Why the CFO Needs to Guide Technology Acquisition for Service Providers?
With telecom service providers (SP) increasingly using technology as a competitive differentiator, it is becoming important not only to acquire the right technology, but to acquire it in a way where it offers maximum benefit to the business.
Rapid technological advancements have made it necessary for service providers to be very nimble and frequently revise their offerings to suit customer requirements. Over the last four years, mobile service providers have exhibited cyclical—but, on average, declining—revenue growth patterns, according to a Cisco whitepaper ‘The Road to Cloud Nine’ published in February 2013. Overall, the momentum has fallen from an 8.9 percent growth rate in 2008 to less than half that rate (3.5 percent) in 2012. This trend is true in both developed and emerging markets.
The whitepaper also suggests that had it not been for data, with service providers relying only on voice, SPs would have seen much lower growth rates (4.4 percent in 2008, declining to -2.4 percent in 2012). On the other hand, data revenue growth increased from 4.5 percent in 2008 to 5.9 percent in 2012. The implication is that data has helped generate a significant portion of the mobile SP growth.
Going forward, SPs need to invest in new technologies that not only complement existing services, but enable them to provide new ones.
Let’s take the example of community Wi-fi as a trend. With the proliferation of smart devices, there is increased demand for community Wi-fi. For instance, when you visit a friend’s home, you expect to be able to access their Wi-fi network to access data on your phone. Community Wi-Fi provides several benefits to SPs. By extending the network via their own customers, not only do SPs rapidly expand the size of that network—they also create a compelling “friends and family” world that enables them to acquire new customers and retain existing ones. Community Wi-fi also allows SPs to differentiate their broadband offers from those of their competitors and to potentially extract a premium for their service.
Another emerging opportunity for SPs is providing mobile cloud. Only a handful of telcos have realized the value of offering mobile-cloud services, through their own app stores or through linkages to outside app stores. Overall, however, SPs are behind the curve on this crucial opportunity, again according to the Cisco whitepaper mentioned above.
In both these examples, the required technology investment will come as a part of a business development strategy, rather than just technology upgradation. Therefore, we are seeing a trend among SPs, where CFOs need to be as active as CIOs in making technology acquisition decisions. According to a Forrester Consulting report, ‘Financing in the Current Macro Economic Environment,’ based on a 2012 Cisco Capital commissioned survey, CFOs are as concerned about the rate of technology change as IT leaders are. It’s also clear from this report that the IT department no longer has complete control over an organization’s technology acquisition process.
Greater involvement of the CFO has resulted in an increased focus on ensuring that technology is acquired optimally from a financial perspective. Given that technology investment is usually just one of many business priorities, vendor financing is increasingly viewed as a preferred alternative to acquire technology as it allows the organization to spread costs over a period of time, to ease cash flow pressure, protect capital, and preserve other lines of credit.
Most importantly, financing allows SPs to acquire technology that can actually bring forward business benefits and to invest for business development purposes as opposed to acquiring IT when run rate budgets allow. CFOs need to understand that an IT investment strategy is no longer just about buying hardware, software, and services. It is important to put in place a 2-3 year plan, in consultation with the CIO, to make appropriate investments that ensure the best ROI.
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