It's hardly breaking news that large telco operators face severe revenue and margin pressures in the business wireline segment. But the scale of the year-on-year revenue decline (between 3% and 8.2%) for products such as Multiprotocol Label Switching (MPLS) and Point to Point Ethernet (P2P), Private Branch Exchange (PBX), on-premise security, and Virtual Private Network (VPN) is sobering.

This decline is forcing a reckoning for many of the biggest providers in the industry.

Red ink everywhere you look

Worryingly, the bleeding looks set to worsen before it improves. AT&T reports that 'business wireline is the segment with the largest headwinds as enterprise customers shift away from high margin legacy offerings and a slowdown in government spending persists.' Several key telco providers have downgraded forward-looking guidance, largely due to the lower-margin products eroding profit margins within these segments. An analysis of margin decrease for established players like AT&T, Verizon, and Lumen shows a decrease ranging between 12.4% and 33.6% in the second quarter of FY2022.

The issues are compounded by many consultancies, which have been busy convincing firms to ditch their telcos' managed services propositions (MSPs) in favor of a more DIY approach. These approaches are great for demonstrating cost-of-infrastructure savings, but they often do not consider skills gaps and the revised operating model required to successfully transition to DIY, especially for smaller organizations. A common misconception creating this vacuum by the telcos is twofold. For one, telcos did not transform their go-to-market motion from product to client solution selling, and proactively approaching clients. Because legacy products are higher margin, many telcos have been too hesitant for too long to broach the topic of transformation. Secondly, product portfolios were not packaged to retain the profit with the right managed services and third-party solution overlay.

Of course, all of this activity has taken place against the backdrop of a pandemic that has forced real estate departments to rethink the amount of dedicated office space needed while trying to right-size their footprints for a hybrid reality. All of this inevitably leads to an additional reduction in business wireline revenues as office space consolidates in favor of a more work-from-home posture.

Turning the tide

Telcos face a hard choice. They can let the continued erosion of their business happen by acquiescing to 10-20% cost cut-downs requested by customers. Or, they can continually reduce operations in a futile attempt to maintain margins, even as service delivery suffers. Additionally, there are a lot of service optimizers roaming the market, who will pick the opportunity and reduce the potential margin even further.

To turn things around, telcos can go on the offense and leverage the deep expertise of their product's technical capabilities or partner with a systems integrator to build competency in digital transformations. Using that competency and a consultative selling approach, they can cannibalize their own products, retaining customers with a “more-for-same” proposition.

Telcos should lead the cannibalization of their products by offering to help plan their client’s digital transformations and leverage the power of system integrators to co-sell it. Rather than waiting, we believe telcos should aggressively look to replace higher-margin, traditional networking products with lower-margin, next-gen networking products with a focus on retaining customers and saving revenue by adding more value-added services. In conjunction, enterprise telco groups should restructure their cost base and operating model for this new model, to make sure they continue to run the business profitably.

What does an example of transformation look like? Below are the standard product sets we see transformed:

  • Internet + SDWAN instead of MPLS
  • Cloud telephony instead of PBXs
  • Cloud-based security rather than premise based
  • Public/private cloud rather than data centers
  • A co-managed service offering rather than fully managed

Naturally, products across the technology verticals, and the security that underpins it all, are vital and need to be layered on with any transformation deal as a means of retaining revenue.

Be Bold: Lose Short-Term Margin for Long-Term Gains by Shifting Your Focus

It requires a consultative approach that realigns the GTM approach, better incentives, and potentially differentiated sales teams (Account Managers vs. Hunters, for example.) On the product side, telcos need to embrace their role as resellers and integrators to create simplified, modular solution packages that are easily delivered while also partnering with integrators who can sell integrated packages to the SMB segment, which may be subscale for your direct sales force.

When incumbent telcos lead, it delivers an opportunity to position extra value-added services, and a powerful cross-sell/upsell opportunity in the context of a consulting engagement.

Taking a data-driven approach is critical. A 360° customer approach means identifying targets by waves based on the highest risk and conversion success rate.

Success Story

We’ve worked with many telcos, helping them get on the front foot in client renewal discussions by updating their go-to-market motion and targeting.

In one case, a successful solution selling with a proactive rather than reactive sales approach led to ~70% of renewals being successful in retaining revenue post-transformation vs 40% when being reactive and waiting for clients to approach.

Proactivity and action consistently prove to be the right play.

Disrupt the market and succeed by focusing on your customers

Telcos need to disrupt the market themselves or it will be driven by third-party optimizers. EBITDA declines for wireline telcos are everywhere, and Free Cash Flow (FCF) burn is a fact of life. But if that FCF burn comes from Fiber-To-The-Home (FTTH) investments, then that can stimulate the companies' asset quality over time.

Take control of your destiny by turning your business into a one-stop-shop for customers. Build your revenue by leveraging partnerships with integrators and third-party solutions, stitching together their product offerings seamlessly with a layer of managed services. 

Act now to help your business thrive while other telcos struggle to survive drops in revenue.