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Derek McManus on Using Technology as a Differentiator

An Interview with the Chief Technology Officer of Telefónica O2 UK
February 16, 2010 by Ralf Dreischmeier
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  • About This Podcast

    Recorded

    30 Oct 2009

    Speaker(s)

    Derek McManus, Chief Technology Officer Telefónica O2 UK

    Ralf Dreischmeier, Partner & Managing Director, The Boston Consulting Group

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    Derek McManus recently spoke with Ralf Dreischmeier of BCG about technology’s role in the rapidly evolving mobile-communications industry, how O2 is using technology to its advantage, and the transformation he is leading to drive that effort—in short, his company’s use of technology as a strategic weapon.

    Derek, the mobile industry’s competitive backdrop continues to shift. What do you see as today’s key challenges for industry participants and in particular for O2?

    It’s all about data. We’ve seen a general explosion of data over the last several years, and over the last 18 months or so we’ve seen that explosion happen in mobile. This has three implications for the industry and O2. First, customers are now using data completely differently—they’re on the move, and they’re always connected—and their expectations are changing very quickly. So the first challenge for us is to understand and deliver what customers need—and to do so in a way that’s different from our traditional model. Challenge number two is about the economics of data. How can we monetize customers’ demand for data? And how do we change our investment in technology to support the necessary delivery capabilities?

    The third challenge is a combination of the first two. Because of data, we have to change how we run our business—how we market, how we service, and how the technology teams underpin the capability. And we need to do this in a way that keeps us apace of the changes happening in data while we simultaneously run our business from day to day and continue to be successful in our marketplace.

    What role does technology play in the industry’s dynamics?

    Technology is a fundamental part of this revolution. And consumers are increasingly savvy about it. Not long ago, the big brands would have to tell customers about a new technology and how to use it. But that’s gone. Customers now are more comfortable with technology than they’ve ever been. They don’t necessarily need the big brands to tell them what to do, because they have options and can do a lot of it for themselves. So yes, technology is a fundamental part of this connectivity world. The challenge for us is to make it relevant, make it intuitive, and make it valuable. Because if we don’t, customers can quite easily find another route.

    A complicating factor is that, as an industry, we anticipated that customers would continue to consume more and more data. And we designed and dimensioned our networks based on that expectation. But what we’re actually seeing, particularly with some of the smartphones that are on the market today, is that many of the applications customers are using really don’t consume a huge amount of data. Instead, they’re what I’d call “chatty.” They’re based on real-time updates or very snappy conversations.

    So a challenge for us and the rest of the industry is that we were dimensioned on volume but now have to dimension on processing power. And it’s a real labor, because we have to measure different things and work with the people who provide the equipment across the network to redimension the whole network. It’s proving to be very challenging from a technical point of view.

    It sounds like O2 is essentially reinventing its business.

    Yes, we are. But it’s a new world and O2 needs to move with it. Our customers are always connected to each other, either online or via their mobile phones. As a result, we asked ourselves: How do we interact with those customers in that medium? How do we become much more of an online business, so that when customers are online, we’re there and easy for them to do business and interact with?

    We determined that we needed to move away from our traditional business of being a mobile operator and toward becoming a trusted brand for customers. We want to manage many services for them, not just voice and text. So our aim is to become a connectivity service brand. What this effectively means is that we want to provide customers with really neat products, like an Apple or Amazon does—products that are intuitive and easy to use. As an example, we just launched an O2 money card, based on the idea that the three things that customers carry around with them all the time are their keys, their mobile phone, and their wallet. We reasoned that if we could somehow leverage that idea and our own capabilities, we could grow our business.

    We also want to provide customers with great service so that they actually want to do business with us. Those challenges—great products and great service—are what we think people will value and what will separate us from the competition.

    As part of O2’s overall transformation agenda, you have also launched a very specific technology transformation. What motivated that launch?

    I started the transformation program, which we named “50/50/50,” about two years ago. What drove it was our view that the economics of the business were changing and therefore our business model had to change. The specific challenge for the technology people in our organization was that they would not only have to transform themselves, they would also have to get there before anyone else so that they could help the rest of the business in its transformation. So we had an ambitious agenda.

    Why did you call the transformation “50/50/50”?

    The program actually had four key goals. The first three were to reduce our cost base by 50 percent, improve our time to market by 50 percent, and raise our return on investment by 50 percent—hence 50/50/50. The fourth goal was to provide people and skills capabilities that make O2 the best technical place to work in the United Kingdom.

