DT's Epic Undershoot Reflects Transformation Woes

Iain Morris
News Analysis
Iain Morris, International Editor
5/25/2018



Missing targets by €1 million may be regarded as a misfortune; missing them by €1 billion looks like carelessness, Oscar Wilde might write if he were reincarnated as a Deutsche Telekom analyst.

The German telco has ripped up its original savings plan after it dramatically undershot targets. Under a strategy announced in 2015, the company aimed to cut indirect operating costs outside the US by around €2.4 billion ($2.8 billion) annually, using 2014 as a baseline. Its goal was to reach savings of €1.8 billion ($2.1 billion) by the end of this year. Last year, it managed just €700 million ($817 million).

In other words, it would need to find an additional €1.1 billion ($1.3 billion) in savings this year to achieve its goal. In a presentation at this week's capital markets day event, it already appears to have ruled out this possibility, slapping a red traffic light marker against the savings ambition to show it is not "on track."

Teutonic Efficiency
Timotheus Hottges, Deutsche Telekom's CEO, is under pressure to make the German telco a much leaner company.
Timotheus Höttges, Deutsche Telekom's CEO, is under pressure to make the German telco a much leaner company.

Quickly forgetting about that derailment, Deutsche Telekom AG (NYSE: DT) has now completely moved the train. Using 2017 as a new marker, it is aiming for about €1.5 billion ($1.8 billion) in annual savings, outside the US, by 2021. If it achieves its latest objectives, the relevant costs will fall to about €17 billion ($19.8 billion) in 2021, roughly €2.2 billion ($2.6 billion) less than in 2014. (See DT Targets €1.5B in Automation Savings, Misses Former Target.)

The savings will largely come in areas where progress under the older initiative lagged expectations. Deutsche Telekom was aiming to complete an "all-IP" transformation, shutting down older PSTN networks, by 2018, but is two years behind schedule. While the overhaul is done in Croatia, Hungary and Slovakia, only 67% of lines in Germany and 45% in Greece now use all-IP technology. (See DT 'Cost Lag' Could Overshadow Transformation Agenda.)

This PSTN shutdown has evidently been far more difficult than Deutsche Telekom had envisaged. "It's not until you get rid of the legacy in the business that you get cost savings, and that is a complex and cumbersome process," says Bengt Nordström, the CEO of the Northstream consulting business.

An even tougher challenge has been Deutsche Telekom's related "pan-net" project. The aim here is to replace the various technologies that cater to individual European countries with a single, cloud-based network for the whole region. Deutsche Telekom has managed to set up network operations centers in Germany and Romania, as well as data centers in Greece, Hungary and Poland. But another red traffic light flashes up on service migration. Only a few services have been moved to the pan-net platform, Deutsche Telekom acknowledges. (See DT's Pan-Net Still at Start of the Marathon.)

This entire overhaul would lead to cost savings of about €1.2 billion ($1.4 billion) by 2020, said Claudia Nemat, Deutsche Telekom's head of technology and innovation, during a press briefing at Mobile World Congress in 2015. This would include savings of about €500 million ($583 million) outside Germany, she indicated. Of that, around €200 million ($233 million) would come from platform harmonization and lower spending on vendors, while another €200 million ($233 million) would result from the simplification of technical services. PSTN shutdown outside Germany would deliver savings of about €50 million ($58 million), said Nemat. (See Deutsche Telekom Turns On Pan-European IP.)

Next page: Brutal automation



Brutal automation
It should deliver even bigger savings in the domestic market. Under its new cost plan, Deutsche Telekom expects to realize €750 million ($875 million) in savings from all-IP transformation and the sale of real estate. The other €750 million ($875 million) is to come from cuts to the workforce as the operator continues to automate processes. Deutsche Telekom refuses to say how many jobs may disappear, but the scale of the savings target points to a hefty reduction.

Overall employee numbers at Deutsche Telekom, including its US business, fell from nearly 230,000 in 2012 to about 217,350 at the end of last year. But the cuts have not been as precipitous as workforce reductions by some other telcos. In Germany, in particular, trade unions and the civil-servant status of some employees have been obstacles to layoffs. On this front, Deutsche Telekom is suddenly encouraged. Most cuts, it says, will happen thanks to agreements, such as a phased retirement deal that will kick in at the end of this year. (See Efficiency Drive by Major Telcos Has Claimed 74K Jobs Since 2015.)

In its capital markets day presentation, Deutsche Telekom provides some inkling of how automation could deliver savings. Among other things, it is using software bots to automate repetitive tasks, and had around 1,500 in operation last year. There is also a growing reliance on "chatbots," which can be used instead of people to address customer queries. (See DT Trumpets Automation Savings Worth '800 Employees' and Chatbot Takes Charge: Vodafone's Customer Services Overhaul.)


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On the networks side, too, Deutsche Telekom has made automation a priority in the last few months. Last October, its deputy chief technology officer, Arash Ashouriha, said his ultimate goal was to develop networks that could function without people. "We now have a vision of zero-touch network service management with no human involvement," he told an industry conference in The Hague. "Brutal automation" is the only way to go, he said. (See DT: Brutal Automation Is Only Way to Succeed and 'Brutal' Automation & the Looming Workforce Cull.)

But as recently as March, Deutsche Telekom was complaining about the lack of automation at pan-net facilities in Romania. And it continues to harangue suppliers about the interoperability of their technologies. "A lot of our vendors have been ready to orchestrate on top of their functions and their infrastructure," said Jean-Claude Geha, the chairman of the pan-net subsidiary, at this year's Mobile World Congress. "That is not our ambition. We want more. We want vendors to be able to orchestrate across other vendors. We want no lock-in." (See DT Demands Automation, Cloud Tech From Pan-Net Suppliers.)

Using vendors as a punching bag has become standard practice for operators in recent years. Yet Deutsche Telekom's managers must take some of the blame for the recent failure. There is no doubt they massively underestimated how difficult the all-IP and pan-net initiatives would be. (See NFV Is Down but Not Out.)

"The top-down project is seldom rooted in the realities of the operation," says Nordström. "In the back end of the business there are legacy platforms and processes that are hard to change." For any operator working on a change program, Nordström advocates assembling a so-called "dream team" of experts who understand the systems and how interlinked they are. "If you have only the top-down approach you will miss important details." With its modest targets for sales growth, and facing threats on the commercial and regulatory fronts, Deutsche Telekom may not be able to afford another €1 billion shortfall.

— Iain Morris, International Editor, Light Reading

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