation, porting of service from incumbent vendor) Errors resulting from non-standardized support processes (e.g., wrong design, incorrect pricing on bundle) Work that can be transferred to a lower-cost back-office factory resource (e.g., first bill review, incorrect billing, service quality issues)

10

20

35 DISGUISED EXAMPLE

that make the sales organization tick. This approach of addressing the structural elements first, then team level capabilities delivers greater impact than structural levers alone. It addresses problems on a company-wide basis, then equips the organization to deliver recurring incremental improvements. Telcos that successfully adopt the top-down and bottom-up approach to improving sales operations could see baseline improvement in sales productivity of 10 to 30 percent and recurring improvements from 1 to 5 percent each year.

Effectively managing the resource pool and processes is even more challenging. Defining consistent roles across all sales operations functions and appropriately pooling sales support resources (e.g., on regional or product level) is crucial to avoid duplicated effort and facilitate end-to-end optimization. Structural lever 2: Segment the back office. Many companies try to shoehorn all their products into the same sales operations model despite major differences in deal value, deal complexity, cycle time requirement, etc. One telecoms equipment manufacturer handled shipping DSLAMs to an operator the same as large, fixed-mobile convergence projects, including system integration and complex bid and project management. Dedicating 80 percent of back-office resources to orders worth only 20 percent of the total order value is not uncommon. For this manufacturer, the solution was clear segmentation, specifying different tracks according to specific factors like deal size, complexity, and cycle time sensitivity. Structural lever 3: Integrate IT systems and applications. Quality management and waste reduction can prove difficult in frequently scattered IT landscapes for pre- and post-sales support. At one telecoms OEM, bid managers had to deal with up to eight different IT systems and tools to generate an offer that combined

Improving sales operations end to end

Fully transforming sales operations can be a massive undertaking, but McKinsey has identified six levers that generate disproportionately high productivity impact when applied collectively. These fall evenly into the two categories of structural (top-down) and team-level capability (bottom-up) elements described above. Structural lever 1: Pool sales support resources. In many telcos, end-to-end transparency regarding sales support resources, activities, and costs is limited. Complicating this, roles and tasks are often inconsistently defined across different organizational units and geographies. For such companies, it is difficult to assess where sales operations are relative to benchmarks.

RECALL No 18 Boosting performance in B2B The performance imperative: Transforming sales operations

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products from two business units. At that same company, one order had to traverse three different SAP systems on its way from the sales unit to the factory. A structural transformation consolidated this companys IT landscape into a single offer generator and single SAP system. As a result, order quality improved dramatically, with much shorter turnaround time. Capabilities lever 1: Define and measure SLAs. Inadequate quality management where sales and sales support organizations intersect is often the root cause behind straggling productivity. An analysis of orderhandling exceptions at one leading telco revealed that the front line itself caused over 50 percent of rework and waste. Specific culprits were inaccurate and incomplete order entry, order changes, requests for status updates, and fax orders requiring manual processing. Such rework and waste caused by the front line itself led to both additional effort and delays in sales support. Reworking exceptions required significant amounts of time from the sales reps as well, eating into active sales time. Improving handover issues typically involves stricter procedures along with clear and simple SLAs to ensure quality in orders from sales reps, combined with training and tracking to motivate the front line to comply. At one company, a simple tool for sales reps to check their bills of materials and an easy-to-use order tracking system reduced erroneous orders and delivery date inquiries by more than 50 percent. Capabilities lever 2: Standardize operating procedures. As in other operations areas, it is important to consistently capture best practices in standard operating procedures (SOPs). Rather than drafting lengthy process descriptions, SOPs should be simple, actionable, and highly visible checklists. Implementing SOPs for core sales and sales operations tasks not only drives productivity and quality within specific groups, it also simplifies interfaces and documents handovers for others. For

one telco, implementing SOPs raised order compliance with SLAs from 60 to 90 percent within six weeks. Capabilities lever 3: Manage for best-in-class performance. Managing sales organization performance requires equal weight on establishing clear KPIs and review cycles and on helping group leaders and managers become better performance motivators. One telcos sales operations transformation program increased the amount of time managers invested into coaching their direct reports, problem solving, and quality control from 20 to 80 percent of their time. This transition often means redefining management roles and priorities, while changing how managers perceive themselves. This approach of addressing both structural and teamlevel gaps systematically works equally well within a variety of telco functions, whether front line or back office. Telcos have used this approach to eliminate high variability in sales rep performance, boosting their sales by 30 percent in the process. Another telco faced high levels of back-office inefficiency caused by waste, variability, and inflexibility, but managed to raise productivity by 20 percent by implementing such topdown and bottom-up improvement actions. Addressing structural deficiencies can be tough. It often requires uprooting locations and merging separate functions a process that can spawn anxiety among employees. This is invariably a necessary evil before team-level transformation and capability building can commence. Only after structural deficiencies have been rectified can the organization set stretch goals to stoke enthusiasm, leverage best practices, build skills, and promote both learning and competition across teams and divisions. The ultimate objective: to build a culture of flexibility and motivation among employees.

