Many communications service providers (CSPs) struggle to extract value from information and communications technology (ICT). We believe this is strongly due in part to an obsolete business-to-business (B2B) customer-segmentation approach. In this Viewpoint, we propose a refreshed segmentation tactic that better positions telecom operators to capture the promising growth that ICT products and services can deliver.
Most CSPs fail at capturing value from ICT market growth. But is this by nature? We think not.
The ICT services market is growing at a CAGR of 8%-15% in most markets and is bigger than the connectivity market in most countries. However, many CSPs have not achieved their aspirations to capture any needle-moving value from this segment. This is because they are struggling with a fundamental set of questions: Is the investment justified in the longer term? Is ICT a “promised land” that’s hard to find? What’s needed to conquer it? Would the fact that CSPs already have a salesforce paid for by connectivity provide a sustainable cost advantage? Or does this promised land not exist, and CSPs should instead focus on efficiency and managing the deflation that software brings to connectivity?
In this Viewpoint, we make the case that the current segmentation used by most CSPs is at the heart of their mistakes. We believe that the way most CSPs segment and approach the market — and consequently tune their value propositions, organize their go-to-market, and eventually invest — directly results in “not winning” in ICT. To date, the wrong segmentation has hindered CSPs’ ability to profitably identify, propose, and close ICT deals.
So, yes, focusing on efficiency in connectivity is a safe bet. It is indeed the strategy to follow if the CSP’s position does not warrant a larger play. If pursued, however, efficiency and automation must be ruthlessly applied. Eventually, though, CSPs will need to accept that an increasing part of their connectivity business will fall prey to software players, disintermediation, and lower-margin wholesale revenues.
But it is absolutely possible for CSPs to capture value in ICT.
To capture ICT growth, many CSPs emulated system integrators with limited success.
When building system integration–like professional services[1] capabilities (which we differentiate from managed services[2]), the competitive disadvantage couldn’t be starker:
A few CSPs have been successful as system integrators. Swisscom hosts many core banking platforms, hundreds of SAP installations, and more. Similarly, Magyar Telekom has been successful, as has STC with its subsidiary STC Solutions, Singtel, SoftBank, and others. Success hinges on the convergence of certain market conditions, including:
However, most CSPs have experienced significant difficulties in maintaining profitability, as reselling margins are slim and upsides for incremental professional services are limited, while effort and risks are substantial. For some initiatives, the jury is still out. Orange Business, for example, has begun developing professional services that span the Internet of Things (IoT), industrial automation, cybersecurity, and more, focusing on clients globally, including off-footprint clients. However, Orange has yet to manage profitability. In another example, Telia’s Division X has grown beyond Sweden’s footprint into the broader Telia footprint, growing quickly and profitably. However, while there are few examples of ICT successes by CSPs acting as system integrators, we believe that cracking the code of B2B segmentation is the real key to ICT managed services’ success.
Many telecom marketing professionals believe size-based segmentation is the best and only approach. We think they are wrong.
The ideal segmentation for B2B ICT services for CSPs would have a limited number of segments with a high level of similarities in required solutions within the same segment and, to a certain extent, across segments. The segments should optimize for channel costs while being suitable for value-up business cases rather than cost-down ones.
Any ICT-relevant market segmentation must meet the following objectives:
Whatever segmentation that CSPs use impacts how channels, value propositions, products, campaigns, organizational structures, targets, key performance indicators (KPIs), and so on, are organized. Thus, changing customer segmentation is fundamental to the why, what, and how CSPs can play bigger in ICT.
Traditional B2B segmentation is unfit.
Often, segmentation is based on size, industry, or product (see Figure 1). Each segmentation paradigm shapes organizational mindset. Size-based segmentations are fit for uniform products — not for ICT services, which focus on channel cost optimization.
Size-based segments may be delineated by number of employees, revenues, total spend, and so forth, none of which are perfect, as each has different advantages and drawbacks, but they all give a proxy for size. Any size-based segmentation is suitable for selling common products that fit across segments (e.g., undifferentiated SIM cards, phones, fiber). Such segmentation serves best in managing channel costs. It allows for differentiating care, managing client complexity, handling price-related governance, and so on. However, customers’ digital journeys can’t be clubbed into T-shirt sizes. There is too little similarity between them.
There are three reasons size-based segmentation doesn’t work for ICT businesses:
Can vertical segmentation work? No!
The verticals that CSPs usually go after include manufacturing, healthcare (e.g., Telia, DT, BT), mining (e.g., Telstra, ATT), and automotive (e.g., DT, Vodafone AT&T). This helps CSPs better understand the industry but a closer look shows this approach falls short:
We believe “place type” is appropriate for most CSPs.
CSPs need to deploy a segmentation that allows them to identify, address, and convert opportunities that can fund the go-to-market effort. We want as few segments as possible with as high of similarity as possible that lead to proposition areas suitable for value-up and optimizing channel costs. There are myriad ways of segmenting, but some don’t lend themselves to identifying addressable commonalities. Figure 2 illustrates a rundown of segmentation options.
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