Competition Calling

Telecommunications companies strive for customer loyalty in a cutthroat market

CIO Magazine
By Christopher Koch
June 1, 1997

Industry:
U.S. telecommunications

Primary Service:
Voice and data communications, worldwide

Revenues:
Approximately $350 billion in North America

Number of Players:
Dozens

There's nothing more jarring than freedom. Going from doing what you're told to doing what you want can be as terrifying as it is exhilarating. CIOs in the telecommunications industry are experiencing that disconcerting sensation regularly these days. "If you don't like riding roller coasters, you shouldn't be in this industry," warns David J. Roddy, chief telecommunications economist at Deloitte & Touche consulting group.

For years, the industry has been moving slowly up the coaster's first big hill, the noisy chain of government controls cranking inexorably toward deregulation. Then the Telecommunications Act of 1996 was signed and the exhilarating and stomach-knotting descent into market competition began. The major segments of the industry (long-distance providers and so-called "RBOCs," or regional Bell operating companies that provide local services, and Internet service providers, or ISPs) were free to compete in any market anywhere.

A year later, some of the major companies in the industry are starting to feel a little queasy, but of course it's too late to get off the roller coaster now. The only comfort those uncertain riders have is that everyone around them is suffering from the same trauma. Many companies have decided that bigger is better, or at least safer, and some megamergers and acquisitions have already occurred -- the $21 billion merger between MCI Communications Corp. and British Telecommunications PLC, has been the splashiest so far. The industry is struggling to redefine itself, and no one is quite sure what lies beyond the next hill.

Whereas companies at all levels of the telecom industry are struggling with their identities, they all know what they need to do: build customer loyalty. Customer turnover, known as "churn," is wreaking havoc with telecom profit margins. From the Big Three (Sprint Communications Co. LP, MCI Communications Corp. and AT&T) to the small ISPs, everyone is spending too much money to get and retain customers, and painful price wars have broken out all over. "In telecommunications, the biggest cost right now is churn," says Roddy. "After spending millions on ad campaigns, the long-distance providers are still losing roughly 30 percent of their customers each year to other carriers." In the ISP market, competition is so fierce that companies are selling service below cost in order to gain market share, says Roddy. Meanwhile, as their formerly exclusive local turfs are opened to outside competition, the RBOCs see churn on the horizon.

Exhausted by the price wars, the telecom industry is turning to technology to provide relief. Technology has long been one of the principal sources of competitive advantage for the Big Three, but with deregulation, technology's impact will be felt across the board. In telecommunications, information technology doesn't merely support the product, it is the product. "The company doesn't have a product unless IT can bring it to the representatives' screens to sell at the front end and bring it to the billing systems at the back end," says Dave Laube, vice president and CIO of US West Communications Co., which provides local phone service in 14 states.

One compelling example of a product born of technology, MCI's groundbreaking Friends and Family discount calling program, was built from a jumble of different MCI computer systems integrated to provide intelligent call routing and billing. MCI's systems integration skills have led to a number of different products since then, including MCI One, which consolidates multiple services on one bill for the customer.

As the Big Three duke it out with ever more sophisticated calling plans and billing services, IT's ability to crank out the code becomes an issue. The company that hits the market with a new service first has an opportunity to gobble market share, forcing its competitors to win those customers back through expensive marketing campaigns.

These days, the code race is focused on gathering as many services as possible -- such as local phone service, cellular service and Internet access -- together on a single bill. So-called "bundling" operates on a basic assumption: Customers who sign up for more than one service with a single carrier are less likely to switch -- the devil-you-know theory. Bundled service programs will devour computer code at an unprecedented rate. In the days before bundling, telcos simply built powerful standalone systems to support each new product or service. As demand grew, the systems grew with it. But today, with multiple discount plans and bundled services coming to the fore, telcos have a powerful need to integrate information from myriad applications and systems, none of which knows how to talk to the others. Scrapping the systems and starting anew is out of the question; too much has been invested, and besides, the systems work fine.