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Kristian Andresen is an Associate Principal in McKinseys Oslooffice. kristian_andresen@mckinsey.com

Atli Knutsson is an Engagement Manager in McKinseys Copenhagen office. atli_knutsson@mckinsey.com

Philipp Landauer is an Engagement Manager in McKinseys Stuttgart office. philipp_landauer@mckinsey.com

Jacob Staun is an Associate Principal in McKinseys Copenhagen office. jacob_staun@mckinsey.com

RECALL No 18 Boosting performance in B2B Profitable at scale: Managing services portfolios successfully

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08 Profitable at scale: Managing services

portfolios successfully

Profitability in services can vary by a factor of five among players in the IT, telecoms, and high-tech sectors. Instead of simply pursuing growth, top performers consistently sell and deliver a services portfolio designed to be profitable at scale. Raising profits in services has long been a challenge for high-tech, telecoms, and IT services providers, but the specific form this challenge takes varies from industry to industry. For high-tech providers, hardware and software maintenance services are generally a profitable endeavor, but they have struggled to grow into adjacent services such as consulting or time-and-material work without giving too much away to customers. IT services companies, in turn, have sometimes developed one-off service deals (e.g., data center management) to win over individual customers a practice that has cost them dearly in terms of profitability. Finally, telcos have introduced new services (e.g., security, backup, unified communication), only to discover that just a niche segment of customers is interested in them. All three types of companies succumb to a common temptation: they pursue services scale for its own sake, even if this means setting low prices to win contracts or introducing a service that cant be delivered profitably. And the rise of cloud computing is about to make this path even more perilous. A recent McKinsey study points out that customers in the SMB segment, for example, expect cloud computing to lower the total cost of ownership by 20 to 30 percent for applications such as managed e-mail or managed backup and disaster recovery an expectation that throws a wrench into services economics if the portfolio is not designed appropriately.

The root cause in all these industries is an imbalance between the need to develop innovative solutions to customer problems and the ability to offer these solutions profitably at scale. Too many providers treat services as a craft and tailor individual solutions for different situations. Being both innovative and profitable requires an industrial approach to consistently sell and deliver the right portfolio of services. Executives who want to make services innovation profitable should focus on three ideas. First, they should build portfolios of service offerings that, like those for products, meet the needs of a range of different customers yet remain sufficiently standardized. Second, they have to find ways to efficiently bring their best value proposition to every customer. And finally, they need to hone their delivery by shifting their services footprint to their most profitable offerings. Scoring on all three counts is what separates the top performers from the also-rans.

Standardizing the services portfolio

The ideal services portfolio offers solutions capable of solving each customers specific problems while attracting enough customers overall. Although the idea is simple, this balancing act is challenging in practice. The most successful services providers master it with a threepronged approach that ensures they develop scalable solutions that customers in many markets really want. First, they ground their innovation efforts in systematic processes based on insights about customers and markets. At the same time, they hold regular portfolio reviews to design an effective portfolio and coordinate the entire organization around it. Finally, they cultivate

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a thriving ecosystem of partners to not only deliver the services portfolio effectively, but supply further ideas for services innovation. A company that succeeds in all three areas is also in a better position to respond to major developments, like the advent of cloud computing. Market insights and knowledge. In some areas, such as managed services (e.g., network operations, business process outsourcing) and integration services (e.g., application deployment, multimedia integration), almost all the services delivered are customized to a degree. At first glance, strictly defined portfolio innovation processes may therefore seem impracticable. Yet the most successful services providers take a highly systematic approach to developing innovative solutions. They glean insights from customers and the market and share them throughout the organization, providing a scaffold to support and direct innovation efforts. Winners in services leverage this hard-won knowledge of their customers and the market in general on a number of levels. Not only do they document and manage the know-how acquired in specific projects, they also develop longer-term portfolio road maps for each service line and offering. The best insights and practices identified in the course of working with customers flow into a company-wide knowledge repository. One IT services provider was quick to draw on early client RFPs to build a more structured offering. In one case, the company identified a gap in its clients existing landscape of IT systems and created proprietary software to address it, gaining an edge over the competition. Then the provider developed special branding for this offering and pushed it aggressively to clients and geographies across the market. Although designing offers before a client requests them can bring a big payoff, many companies fail to seize this opportunity. Developing relevant service offerings in advance and marketing them proactively can greatly boost the services business. Effective portfolio reviews. Portfolio managers draw on their understanding of customers and markets as they make decisions. But they shouldnt act alone. Instead, leaders from the marketing, sales and presales, engineering, and delivery functions should work with portfolio managers in regular portfolio reviews. At these meetings, representatives from the various functions assess the existing portfolio against criteria derived from market insights and profitable accounts and evaluate potential new offerings. Ensuring that proposed solutions will generate the scale to be profit-

