How much will be jointly procured, and with what results?
At a press conference in London this morning, executives from DT and Orange added further details to the announcement that they will form a joint procurement function by the end of 2011.
Mobile Europe has compiled a Q&A to address the key matters arising from the announcement. You can see the basics of the agreement here. In essence, the JV will be spending €13 billion a year after three years, achieving savings of €1.3 billion across both operators.
Why are the operators doing this?
Market pressures – a growing demand for more bandwidth and connectivity from customers, allied to competitive pricing pressures. Operators need to act more efficiently to allow them to compete with their global rivals, who can already operate on these economies of scale.
Are Orange and DT combining everything they spend?
No. The operators see a combined spend of €13 billion flowing through the joint procurement operation. The operators’ combined total spend at the moment would stand at around €40 billion, according to Olaf Swantee, Executive Vice President Europe and Sourcing at France Telecom-Orange.
“The €13 billion represent the current overlap on the four selected areas of networks, terminal equipment, service platforms and the parts of IT we’ve included into JV” said Kozal. “That’s not accessible to us on day one. As contracts come up for renewal or are renegotiated then the 13 billion becomes accessible to the JV.”
Where will the greatest savings come from, as a result of this JV?
The operators have outlined four areas of procurement co-operation – network equipment, customer equipment, service platforms and internal IT – through which they hope to drive €1.3 bilion in savings.
Swantee said that the largest single area of saving would be from network equipment procurement. However, he added that the operators would not have included terminal equipment if they did not think there was an opportunity there. The operators purchase 45 million customer devices between them currently, Swantee said.
Edward Kozel, Chief Technology and Innovation Officer of Deutsche Telekom, pointed out that both operators already purchase many of the same smartphones, for example. “There is already a large overlap in terminal equipment, and therein lies the opportunity,” he added.
“At the same time there is commoditisation of one part of the market (neworks), we have fragmentation of the customer facing part of the market. This [agreement] allows our companies to focus attention on that part of the market to provide a better customer experience and competitive advantage,” Kozal said.
Does this mean that the operators will merge their technical roadmaps, to enable joint procurement?
This question was slightly fudged by DT’s Kozal, who emphasised that the operators would press for harmonisation on standards from vendors. “The question of how we mutually drive further standards is part of this agreement, and our respective technical organisations will be working together to push industry standards and more common technology platforms.”
That said, standards and common platforms are not the same thing as two operators specifying the same vendor. But with network equipment earmarked as the greatest single area of savings, it seems likely that we will see more combined purchasing being brought to this area. There is already a substantial overlap, Kozal said.
Will savings be passed on to customers?
Swantee said, “I am absolutely certain that the efficiency we generate will absolutely be used to be even more competitive in the markets where we operate.” Kozal said, “Ideally some savings would be available in the price of terminals, and for some smartphones we may see better prices [than are currently] available.”
Will people be made redundant as a result of the creation of the JV?
Swantee: “It’s absolutely not our intention to make savings by reducing head count.” The JV will have a staff of 200, with offices in Paris and Bonn. It will have a single CEO, with four board members (two from each company).
Is the JV bad news for suppliers, who will see greater pressure on their own margins?
In the long term, Swantee claimed, suppliers will benefits by being offered access to a greater number of markets. It will also allow suppliers to harmonise and focus their R&D, he claimed.
There’s little doubt, though, that as the aim of the JV is to drive procurement savings, those savings will fall on the suppliers.
Of the targeted annual €1.3 billion saving after 3 years, €400 million falls to DT and €900 million to Orange. Why is Orange benefitting from greater savings?
The answer appeared to be that DT is already operating more efficiently that Orange, and will therefore generate fewer savings initially. On a like for like basis, in the long term, the companies envisage equal savings accruing to the two partners.
Orange’s Swantee said, “This is about enhancing our processes and functional capability. Both companies are large distributed organisations, operating different models.”
What regulatory clearances are required?
The operators will require anti-trust approvals in Germany, Poland and Austria, and in Romania and the Czech Republic, where the two companies are competing. This is a non-collaborative JV, so the EC will be informed but the companies don’t anticpate needing specific approval. Clearances are expected in the summer time, Swantee said.