So telcos are using software to achieve a kind of virtual integration. Indeed, CIO Lance Boxer of MCI and his boss, John Gerdelman, president of NetworkMCI Services, a division that operates and maintains the company's global network as well as its IT, could be poster boys for object-oriented programming. For the last 10 years, they have devoted significant time and resources to slicing and dicing MCI's software architecture into a component-based model using Data Access Point, an intelligent database that routes calls to the proper "product capability engine" (e.g., cellular, fax and long distance) and then sends information to the billing engine. The 400 different applications in the system are connected through a message-oriented middleware layer called "registry" that translates code from one application into code that other applications can understand. The mainframes have not gone anywhere, but the ways they talk to one another have gotten much more efficient and speedy.

That speed is critical because a lot happens in the seconds after the customer dials a phone number. For example, when an MCI customer gets on the line, the computers at the company's four data centers light up as they try to identify the type of call (for example, is it a fax or a cellular call?). Then they must search for the various discount programs and other services attached to the number so that the call can be billed accurately. "Almost 80 percent of the calls require intelligent routing," Boxer says. Each of those calls requires 16 different searches on the system. And those must occur on a vast scale: MCI averages 250 million transactions per day, all of them dripping with computer code.

As the RBOCs struggle to diversify in the aftermath of deregulation, they face an uphill fight to match the technology excellence of their more nimble competitors -- the Big Three, which have been honing their development skills for years in the competitive long-distance market. The RBOCs' IT systems grew up in the warm, cozy world of monopolistic price controls. As their exclusive local markets are opened to the Big Three, however, all that baby fat is becoming a major liability. "The long-distance companies have spent years paring themselves down to prepare for a more competitive market, and we have to do the same with systems as they have," says Cliff Dodd, CIO of Ameritech, a Midwestern RBOC. Ameritech recently went on a crash diet and is in the process of outsourcing most of its data centers to IBM Corp.

Dodd and his colleagues at other RBOCs don't mind getting more efficient and competitive in the systems arena, but they do mind the urgency -- and, in their minds, the lack of foresight -- with which the FCC has been driving deregulation. The RBOCs must open their local network to competitors, essentially becoming wholesalers to all comers from Joe's Telephone Co. to MCI or Nynex. They must not only lease time on the lines but also give those companies access to customer billing, repair and physical connection records. "That is what's truly keeping every CIO in the telecommunications industry awake at night," says Laube. He may be projecting a little. US West, the most geographically dispersed of all the RBOCs, faces the biggest challenge in terms of reconciling its systems. "We have 14 different states and 14 different regulatory environments," says Laube, "so from a systems perspective, I could end up getting whipsawed into a highly complex environment." That appears likely, as US West and other RBOCs are fighting the FCC's interpretation of the Telecommunications Act of 1996 state by state in the courts.

Because all politics are local, the settlement agreements could be local, too, which would complicate things for the Big Three: The FCC has defined a standard interface for connecting one telco to another, but it has not defined how the systems actually access and deliver the data. Laube is planning to build a Web-based system to serve his competitors, while Dodd is planning to tackle the issue with middleware. The FCC also has failed to define national pricing and quality standards, leaving those decisions to the states. "The long-distance companies may have to do this 50 times over, which is why I think the companies will not get into local service on a large scale," Roddy says.

As telcos wait for all the squabbling to die down, they are beginning to look to foreign lands, where markets are calmer and no one has ever heard of the "dime lady." The Big Three have established global initiatives of one sort or another, and they all dream of gaining competitive advantage through their networks rather than through price wars.

In the U.S. long-distance market, the Big Three have given up trying to differentiate themselves on quality of service and now compete on price. "Basically, long distance has become a commodity market," Roddy says. "The customer no longer perceives any difference in quality among the Big Three -- a minute's a minute these days."