able is important in every case, but a minimum-scale requirement matters even more in a cloud environment. Just as importantly, top services companies use reviews to identify and eliminate offerings that are out of date or less profitable. Telcos in particular often continuously add services to their portfolio without freeing up the necessary shelf space in their IT systems and end up with a complex portfolio that is hard for reps to sell, customers to understand, and IT to manage. By bringing the same discipline to pruning the portfolio that they do to innovation, the best providers keep complexity costs down and maintain a positive market perception. No matter how well a set of offerings is designed, it will not be successful if the engineers cant efficiently realize them or the sales team cant explain their advantages to customers. The team approach fostered by regular reviews ensures that the entire organization understands the portfolio and can act in concert to develop, sell, and deliver it. Such a system allows the portfolio manager to act as a conductor, making sure all functions work together in harmony. A thriving ecosystem of partners. Internal processes like knowledge management and portfolio reviews are prerequisites for success as a provider of services. But even the most talented innovators cant do it alone. Highly effective services companies choose their partners wisely and get the most out of these relationships. Of course, they look to partners to reliably supply the parts of solutions they cant provide directly. But they also share customer and market knowledge with their partners so both sides can anticipate and meet customer needs. To give promising partners the attention they deserve, some providers have dedicated relationship managers who work jointly with them to plan services offerings. The long-standing relationship between one major European software developer and a provider of IT services epitomizes such a win-win partnership. In a recent example, the services provider learned that the software firm was developing a version of one of its key products for a particular vertical market. In response, it proactively trained its consultants to understand both the software itself and the resulting service integration issues. Now the services provider holds a commanding position in this valuable segment, and its offering helps its software partner better sell the product in return. The cloud computing context further heightens the need for a coherent ecosystem of partners because the cloud

RECALL No 18 Boosting performance in B2B Profitable at scale: Managing services portfolios successfully

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Segment- and deal-specific account team configurations ensure optimal capability and value proposition
Deal type Segment Top accounts New growth opportunities Retain and defend (large) Retain and defend (small) Deliver only Add-on to existing service Small transactional/ new service Large transactional Coverage team + solution architect + industry expert (potentially) Transformational Coverage team + platform architect + industry expert + business consultant

Coverage team + platform architect Coverage team + business dev. + platform architect Coverage team + business development + portfolio (potentially) for new services inretain and defend (small) and deliver only segments

Coverage team + client sales exec. + platform architect Respond on case-by-case basis

Respond selectively

is simply too vast for any one company to tackle end to end. This ecosystem can take a number of forms. A leading European telco, for example, has aggregated a large number of application providers into a single software distribution system, while other hardware and software vendors have forged an alliance to provide one-stop shopping for cloud infrastructure.

rates among providers vary from 40 percent for the best performers to just 10 percent for the weakest. Account coverage and team staffing. When it comes to sales, most provider organizations use an account coverage model, assigning salespeople to a specific major account or to tailor coverage with an efficient cost-toserve model a set of smaller ones. The best providers go a step further to ensure that their sales teams also have the capabilities to understand what the services portfolio contains and how to efficiently leverage it to meet the customers needs. When responding to an RFP for an enterprise network solution, one telco adds technical experts to the bid team along with the sales managers and contract specialists. Not only do the technical experts ensure that the contract can be delivered, but they also lend the team credibility. A transition manager, for example, can be essential to assuring a client that execution will go smoothly from day one. For one major provider of network services, account teams include several such members. A pricing and penalty model manager checks that pricing mechanisms foster the right behavior over the course of a contract. An SLA manager, in turn, keeps service level agreements as standardized as possible to avoid unnecessary complexity. And a network architect ensures the technical prerequisites for successfully managing networks

Efficiently bringing the best value proposition to every customer

Having the right portfolio in place is only half the battle. Selling innovative services and selling them with the right economics to every single account requires bringing the right value proposition and know-how to every single deal. One approach is to add portfolio experts to account teams. The ideal team configuration varies depending on the customers situation and potential importance as an account. Yet just as companies must keep services sprawl in check, they must also resist the temptation to overly tailor their account teams to individual clients. How can providers balance the need to bring expertise to the deal while ensuring their go-to-market approach is scalable? The most successful ones upgrade account teams with portfolio-related specialists, while employing a lean support backbone to standardize and streamline sales processes. Getting sales right can have a huge payoff: new-business win

