SME bundling: strategies for operators
Terry van Staden, enterprise analyst and Tom Rebbeck, Director of Enterprise and IoT at Analysys Mason talk through the findings from our recent report on SME bundling strategies for operators: building an ICT portfolio for SMEs.
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Video and podcast transcript
Hi, I'm Tom Rebbeck, research director of Enterprise and IoT at Analysys Mason. I'm here with Terry van Staden, who's one of the analysts on the enterprise programme, who's going to be talking through some of the findings from our recent SME bundling report.
Terry: Yes, hi, so today we are going to be doing a short video on our SME bundling strategies for operators: building an ICT portfolio for SMEs report. Operators' interest in ICT services comes from three primary needs: first is to differentiate their proposition and then to enhance the stickiness of their products and reduce churn and possibly to generate new revenue.
Tom: talk us through the first slide
Terry: Here we have presented the total value in growth rate for traditional connectivity and ICT services between 2017 and 2022 for each SME segment. And we have put the traditional connectivity services as the large dark blue bars and the ICT services as the light blue bars. From this chart we can see that connectivity accounts for almost 95% of operators' sales from SMEs worldwide, and ICT services only accounts for 5%. The fundamental implication of this is that given the low value of ICT services why should operators be investing in it?
Tom: The large dark blue bar is the connectivity offering, then the light blue that is the spend by SME's with operators, not their total ICT spend – just their spend with operators. You can see the traditional connectivity has got a little bit of growth for Micro, 0.4%, but for the small and medium it's declining 0.8%, 0.7%. Where there is you have got growth in the ICT services 11% for Micro, 6% for small and 5% for medium.
Terry: From this chart we can see that almost all growth from SMEs will come from ICT services and particularly from the micro enterprise segment which we feel is a largely unaddressed opportunity by operators.
Terry: From this chart we've plotted the three typical approaches of operators to ICT services. The first approach is operators who will avoid ICT services and focus exclusively on connectivity. This means that operators don't have to adjust their sales and support processes and they don't need to invest in new services. However, they may be forced into competing on connectivity aspects alone and therefore be forced into price competition.
Tom: So, this could be a provider just selling broadband where it is going to struggle not to have to compete just purely on price?
Terry: Yes, and they will also be competing against competitors who have a more complete offering which they may find difficult.
Tom: By more complete – including more ICT services.
Terry: Yes. The second approach which is where we think most operators want to be, at least in the short term, is using ICT services as a tactic to differentiate connectivity. This has the added benefit of decreasing churn through stickiser products and increasing differentiation through a more complete portfolio. However, the value of these ICT services tends to be a lot lower than connectivity which can have a potential negative impact on margins.
Tom: So, the values are lower but it's also harder to make profits on them but that may not matter if it's being sold as a bundle where the tactic is to increase the stickiness and the value of the customer.
Terry: Yes, so operators will measure the success of this approach through new customers gained and through decreased churn which is value enough.
The last approach is bundling as a strategy where operators view ICT services as a new business with its own agenda. The benefit of this is that operators have the potential to explore high value services and generate new revenue and margin. But the disadvantage is that this requires significant investment and commitment from operators particularly with reforming sales and support processes.
Tom: In terms of where these three different approaches fit. No bundling obviously works with all segments, bundling as a tactic also works with all segments from micro up to medium. Bundling as a strategy is that more applicable to small and medium?
Terry: To the larger SMEs certainly. Micro and very small enterprises don't have much of a market for high value ICT services and operators who want to explore the full value ICT services will need to target the larger SMEs.
Terry: on this chart we have tried to assess the interest levels for operators in the different ICT services and it is based on multiple criteria. The first which we have put on the Y axis is the growth rates for each ICT service and on the X axis we have the total value of each ICT service. But we have also put in several qualitative factors such as how closely do these services align to operators' core connectivity propositions. From the chart we can see for example SaaS is of fairly high interest to operators because it is of high growth and high value.
Tom: So the green means it is of more interest to operators, so unified comms, SaaS, security of more interest to operators whereas the red, the desktop management and platform as a service is of less interest.
Terry: Yes, desktop and platform management are low value services and high growth and they will be difficult markets for operators to penetrate. Whereas services such as unified communications and security are closely aligned to operators' core portfolios and therefore of high interest to operators.
Tom: And closely aligned this idea of using ICT as a tactic to support the core connectivity business.
Terry: Here we've had a look at the sales approach and examples of key ICT services for each SME segment. So, in the micro enterprise segment the fundamental challenge operators face is migrating micro enterprises from consumer grade packages onto enterprise grade packages. However we think that basic ICT services such as antivirus backup and storage and Office 365 when bundled with connectivity has the potential to move micro enterprises onto more valuable connectivity packages.
Tom: Again it's back to this tactic thing, you are not going to make big margins reselling Office 365 but it might support your broadband offer.
Terry: Yes. The main goal for micro enterprises is to get them onto better connectivity packages, whereas the ICT services in the segment won't generate much value for operators. In the small enterprise segment operators typically operate through a very indirect approach or through small resellers which are much better placed to address SMEs needs. The key ICT services for operators in this segment are again fairly basic such as security services colocation and Office 365. Lastly for medium enterprises operators have the opportunity to take a more direct approach and explore the full value of the ICT market through high value ICT services such as managed security, managed cloud and unified communications.
Tom: This is where for operators that want to there maybe potential to earn additional revenue beyond the core connectivity services.
Terry: Yes some of the larger SMEs will be interested in high value ICT services from operators. And there is a market for operators to capitalise on this opportunity.
Tom: Just one question - the sales approach is you got this inside sale so indirect and direct is fairly clear. What do you mean by inside sales?
Terry: Inside sale is more of an upselling technique where a sales agent would contact customers via a phone for example and try to upsell their various ICT services.
Terry: In summary operators should look to ICT services to both defend and generate revenue from SMEs. However operators should be clear about what their strategy is and measure their success accordingly. We think that operators should explore the simpler ICT services first and get good at that before becoming a more complete ICT provider.
Second - operators should select ICT services that are closely aligned with their core connectivity services and have the most potential to differentiate the core portfolio.
Lastly - operators should address the difficulties in sales and support and tailor their strategies to each segment. This will likely be the greatest challenge operators face in the market. However in our report we outline steps to address these challenges and help operators capitalise on this opportunity.
This video comes from our strategy report SME bundling strategies for operators: building an ICT portfolio for SMEs. Please refer to our website for further information on this and associated reports including Worldwide forecasts and Enterprise surveys.
Upcoming research for 2018 include the 2018 survey reports, global forecasts and differentiating services for the SME market.
If you have any other questions, please don't hesitate to contact me. Thank you.