When any brutally competitive market becomes a commodity market, profit margins begin to disappear. That's why the Big Three and their RBOC kin are diversifying into more profitable areas such as cellular communications and Internet access. However, they're also beginning to think about the profits to be had simply by giving the 50 percent of humanity that has never made a phone call the opportunity to reach out and touch someone.

Even in developing markets that already have phone service, a reliable dial tone is a luxury rather than an expectation. Many of those phone systems are ruled by state-owned bureaucracies whose abysmal service and neglected infrastructures are legendary. But with deregulation becoming commonplace around the world, U.S. and European telcos (which themselves were recently released from government regulation) are spotting opportunity in developing markets and are getting to know one another as eagerly as lonely hearts at a singles dance.

The Big Three are dancing three different steps, according to Roddy. AT&T is setting up loose cooperation agreements with foreign telcos to ship business to each other when possible. Sprint has merged with France TŽlŽcom and Deutsche Telekom, but no one company has direct control of global efforts. And MCI has merged with British Telecom; the two have formed a new holding company called Concert that is scheduled to begin doing business this fall, according to an MCI spokesperson. MCI and BT business units will remain distinct entities within Concert, but it is hoped the arrangement will encourage more global cooperation.

MCI and BT's dance looks like the smoothest, according to Roddy: "Direct ownership and coordination will be the most effective type of alliance -- assuming you've chosen the right markets." Indeed, the emerging markets may be ready for competition, but that's no guarantee of profits. Developing countries can be extremely mercurial when it comes to opening their markets to foreigners. Years of investment can be wiped away by a single stroke of a bureaucrat's pen.

MCI is protecting its investment with the "intelligent services network," a service and billing architecture that can be adapted easily and quickly to foreign markets thanks to a distributed object-oriented software architecture. The package already has been installed in BT's operating units, and it also has been used by MCI's Mexican subsidiary, Avantel, and by Stentor, a Canadian consortium. Typical time to market is two to three months, according to Fred Briggs, CTO of Concert.

Ironically, the biggest challenge in creating the system was making sure it could scale down rather than up, according to Briggs. "It's one thing to roll something into a British Telecom or MCI where you're handling 10 million transactions," he says, "but in emerging markets, you have to have your systems scale down and be cost-effective." If the Ivory Coast isn't ready for Amis et Famille, MCI and BT can host both call routing and billing services on their own systems until the local network is ready.

One of the challenges in the deregulated market will be to eliminate the stigma that persists among customers about "the phone company." After the breakup of AT&T, the RBOCs absorbed the brunt of consumer venom on the local service front. But as those local markets open up, customers could learn to hate the Big Three every bit as much as Nynex or Ameritech. MCI's Gerdelman dreams of heading off customer complaints by not giving them reasons to be angry in the first place. At the business level, he wants to monitor networks for problems and fix them before they cause trouble. "It's time to get beyond the physical separation of voice and data and manage computing and telephony together, end to end," he says. He foresees the growth of networks based on logical functionality rather than on physical structures. That kind of bundling will build loyalty among MCI business customers, he says. "Customers are saying they're tired of all this differentiation between data and voice," he says. "They're saying, 'If you can do the value-added stuff like running my network, then I'll give you the whole thing.'"

Across the industry, CIOs have the same vision: Make the phone network smarter and customers will come. The days of physical switches have passed, and now software rules. "The ability to design features and functions into the network is no longer the sole province of the switching vendors," says Laube. "Today, you can write intelligence into the network yourself, using software." The possibilities are as complex as Gerdelman's dream of monitoring multiple networks and as simple as getting a pizza delivered before it becomes ice cold by automatically routing calls to the store closest to the customer's house.

The trick will be to raise the network's IQ without creating bloated, inefficient systems and slow software development cycles. Match that with the ruthless competition among telcos at the national -- and now global -- level, and CIOs can expect the roller coaster ride to continue.

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