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A repository of sales support materials ensures providers bring their best thinking and value proposition to every deal and client
Client-facing materials Case studies that show how to achieve potential business benefits of offerings Value statements that demonstrate how a companys technical solutions create economic value Sales support presentations that can be customized for various target audiences Customer communication materials that facilitate effective, standardized communication with customers Playbooks that serve as single source of content about offerings Up-selling and cross-selling materials that help identify opportunities and outline sequencing of offerings Competitor and market intelligence that is current, reliable, and insightful Pricing tools that leverage a database of standardized competitive, profitable, and market-based prices Proposal materials that are modularized to make searching and compilation easy Contract terms and conditions that are standardized and consistent with companys historical positions, with an emphasis on business impact

Non-client-facing materials

Proposal and contract materials

are in place and the operator technology and delivery strategy are aligned. Further experts for areas such as value-added services make sure that the contract allows for up-selling and up-scoping the areas in question. While additional experts can make account teams more effective, not every potential deal requires the same level of expertise. Modular sales coverage models can provide flexibility without straying too far toward customization. One services provider breaks down its customers and prospects into segments and defines a coverage model for each (see table on previous page). Dedicated teams serve large or strategic targets, while pooled resources handle smaller customers. The scalable model covers not only traditional account team members customer service and business development executives, for example but also specifies the extent of portfolio-related roles such as solution and platform architects and experts on the clients industry. By involving individuals with in-depth knowledge of the portfolio, the company makes certain its offerings are deployed effectively, especially for large accounts. Account team support. The most advanced providers make sure that their best services portfolio thinking is available and applied throughout the organization. By eliminating the need for account teams to constantly reinvent the wheel, a lean sales backbone lowers costs while ensuring consistently high-quality proposals. One essential part of such a support structure is a central,

easy-to-access repository of sales support materials (see table above). The repository should contain readyto-use client-facing materials, such as case studies, sales support presentations, and illustrations of how the companys technical solutions create value. Materials for sales teams should also be covered playbooks, information to support up-selling and cross-selling, competitor and market intelligence, and pricing tools. Finally, the most useful repositories include proposaland contract-related materials. These can include upto-date proposal modules and standardized versions of contract terms and conditions. While centralized knowledge repositories function largely as self-service resources for account teams, the lean sales backbone includes focused support functions as well. For instance, providers may have a deal desk to help teams compile consistent, high-quality proposals. Companies at the forefront of effective service provision empower these teams to collect intelligence, analyze trends, challenge proposal content, and provide the front line and management with real insights. One IT services provider staffs deal-desk teams with a range of specialists deal analysts, configuration experts, and analysts for pricing and enterprise licensing agreements. Such steps to optimize sales support and operations often require network services providers to extensively rethink how their sales functions work. But impact can be tremendous: revenues can increase by 10 to 20 percent and back-office costs can fall by 20 to 30 percent.

RECALL No 18 Boosting performance in B2B Profitable at scale: Managing services portfolios successfully

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01

Scoring all bids on a range of factors can reveal underlying reasons Scoring all bids on lost why they were won ora range of factors can reveal underlying reasons why they were won or lost
Scores for deals Percent Won Deal qualification RFP management/shaping Solutioning quality Solutioning efficiency Relationship/decision makers Factors related to competitiveness of services portfolio and deployment of portfolio in bids Understanding of decision making process Articulation of value proposition Value proposition tools Industry and contextual knowledge Client alternatives considered and addressed Topical expertise available and applied Internal process
SOURCE: McKinsey

Lost 70 57 50 43 54 60 51 34 70 51 51 43 DISGUISED EXAMPLE

84 73 75 54 81 84 71 37 72 68 54 49

Delivering your target portfolio of services

Even the most carefully tuned portfolio strategy wont have impact if it isnt delivered consistently with the right economics. Correctly executing the portfolio strategy and reaping the benefits of standardization require close orchestration among portfolio management, local sales and delivery teams, and support functions. As we have seen, regular portfolio reviews help provide this alignment. Furthermore, a system of clear KPIs allows managers to check that portfolio management, sales, and delivery are all on track and are pulling together to build, sell, and leverage the right services portfolio. Many services providers simply set sales targets for each region, but they should consider breaking these down into three to five offering or service line categories (e.g., maintenance, consulting, integration, managed services). Sales teams tend to focus on what is easiest to sell: established products and services that customers already understand. Providers can counteract this with explicit targets for forward-looking services that require more customer education, rewarding teams who sell the portfolio of services that is profitable at scale. Front runners in services never fail to consider the most important indicator of all: lost sales. If a companys