    With regard to the numbers, the economics and our projections were telling us that we probably had to improve on those dimensions by “only” about 30 percent. But to me, 30 percent is an incrementalist strategy. So we went to 50 percent primarily for what it says to our people, our business, and our partners and suppliers. It says that the program is about real transformation. To achieve the 50 percent targets, you can’t just move incrementally. You need to stand back and think fundamentally about doing things differently.

    That’s quite bold in terms of goals and objectives. What was the reaction within the technology group and from the business when you announced it?

    From the technology team, it was denial. They heard it but really didn’t believe it—particularly my management team. I spent probably a year with my management team repeatedly going through the implications of 50/50/50 until they understood that this was part of what they had to do every day. The rest of the business didn’t believe that we were serious. So the reaction was a bit of both denial and disbelief.

    What happened in the first few months of the transformation?

    We made good progress, and I think mobilization was key. We had a number of important conversations within technology, across the business, and with our outside partners. The great thing about 50/50/50 is that, because it establishes very concrete targets, there’s no room for argument. If one of my suppliers told me that they could cut costs by 20 percent, I’d say, “Which part of 50/50/50 don’t you understand?” So that part was nice and clear.

    The conversations we had on the inside were similar. Someone would say to me, “Derek, do you really mean 50/50/50? Surely you don’t.” And I’d say, “Yes, I do.” But once we’d had that initial conversation, the discussion would quickly move on to, “So, does this mean we don’t have to do this anymore, or we don’t have to do that anymore, because we’re now doing things differently?” And at that point I was essentially letting go of the problem, because they were taking it on themselves. And they were experiencing how refreshing it is to be able to attack something in a different way.

    But the conversations I had with my leadership team were probably the biggest challenge. They’d come into my office and tell me it couldn’t be done, and I’d say, “Well, do you want us to rename the program ‘20/20/20’ or something similar? It’s going to be pretty awkward, since we’ve already taken credit for taking on this challenge.” So there was resistance. All told, it took a full year to reach the point where my team was saying, “There’s no point in saying it can’t be done, because it has to be done.”

    You said you’re about two years into the transformation. Where are you in terms of both timeline and achievements?

    From a cost point of view, we are two-thirds of the way through and more than two-thirds of the way to the target. In fact, I would say we’re probably only about 15 percent short in terms of achieving the target. So it’s been a fairly sizable challenge, but I’m pretty confident. For return on investment, we’re there—in fact, we’re exceeding the target.

    Time to market is probably the biggest challenge we’ve had. We’re now radically looking at how we do our IT and bringing in a number of skills and approaches that are closer to Web 2.0 and Internet-type approaches than they are to traditional IT. In fact, we feel a bit like pioneers with our IT, both within our business and as part of our parent, Telefónica. But we’re beginning to get some traction, and I would say that, of the three 50s, time to market is the one I’m now most excited about. And as a result of what we’ve done, our innovation capability has risen dramatically—because we believe that the only way we can really achieve our goal sustainably is through innovation.

    Meeting our people target has been a challenge because, as part of any transformation, you do many different things to the shape and size of the organization. But we now have a cultural change capability and a training capability that I’m really excited about. We’re also now pulling a small number of key people in from outside and moving a number of people into roles that are oriented toward the future. All of this leaves me very excited about the capability of the organization going forward.

    What do you think the critical success factors have been for what the transformation has achieved to date?

    I think the clarity of the statement—50/50/50—has really helped. A program called 50/50/50 is a real attention-getter, particularly with engineers. We could have given the program a different name, perhaps an ethereal one that was a variant on a word from another language that meant change or transformation or something similar. But I don’t think engineers would have engaged with that. By naming it 50/50/50, we made it very easy for them to understand what we intended. So I think that the name was a critical success factor. I also think that the management and leadership team demonstrating real commitment in actions, as opposed to words, was critical. The last key factor was getting some successes on the scoreboard early.

    Are there any lessons learned thus far or things you would do differently?

    I would have tackled innovation and time to market earlier. I think we focused too much on the financial side early on, although we did that for a good reason, because we knew we’d gain credibility once people could see the money landing on the desk. But having reached the other side, I wish I’d started innovation and time to market a lot earlier, because it’s a real challenge now to hit those targets.

    What type of leadership style was required to get people to buy into 50/50/50?

