Making Lean Machines

As the telecom industry rebounded from its meltdown, earnings, market shares and stock prices of incumbent carriers have inched back up. But the respite will be brief. Deregulation, shifts in customer needs and technological change have opened the door to low-cost newcomers, some of which are giving away voice service through the Internet.

To understand the changes required to address these market pressures, we studied the cost structure and pricing trends of incumbent carriers. On average, incumbent carriers must reduce their cost structures by at least 30% and dramatically reduce the time it takes to provide new services and make service quality improvements. But how can companies weighed down by investments in aging technology, heavily unionized work forces and a high proportion of shared costs reduce expenses by this magnitude and improve service and delivery times? The answer lies in tailoring the concept of “lean manufacturing” to their businesses.

A proven approach to rooting out costs, waste and errors, lean manufacturing originated in automobile manufacturing. Pioneered by Toyota, lean manufacturing enabled that automaker to produce the world's highest-quality cars at the lowest cost and become the most profitable car manufacturer. Today, Toyota's market capitalization exceeds that of the other top-four players combined.

We have adapted lean manufacturing to the telecom environment and helped several carriers make significant, sustainable operational improvements. For example, a lean operating model helped a North American carrier reduce costs 20%, cut installation times 40% and improve quality 10% in its DSL business. A South American telco slashed costs 20% and average repair times in half using lean techniques in its data business.

Underpinning the lean philosophy is the identification and elimination of all activities that do not add customer value. Lean operating systems in telecom eliminate eight types of waste: overproduction, conveyance, inventory, waiting, processing, correction, motion and intellect. Taking a comprehensive view of waste allows carriers to resolve operational problems at their root source rather than eliminate symptoms of under performance.

In addition to changes in business processes, lean systems require shop floor and management personnel to adopt several new behaviors and work practices: systematized problem-solving and a systematized approach to waste elimination; an environment of learning and continuous improvement; unanimity in what activities create value for customers; new mindsets and practices that create efficient and flexible operations; and more productive supplier relationships through sharing of information, costs and risks.

Of course, lean manufacturing techniques must be tailored to the telecom industry, accounting for the high number of complex products, the high dependence on IT and the greater difficulty in balancing supply and demand. As a result, telcos must incorporate variability and rigidity into basic lean approaches.

Telecom networks must be available to customers even though demand can't be reliably predicted. That means reducing or modifying the number of activities in the front office (taking orders) and the back office (service assurance, testing procedures and diagnostic tools). Rigidity refers to a telco's operational restrictions because of IT systems, work force constraints, regulatory and other factors. There are three types of rigidities: systems (many different software systems to support different parts of the business), customer-driven rigidities (e.g. customer due dates) and platform (the IT systems and telecom network itself).

Telcos must institute lean approaches quickly because fundamental technology change and new competition threaten to increase the outflow of customers to less-expensive and more responsive telecom providers. Fortunately, now telcos able to make the necessary changes can adopt lean techniques faster than the multiple decades it took Toyota to go from an also-ran to near the top of the auto business.

Peter Ewens, Prashant Pathak and Hugo Sarrazin are partners at McKinsey & Co.