products arent selling, the reasons are usually fairly obvious they dont do what customers need or a competitor offers a better price. If services arent selling, the reasons can be harder to pin down but world-class providers relentlessly pursue what lies behind missed sales. One IT services company performs a systematic analysis of won and lost bids. Each deal is scored on a range of factors: the companys understanding of its customers decision making process, its articulation of the value proposition, or the quality and efficiency of its solutioning (Exhibit 1). By comparing scores for each factor between deals won and lost, company leaders can see where the portfolio is being effectively leveraged and where it isnt. Beyond identifying problems, they also clearly define the responsibility for fixing them. IT, telecoms, and high-tech providers trying to make their services more profitable often assume that scale will automatically pay off. But growth alone is not enough and unchecked growth can actually hurt profitability. Winners in services are smart about scale. They begin by developing a portfolio of services that is innovative but largely standardized. They bring the best value proposition they can offer to every customer efficiently. And they continuously improve delivery performance.

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Kim Baroudy is a Principal in McKinseys Copenhagenoffice. kim_baroudy@mckinsey.com

Homayoun Hatami is a Principal in McKinseys Paris office. homayoun_hatami@mckinsey.com

Christophe Meunier is an Associate Principal in McKinseys Paris office. christophe_meunier@mckinsey.com

RECALL No 18 Boosting performance in B2B Putting SMB churn on ice: Integrated Customer Experience

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09 Putting SMB churn on ice: Integrated

Customer Experience

Customer experience is the hot topic for telcos with customers in the SMB market. McKinseys Integrated Customer Experience (ICE) offers an approach to help operators distill actionable customer insights and increase profitability in an environment of slowing growth and increasing price pressure. As telecoms markets mature, the steady stream of new customers slows to a trickle. Fixed-line incumbents continuously fight off attackers who attempt to lure away subscribers with low-cost bundles and new technologies. Mobile operators recall the days of breathtaking growth fueled by hordes of new users clamoring for service. New and more effective ways to attract and retain customers have become the Holy Grail for both fixed and mobile players, but most companies struggle to translate this new focus into an end-to-end approach. Surveys show that positive customer experience can significantly increase average revenue per client, since it opens up opportunities for up-/cross-selling. A better customer experience also reduces churn. For example, a leading Western European mobile operator faced the highest churn rates in its market and negative customer perception regarding its network and service quality. After a customer experience transformation, annual churn rates dropped from 31 to 26 percent. And after a retail store improvement program, customer satisfaction rose by 20 percent. True customer experience excellence entails making the customer pivotal in all activities, enabling telcos to make continuous improvements. Customer experience should, therefore, not be limited to the customer ser-

vices department, but span the functions of the entire organization and rank high on the CEO agenda.

Understanding what really matters to SMBcustomers

Small and medium-sized businesses are more complicated to serve than customers in other segments for a number of reasons: They interact more frequently with the touch points that are designed to be once-in-a-lifetime encounters, such as activation. The reason is because every time a new employee is added, a new mobile line and/or landline needs to be activated. They value some touch points much more than residential customers. For instance, a network outage can be far more disruptive, as it is likely to affect their revenues. They interact with segment-specific touch points. For example, they are often served and targeted by outbound agents, direct sales staff, and commercial partners. They are more heterogeneous than residential customers. One example is that larger SMB customers tend to be more demanding than small and home offices, expecting faster delivery and repairs. Since residential and business markets differ so greatly, managers may not be able to build on the knowledge accumulated from their residential customers to

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01

The benchmark reveals customer experience improvement opportunities at The benchmark reveals customer experience improvement a very granular level opportunities at a very granular level
How effective was the call center in solving your problem? Satisfaction Percent 80 77 50 50 40 18 30% 40% 20% 10% Customer base distribution 40 18 Client Market average Insight: Customer satisfaction highest if the question gets answered on the first call, but drops significantly if a second operator is required to find the answer

The last question I had was solved on my first attempt by the agent who picked up my call
SOURCE: McKinsey

The first agent I spoke to redirected my call to another agent who answered my question

The agent had to call me back with an answer in 1 - 2 days

The agent had to call me back with an answer in 3 days or more MOBILE SMB EXAMPLE

improve the experience of their SMB customers. With ICE, companies can identify gaps in their customer experience performance and quickly develop focused improvements. ICE is an end-to-end approach: it tracks the companys performance at each customer touch point, revealing strengths and weaknesses. In doing so, it takes a 360-degree view, measuring both customer perceptions and operational performance through the lens of the business customer market. The granularity of ICE makes it possible to assess the relative importance and performance of different experience drivers related to the touch points. The approach actively links actions to concrete improvements in a transformation program designed to drive bottom-line impact. It provides the fact base and tools needed for a variety of critical activities, including customer strategy, customer satisfaction, competitive benchmarking, and operational decision making. In practice, ICE has three main parts. First, a diagnostic generates deep customer experience insights. Next, the insights from the diagnostic are used to shape and prioritize the main improvement levers. Finally, this is translated into an ICE transformation path. The three phases are part of an iterative process and form the basis of a continuous improvement effort.

