Business Transformation

Wake Up & Smell the Coffee, Telefónica

What can a 94-year-old Spanish telco possibly learn from a 152-year-old Swiss food-and-drinks maker?

Quite a bit, according to Angus Ward, the CEO of digital platform solutions for BearingPoint, a software and consulting company.

Both network operator Telefónica and food giant Nestlé have wrestled with big transformation projects in the past. But while Nestlé's revamp of its coffee business was as silky smooth as a Le Maistre-endorsed cappuccino, Telefónica's former efforts at "digitization" left well-wishers sputtering over their breakfasts. (See Spirent Passes the Coffee Test.)

As Ward recounts, Nestlé faced a potential decaffeination crisis when consumers began to lose their taste for its Nescafe Gold Blend range of "instant" coffee granules, despite all the good advertising work that Anthony Head (of Buffy the Vampire Slayer fame) and Sharon Maughan had put in starring as neighbors whose romance brews over a mutual enthusiasm for crap coffee.

Nestlé's response was to incubate a premium coffee business -- today's Nespresso -- selling machines and the capsules that go with them. In the 21st century, it has taken off and is now a massive revenue generator in its own right. George Clooney has replaced Anthony Head as Nestlé's chief coffee evangelist: Commercials depict him failing to protect his beloved Nespresso from a succession of glamorous women more interested in George's coffee than in George.

Just to clear up any possible confusion, this isn't George Clooney.
Just to clear up any possible confusion, this isn't George Clooney.

Telefónica appeared to start out on the right path, setting up its Telefónica Digital business as an entirely separate venture in 2011. But three years later, the Digital unit was closed down and chopped up in a round of "restructuring." Bits of it were sucked back into the mainstream connectivity operation, including CEO Matthew Key, who ended up bossing Telefónica's O2-branded UK subsidiary.

"We were all confused," said Ward, during a conversation with Light Reading at last week's Digital Transformation World event in Nice. "Maybe they felt they needed to focus on networks, but everyone was asking why did they kill the business."

The decision was clearly a mistake, as far as Ward is concerned. He points out that Telefónica was one of the worst-performing companies on sales development in a ranking of the world's top 30 communications service providers by market-research firm Gartner.

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It wasn't a complete surprise, though. Going back to their connectivity roots is what operators typically do when faced with adversity, says Ward. The real surprise, perhaps, is that Telefónica Digital was ever a separate venture. "The telco model would be to keep everything in the Gold Blend business and then, when times are hard, say we only make coffee granules," he says.

Ward is especially critical of European operators, too. "Europe is incredibly cautious and very slow-moving," he says. That contrasts with some of the recent activity in the US market, where AT&T's takeover bid for Time Warner Inc. (NYSE: TWX) is one move that Ward deems potentially exciting if the operator can make it work. (See AT&T Shakes Industry With $85B TW Bid.)

The examples of Telefónica and AT&T Inc. (NYSE: T) tie in with BearingPoint's broader message that operators need productive partner ecosystems to innovate effectively. In recent research, it points out that few innovations are born of the usual in-house telco environment.

BearingPoint's own software is designed partly to help operators align their IT systems with partners. In Europe, one of its biggest clients is the UK's BT Group plc (NYSE: BT; London: BTA), which has used BearingPoint's platform to help enterprise customers use services from the likes of Amazon Web Services Inc. and Microsoft Corp. (Nasdaq: MSFT) over BT infrastructure. (See BT to Unveil New Cloud Partners by Christmas.)

Operators are optimistic, at the very least. According to BearingPoint's research, about half of communications service providers expect their revenues to grow by more than 16% over the next two years thanks to partner ecosystems. Some 12% of them, moreover, are anticipating revenue growth of more than 25%. If those estimates are to prove accurate, telcos besides Telefónica will have to wake up and smell the coffee.

— Iain Morris, International Editor, Light Reading

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