Facing pressure from shareholders, Telkom looks set to outsource large chunks of its core business.
A Telkom strategy document in possession of the Mail & Guardian shows that the fixed-line telco is planning to outsource a substantial amount of its core business, including its network, the backbone of telecommunications in the country, as part of a restructuring process that it hopes to complete by August.
The document gives no indication of who would be the favoured party to handle the outsourcing deal. There is speculation that both local and foreign players will fill this role.
The document states that Telkom will announce a request for proposal (RFP) on May 30, inviting bids from companies interested in running its network operations, information operations and Telkom Direct shops.
The document does not quantify what proportion of Telkom’s operations may be outsourced, but outsiders estimate that it might involve as many of 19Â 000 of Telkom’s almost 26Â 000 staff.
Analysts told the M&G that if Telkom is indeed planning to outsource these divisions, it would amount to outsourcing a large portion of its core business. One analyst said the move was possibly because of a skills crunch that Telkom faces as it gears up for greater competition.
A source close to the outsourcing negotiations who wanted to remain anonymous told the M&G that the network operations division involved all of Telkom’s physical networks and the information operations division involved all of the IT services.
Under the Electronic Communications Act (ECA) there is an expectation that the major competition in the ICT sector will happen not at a network level but at a value-added service level, and this move could be viewed as Telkom positioning itself to take on its competitors in this space.
“The evolution to a converged world has put service providers such as Telkom SA under increasing revenue constraints, market and competitive pressures,” says Telkom’s strategy document. “Responding to these challenges Telkom has recognised the need to optimally leverage its internal as well as external capabilities of the industry.”
The document says that this will lead to an increased focus on customer service, the faster delivery of new services to the market, improved cost management and the sharing of risk with an accountable partner. It also states that it will allow Telkom to meet shareholder demand for increased value.
The move is expected to affect thousands of Telkom staffers who may be relocated because of the outsourcing strategy.
Labour union Solidarity issued a statement on Monday stating that Telkom was planning to outsource more than 90% of its activities. It called for a full investigation and for there to be regulation of any outsourcing process. The statement said 19Â 000 Telkom employees might soon be affected by the “intensive restructuring programme”.
Telkom says the statement released by Solidarity “borders on alarmist” and that the restructuring process was not about employees, but about responding to a rapidly changing ICT business landscape.
Telkom’s head of human resources, Charlotte Mokoena, says that outsourcing is just one element of the broader strategy for restructuring and that there are other options such as strategic partnerships and joint ventures.
The strategy document in possession of the M&G states that Telkom hopes to award contracts to the preferred bidder by August 20, however, Solidarity says such a crucial decision cannot be rushed.
“A decision of this magnitude cannot be taken in a hurry and all possible pros and cons will have to be weighed to safeguard the interests of employees and clients,” says Solidarity spokesperson Jaco Kleynhans.
One analyst, who refused to be named, expressed surprise when told of the August deadline, insisting that this was “really speedy” for the telco to take a decision, but that ultimately the decision to outsource may be a good one.
The analyst said potential local bidders could include players such as Arivia, Business Connexion and Didata, but a number of international players could also be in the running. He said that since Telkom announced its poor results last year, the “heat” has really been on it and it does seem like “panic is setting in”.
Another analyst who did not want to be named said there was a concern in the government that Telkom was a bit “headless” at the moment and “they need a new strategy”.
A senior executive at another large South African telco said that with the way the new licensing process was set up under the ECA, Telkom would have two licences — a service and network licence.
With more players being able to roll out and develop network infrastructure, the real competition is expected to happen at the value-added services level, with the network infrastructure just becoming a basic input cost.
An analyst said that the rationale for the failed merger between Telkom and Business Connexion, which was not approved by the Competition Tribunal, showed that Telkom saw the basic network infrastructure as a “commoditised service” and was looking to get into the value-added services market.
“The value-added services are going to be where you differentiate yourself from the competitors through quality or a particular skill set,” the analyst said.
Telkom’s response
Telkom’s chief of operations, Motlatsi Nzeku, confirmed to the M&G that it is considering outsourcing core business divisions and that it would affect the majority of the company.
“Network operations refers to the internal divisions that deal with national transmission and access networks,” said Nzeku. “Network operations is a core business for Telkom. Information operations refers to those divisions that deal with the building and operating of software systems and hardware infrastructure.
“It is important to note that capability management [redesign of operations model] is a programme that Telkom has embarked on to balance rapidly changing technology, speed of technology deployment, fluctuating demand and supply of services, capacity to meet market requirements and redesign of business process.
“The redesign of the operations model is aimed at extracting market scale and maturity. It is also aimed at improving operational efficiencies and building resilience to cater for fluctuating demand and supply of services.
“The selection of strategic technology partners and/or operations partners is at its early stage and there is no rushing through of any process.
“The preparatory work on capability management started last year with a ‘business summit’ discussion in which Telkom management shared extensively with the leadership of organised labour the rationale and insight for the revision of the current operations model.
“This preparatory work peaked early this year when management and organised labour carried out a joint benchmarking exercise on international trends in Europe, Australia, New Zealand and South America.
“The results of this exercise confirmed the company’s position to change the operations model. There are no numbers confirmed yet, but this change would affect the majority of the company. It is important to understand that the employability of Telkom employees is a major objective of this process.
“Although they may no longer work for Telkom, they will be able to find employment in entities that offer services, not only to Telkom, but to other operators in the telecommunications arena.”