From research to analysis to concrete action

What sets ICE apart from other techniques is that it builds on a deep foundation of facts and insights about important customer touch points from the customer and operational perspectives. The customer perspective stems from a granular market survey. This customer experience survey shows how a telco performs in customer experience compared to its direct competitors. In addition, the diagnostic identifies the most critical touch points for a customer based on contact frequency with a particular touch point and the impact the interaction has on the overall customer experience. Customer satisfaction as a result of these experiences can be mapped by touch point, allowing a competitive comparison of customer experience that reveals which touch points are underperforming and which are satisfaction spikes compared with competitors. ICEs diagnostic component goes one step further. For each touch point, it identifies which drivers have the most impact on satisfaction. The call center, for example, includes experience drivers such as waiting time, staff friendliness, and interactive voice response systems. A satisfaction cliff specifies the optimum performance level for each driver (Exhibit 1).

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02

Customer-centric transformations can result in near-time improvements Customer-centric transformations can result in improvements in as little as two months
Installation waiting time Indexed 100 68 0 56 -32 6.9 Customer satisfaction Scale from 1 to 10 7.8 7.9 7.7 +0.9 (13%)

Repeat work needed Indexed 100 78 n/a Information on order problems Customers with 4+ calls over 6 days, indexed 100 17 Baseline SMB adoption 2 months
SOURCE: McKinsey

n/a

-22

25 +1 month

17 +2 months

-83 Baseline 2 months SMB CUSTOMER EXAMPLE End of pilot +1 month +2 months

End of pilot

When applying ICE, one mobile operator learned a great deal from the importance analysis and the resulting satisfaction cliff. Its call center effectiveness proved to be the most important experience driver. In particular, first call resolution generated higher customer satisfaction than multiple calls. If the first agent contacted could resolve a problem, satisfaction was much higher than if the call was routed to a second-level call center. In fact, the telco recognized that it was abusing its second-level call center by routing almost half of all calls there. The telco was able to act on this insight by improving the skill level of its frontline agents. Such analysis can also drive more strategic choices. One not-fully-integrated telco was able to quantify just how much customers valued single billing by benchmarking its customers versus those of its competitors. As a result, it decided to push convergent offerings for SMB customers faster than initially planned. ICE can also provide insights on commercial strategies, helping another telco understand that the most important satisfaction driver related to outbound calls is the offerings pertinence. The length of the call was almost irrelevant. This evidence that SMB customers are happy to stay on the phone as long as the conversation is relevant to their business needs led the management to

abandon initiatives to minimize average call duration across the board and instead focus on call relevance.

Launching a sustainable transformation

The key challenge of the customer-centric organization is to turn customer experience data into insights and eventually into long-lasting impact. Given the potentially broad spectrum of customer experience improvement initiatives (across touch points and key processes), it is of utmost importance to have an effective prioritization mechanism to phase the initiatives over time. One telco in Europe found itself facing three specific issues: converting the data into insights, aligning a very large organization along the priorities, and then launching a transformation that encompassed several touch points. This telco took a highly pragmatic approach. Specifically, it developed a set of tools to align the organization on priorities, set targets, and track improvements on each organizational level. ICEs simulator component played a critical role in helping managers agree on top priorities. Based on ICE end products, the organization reached consensus on the most important touch points for customer experience. Beyond this, it was able to pin-

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point the ones that once improved could generate higher satisfaction and minimize churn. By predicting churn reduction when comparing several improvement opportunities competing for the same investment budget, the telco identified the installation process as the main priority. It then launched a customer experience improvement pilot that comprised several bold actions to redesign the process (Exhibit 2). Within the pilot period of two months, this reduced installation time by 32 percent and repeat work needed by 22 percent, while customer satisfaction improved by 13 percent. Understanding the hallmarks of SMB customer experience and ultimately the drivers behind satisfaction is the key to succeeding in an increasingly competitive environment. Data alone does not generate impact. It must be linked to capabilities that turn figures into insights and eventually into sustainable impact.

Bart Delmulle is a Principal in McKinseys Brussels office. bart_delmulle@mckinsey.com

Tomas Keisers is an Associate Principal in McKinseys Antwerp office. tomas_keisers@mckinsey.com

Rene Langen is a Director in McKinseys Athens office. rene_langen@mckinsey.com

Alberto Menegazzi is an alumnus of McKinseys Milan office.

