Herbert Blum: The Fool's Gold of Capital Efficiency in Telcos

As revenue growth slows and demand for infrastructure projects increases, capital intensity is becoming a major pain point for the telecom industry. While many execs are turning to capital efficiency, industry leaders are thinking about capital effectiveness. Herbert Blum, a partner with Bain's Telecommunications practice, discusses how companies can utilize the 4 S's of capital effectiveness to improve their strategic position and beat the competition.

Read the Bain Brief: The Fool’s Gold of Capital Efficiency in Telcos

Read the transcript below.

HERBERT BLUM: Capital intensity has become a major pain point in the telecommunications industry as revenue growth has slowed down, while at the same time the demand for large infrastructure projects is not slowing down. So unfortunately, too many executives look through the lens of capital efficiency, trying to squeeze as many projects as possible into a restrictive envelope. The right way to think about this is through the eyes of capital effectiveness—the ability to improve your strategic position. Which...in a business that's marked by slow revenue growth, is about the ability to take share from your competition.

But that is not easy. We looked at carriers around the globe, and we found that only one in eight is actually capital-effective. So only one in eight are taking, on a yearly basis, share from the competition, without having to spend more than their fair share in terms of capex.

Capital effectiveness is about the ability to take share from your competition at the lowest possible cost. And it is important to note that it's in this order. Capital effectiveness ought to trump efficiency.

So what are the leaders of capitol effectiveness doing? They think about this in a very comprehensive way, what we term to be the four S's of capital effectiveness. Number one, situation—what is their competition doing? What is their balance sheet allowing them to do or not?

Number two is strategy. And interestingly, it's the ingredient that's most often missing among those that are not capital effective. The awareness, the crystal clarity about the intent in which particular parts of your market you are going to beat your competition.

Number three is, yes, spend. Those carriers that are capital effective, just like anyone else, are obsessed about doing the things in the most cost-effective way. 

And fourth is structure. Structure is about enabling the organization not only to once a year think about how they are going to spend the capex over the next 12 months, but in effect on a daily basis allowing your organization to make the right decisions about the big-rock items, as well as the little things that add up to these big capex envelopes that service providers face each day.

So capital effectiveness is about spending your money where it really matters, where you are able to improve your strategic position and beat your competition. And where it doesn't, to have the discipline to take it off the table.

Read the Bain Brief: The Fool’s Gold of Capital Efficiency in Telcos