Ask The Expert

Dear Expert Eye,

What are your feelings on the overall viability of the telecom industry, considering the drastic cuts in spending that services such as VoIP represent? What do you recommend agents do to mitigate the risks of lost business? Predictions? Recommendations?

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The $300 billion telecommunications industry continues to be disengaged from the broader economic recovery. Major telecommunications suppliers continue to report poor revenue and earnings, in many cases seeing financial performance plunge much deeper than was expected by company executives, by shareholders and by the investment community.

Look for 2004 to be another brutal year financially in telecommunications as opposed to an industry recovery. Why? Carriers commodity pricing is likely to continue through 2004 and into 2005 as telecoms issue new directives to match — or beat — price discounts offered by competitors in an effort to gain market share and own the end-user contract. As well, it is the consensus of opinion by leading corporate telecommunication industry CEOs that there will be further corporate mergers, organizational restructuring, lay offs, overcapacity and slack demand. And lets not overlook AT&Ts recent stock slide, and Standard & Poors saying the companys BBB long-term credit rating could be cut to junk level, which only adds to this near-term industry prediction.

Further punctuating the present state of the telecommunications industry is change to new technologies you mentioned, Geoff.

• VoIP. The reemergence of this Internet-based method of communicating, with much improved service characteristics and much reduced cost;
• Emergence of small, fleet, well-funded, emerging VoIP companies;
• Convergence of companies, like Cisco Systems Inc., morphing from conventional telephony to VoIP for 35,000 employees and consultants at a savings of $300,000 a month in Europe alone;
• Equipment transformation, resulting in an estimated 20 percent of all new phone equipment installed by the end of 2004 being VoIP, and in excess of 50 percent of all new phone equipment being VoIP by 2007 (source: Yankee Group);
• Shifting of investment, R&D and innovation by major suppliers, like Qwest Communications International Inc., AT&T Corp. and BellSouth Corp., to VoIP, including the introduction of VoIP services to existing business clients in targeted major markets; and
• Next Generation,unregulated (and untaxed, fee-free) Internet phone services, creating a new technology alternative to traditional telephony for business clients, not to speak of reported cost savings. In todays business climate, not only is cash king, so too is cost reduction. Cost reduction will continue to be a major decision driver of businesses with regard to current and future telecommunications expense and investment.

Adding to these industry trends is the growing customer satisfaction with wireless telecommunication services with its new service applications, combined with follow me wireless telephone number portability. For example, Verizon Wireless announced plans to invest $1 billion during 2004 and 2005 to deploy a high-speed wireless Internet data network nationwide. It is anticipated that this move will force other wireless carriers to increase their capital spending and speed up plans to roll out similar features. These wireless carriers include telecommunication suppliers of legacy telephone service. The Verizon investment signals that telecom companies are moving to invest in growth areas, even as their core businesses, such as phone lines, continue to decline amid increasing price competition.

Further illustration of the telecommunications industry shift away from legacy telephony is the continued depressed and shifting capital investment.

• Overall capital spending by telecommunication suppliers, including announced increased capital investment in wireless, is expected to remain stable for 2004 (approximately $35 billion);
• New technology applications, as well as increased spending on wireless technologies, will result in further depressed capital spending in conventional phone systems and services;
• The Commerce Department reported that orders for telecommunications equipment plummeted by 40 percent in November 2003, erasing all of the combined gain achieved in durable goods orders.

It is not likely that the telecommunications industry will rejoin other business segments in the broader U.S. economic recovery within the foreseeable future. So what do alternate channel master agents and others do to participate more fully in the telecommunications shift?

• One space, one voice. The alternate channel needs to establish a strong, focused and active trade and research association. It is far more prudent for master agents to work together (than apart) in the small, but essential middle space between carriers and end users. To do so will require a leadership focal point, knowledgeable resource and representative lobbying group.
• A goal without a plan is a wish. Those participants within the alternate channel who sit idly watching the game without a crisp, clear, well-articulated strategy will quickly be out of the game. Period!
• Lead, follow or get out of the way. Alternate channel master agents will continue to exist as competitors, or will look to more collaborative ways to join forces to accelerate the growth and profitability of the channel. Possibilities within this theme range from joint contracting with carriers to possible mergers or acquisitions.
• Either get on with living or get on with dying. With the emergence of new technology-driven products and services come new challenges and opportunities for master agents. Seize the opportunity to define your strategy and become a part of the new wave and effectively integrate these new products and services with your existing offer. If you dont, be prepared for the consequences.
• The customer is king. Im referring to your agents in this theme. Master agents are either going to invent and spend their way to gain agent loyalty, or will create simplified, seamless, collaborative service models within the alternate channel that permit agents to focus on sales and service, not administrative minutiae. This includes new products and services, developing simplified data warehousing/systems access, contracting, and commission and incentive plans.

Now is as good a time as ever, Geoff, to step back, examine your current business and financial model and strategy, and consider new business and enterprise strategies. You will not only find the exercise to be challenging and stimulating, you may find new ways to restructure and grow your business, and remain highly competitive.

Hedley Lawson brings more than 25 years of experience as a senior executive, officer and business leader to his role as the managing partner of Aligned Growth Partners. He has worked with domestic and global boards of directors, executive committees and management teams to build and sustain business, human capital, organizational performance and organization change strategies for entities ranging from startups and pre-IPO companies to corporations with more than a half-billion dollars in sales and more than 4,000 employees.Lawson has held positions of senior vice president and vice president, providing human capital, quality management and technical services leadership in high technology, software development, telecommunications, medical device technology, financial services and manufacturing businesses. His experience includes SOLA International Inc.; SOLA Optical USA; Fair, Isaac and Co. Inc.; and QuantumShift Communications Inc.