RECALL No 18 Boosting performance in B2B Change isnt always a breeze: An interview with Silvia Rapallo

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10 Change isnt always a breeze:

Microbusiness and SME Marketing Director, WIND

An interview with Silvia Rapallo

WIND Telecomunicazioni was established in 1997 and operates today as the third-largest mobile phone company in Italy, with 20.3 million subscribers. WIND is also Italys leading alternative provider of fixed-line services, serving more than 2.31 million direct voice and 2.03 million broadband customers. Silvia Rapallo joined WIND in January 2010 in her role as Microbusiness and SME Marketing Director. McKinsey had the opportunity to talk with Ms. Rapallo about WINDs strategy to venture into new territory against some steep competition. McKINSEY: WIND has a reputation as a telecoms attacker with the individual consumer mind. Is the focus on small and medium-sized businesses new? SILVIA RAPALLO: We are perceived as very much a consumer telco, and weve been growing in market share as a brand and in terms of acquisitions in the consumer market. The growth in SMB has been more recent. One of the key differences for the business segment is that the expectations in terms of customer experience are relatively high. Our history as a consumer-oriented attacker focusing on a segment for which customer experience is of relatively less strategic importance was a challenge we had to address head-on. This was especially difficult given that we faced incumbents like Telecom Italia and Vodafone with strong track records in customer experience in the business market. McKINSEY: Is your vision to really differentiate your SMB service and surpass your competition?

SILVIA RAPALLO: Our strategy is actually more modest than that. Were working to bring our service on par with our competitors. Specifically, we are trying to close the gap between us and our competitors in terms of acquisitions. Vodafone and TIM are our reference points. They are the two institutional players in the consumer market, but also in the business market. They have basically split the market in two. McKINSEY: What specifically is WIND doing to attract those business customers that would otherwise turn to Vodafone or TIM? SILVIA RAPALLO: Customer touch points are our focus. A very important one is the network. Quality in this area is extremely important to business customers, and the whole company has been focused on improving network quality for a couple of years. The general perception is that WINDs network is inferior to that of our competitors, and one of our goals is to close the 3G gap. Another major area of customer experience is customer care, particularly our call centers. We have launched an optimization of most of our sites, and our work is beginning to pay off. Customer satisfaction in this respect has already risen to the level of TIM, which is the second-largest player. Now we need to close the gap with Vodafone. McKINSEY: And what exactly is the new perception or image that WIND is trying to cultivate? SILVIA RAPALLO: Credibility. WIND has a history of being seen as a down-market provider of consumer

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services. A lot has to be done to develop credibility as a provider of quality business telecommunications. If we want to be in that business, we really need to work in this area. This is the job of marketing and the goal of a greatly enhanced customer experience. Vodafone started its SMB business with the advantage of already having a reputation as an upscale brand that was the choice of innovators even where its consumer business was concerned. It was already in their DNA. McKINSEY: Enhancing customer experience can take a significant amount of resources. How does WIND compete with the more established telcos? SILVIA RAPALLO: You have a point: our bigger competitors have double the advertising budget that we have, and this is a tool that influences customer satisfaction. So we just need to be as smart as possible, and this means optimizing the levers that have the highest impact. For example, we invest a lot in our Internet presence, while our competitors focus more on television. This careful use of limited resources transfers to other areas as well. When it comes to the network, for example, we are very selective in the areas we develop much more so than the others, I believe. The same goes for customer service. Our improvement investments are highly targeted. We identify the areas that have the greatest impact on customer experience, and thats where we invest. One initiative we launched was a certification program for our sales force getting them ready to deliver quality service to our business customers. It was very specifically focused on improving our acquisition rate and the loyalty of our sales channel, and it had the very positive side effect of increasing the perception and experience of our customer base. McKINSEY: Have you seen a direct, bottom-line benefit from this improved customer experience? SILVIA RAPALLO: Yes, absolutely. I see it in the numbers. Our agents are visiting prospective customers and being welcomed and recognized as professionals. This has led to acquisition gains. We see it less on the inbound side of sales. We dont yet have a presence in shops, and we believe there is a lot of opportunity there to sell to businesses. We could also capitalize much more on our communications and all the advertising if we developed our inbound sales channels more. We recently launched the e-shop, and activity from this channel is growing. I think this is a sign of increased credibility on the market.

McKINSEY: Since your entry into the business customer market is fairly new, is your customer base rather undifferentiated at this point? SILVIA RAPALLO: A few years ago we did not even differentiate between our SMB clients and our consumer clients. But for a couple of years now, we have been segmenting our business customers based on either actual customer lifetime value or some proxy based on that. Our ser vice mode very much depends on that segmentation. One way this plays out is in terms of assigning a project manager. Our high-value business customers with complex needs receive a project manager who accompanies them in the migration of their services from another operator to us. As I said, though, this is fairly new. McKINSEY: How were you able to rally the organization around such a massive undertaking? SILVIA RAPALLO: For us, there were two big players apart from the marketing side that were crucial to our focus on business customers: customer care and the operations functions. The mobilization of both organizations was rooted in the big gap that we were experiencing on the customer satisfaction index. The bottom-line consequences of low customer satisfaction were huge, so it was a priority concern for the top levels of management. McKINSEY: Now that these stakeholders are on board, how do they all participate in these improvement measures? SILVIA RAPALLO: We have created a structure in which operations and customer care sit down with marketing for biweekly process status updates. In these forums we review the operational areas that have an impact on customer perception, and work together to make improvements. Each business unit has a key point of reference that interacts with the representatives of the other business units. I serve that function for marketing, and it is my responsibility to set the level of service that WINDs customers experience. McKINSEY: What would you say is the biggest challenge you face given such dramatic expansion into a new customer base? SILVIA RAPALLO: One hurdle has been a shift in organizational mindset to accommodate this new objective.

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Operational issues had been the top priority for quite some time, and we were more focused on attaching KPIs and KPOs to the operational aspects of our business than on the customer satisfaction index or customer experience overall. Everyone at Vodafone has either a customer delight index or customer satisfaction index in all NBOs of management, and this focus is in addition to concentrating on operational issues. It is a matter of organizational maturity. Were now making good progress. McKINSEY: What are you noticing as the major difference between improvement efforts on the consumer side and those on the business side? SILVIA RAPALLO: Achieving a real step change in customer satisfaction is proving much more difficult, and this is key to our business customers. Any real change takes the time and effort of the whole organization. We represent a relatively small part of the company in comparison to the consumer side. Making operational changes is challenging, but we are able to understand what needs to be done and to act relatively quickly. Our clients perception of us vis--vis the more established competitors in this market is a tougher endeavor, and just takes time. McKINSEY: Finally, could you offer your colleagues in other markets who may have a similar agenda any advice on the importance of marketing? SILVIA RAPALLO: I would first say that it depends on the operators phase of life where they stand in their particular market. If you have just launched a new venture, you may clearly have to focus on building a distribution channel. But if you are also an attacker who needs to establish yourself in the market, developing your credibility is of the utmost importance. You want the type of word of mouth that is going to promote your new objectives, and positive customer experience goes a long way toward achieving that. Sales distribution is obviously extremely important, but that goes hand in hand with a focus on customer experience. An attacker cannot afford any weaknesses in this arena. Silvia Rapallo was interviewed by Bart Delmulle, a Principal in McKinseys Brussels office, Tomas Keisers, an Associate Principal in McKinseys Antwerp office, and Alberto Menegazzi, an alumnus of McKinseys Milan office.

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News, views, insights

McKinseys Telecom, Media & High Tech Extranet is the gateway to some of the best information and most influential people in the TMT industry. The extranet offers selected McKinsey-generated information that is not available on the general Internet. Updated weekly with new articles on current issues and trends, this site allows extranet users to access selected McKinsey articles on topics such as mobile telecoms (including data, media, and broadband), fixed networks, next-generation network infrastructure, enterprise hardware, online services, software, and many more. Direct communication channels ensure that your questions and requests are addressed swiftly. McKinseys Telecom, Media & High Tech Extranet lets you: Obtain exclusive information free of charge and access a portal specifically designed for the industry Access cutting-edge know-how, interact with experts to gain new insights, and contact industry leaders Stay well informed with daily industry news from factiva that you can tailor to your needs and interests. General information about the site is available at: http://telecoms.mckinsey.com

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Serving clients around the world

Building on the strengths of three of McKinseys strongest industry practices, the Telecommunications, Media, and Technology (TMT) Practice has been established to better address the convergence and value chain synergies for our clients in the sector. The TMT Practice serves clients around the world in virtually all areas of the TMT industry. Our consultants are individuals who combine professional experience in TMT and related disciplines with broad training in business management. As in McKinseys work in every industry, our Practices goal is to help our clients make distinctive, substantial, and lasting improvements in their performance. The Practice has gained deep functional expertise in capability building and transformation, product development, operations, network technology and IT (both in strong collaboration with our Business Technology Office BTO), purchasing and supply chain, as well as in customer lifecycle management, pricing, branding, distribution, and sales. Furthermore, we have developed perspectives on how new business models and disruptive technologies may influence these industries.

Telecommunications, Media, and Technology Practice November 2011 Designed by Visual Media Europe Copyright McKinsey & Company, Inc.
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