    Foremost, it required a team effort, since the transformations we had to go through couldn’t be done in pockets—they had to be done on quite a broad basis. It also required a lot of effort invested in getting people to open up. Resistance to change comes in many forms. And what I found in the first year was that resistance would come when people were really personally uncomfortable with the change they had to go through. It would manifest itself in offering technical reasons for why things couldn’t be done. So we spent a lot of time with the management team to get our engineers to open up on an emotional level as well as on a practical level, which was no mean feat with my leadership team. But as a result of these efforts, we’re now able to have much more honest, meaningful, and productive conversations than we were two years ago. So that element has been very important in implementing 50/50/50.

    Did the arrival of the downturn have any impact on the transformation?

    It heightened the sense of urgency in terms of the cost agenda, certainly. But we had already taken out a significant amount of cost and were therefore ahead of the game, so the downturn found us in a relatively strong position. But this was more about luck than insight, since none of us foresaw the downturn.

    Are there any additional or future challenges for O2 in general or the technology function in particular that you can foresee coming on top of 50/50/50?

    We have several challenges facing us. One is determining the next act. When I went to my colleagues in Telefónica and said that I was doing 50/50/50, they were skeptical. But about a year and a half into it, they told me they really liked 50/50/50—and that I should do it every two years! I nearly fell off my chair when I heard that. But there’s an element of truth there, because a transformation on the scale of this one really has to continue. You can’t just do it for three years and then sit back and admire what you’ve done. So I’m now thinking about what the follow-on is.

    A second challenge, and perhaps our biggest one, is to change our operating model to be much more regionally and globally based. We should be developing services on a global level, and we should have technical interfaces that simplify doing so. Another big challenge for me is, how do I innovate like a small company when I’m part of such a large one? How do I drive the U.K. business forward but also make the corporation feel comfortable moving quite dramatically away from its comfort zone? And I’m recognizing that a lot more of my conversations now are around whether people’s heads and hearts are comfortable with the next set of transformations that I think we need to do.

    How important a role does innovation play?

    Last summer we held a series of conferences that were all about innovation. We think it’s vital, and we’re trying to actively engage everybody on the technology team. We’re also defining innovation broadly. We believe it’s about more than fancy products and designs—it’s about staying one step ahead and looking at things differently. And this applies to everything and everyone. It applies as much to the people who are monitoring the network, who are thinking about how we might do things in a different way that enhances efficiency and the customer experience, as it does to product design.

    In short, I think innovation will be how we succeed. This is particularly true because, through 50/50/50, we’ve already addressed the really obvious things that we needed to do to become leaner, quicker, and faster to market. So now we need to look for things that aren’t obvious, or maybe are risky or are things we’re uncomfortable with. And we feel that if we can develop a workforce that is engaged in innovation and feels comfortable expressing itself, we’ll be in good shape. Innovation will be how we succeed.

    Do you have dedicated innovation capabilities? If so, how do they relate to your broader innovation campaign?

    I have an innovation team, and part of its job is to engage the entire organization. Telefónica offers a lot on the innovation front. It has a considerable amount of engineering resources devoted to innovation, and I’m trying to leverage those in the United Kingdom and apply them to the customer. One way we’re doing that is through something we call O2 Crowd, which is essentially a vehicle for the internal “crowdsourcing” of our own ideas. We post ideas and encourage the organization to react. This is something that we see tremendous value in because the customer-service agents who talk to customers, or the engineers who go out and do things in real time on our network, often have more ideas about how to make things work than the specialists sitting in the ivory tower. So yes, we have a separate innovation function. But part of its job is to make innovation accessible to the wider community.

    You said that there was disbelief from your colleagues on the business side when you announced 50/50/50. What does the business think now of the technology group and its efforts?

    We’re being held up as an example. In fact, all of O2 UK is now engaged in a transformation program. Telefónica is also holding the U.K. technology team up as a model of the type of success that’s possible. So 50/50/50 has become part of the company’s vernacular.

    What would be your advice to other CTOs and CIOs who plan to embark on a similar journey?

    I think it’s critical that you make what you’re trying to do really clear so that people understand it fully. There shouldn’t be any myths or misunderstandings about what the objectives are. I also think it’s important to engage with the people in the organization who want to engage with you. Lastly, I think it’s vital to lead by example. I’ve had to be very, very passionate about this effort from the start, because if I hadn’t been, we would have come off the rails very early. And that’s meant having tough conversations with my leadership team, tough conversations with my boss, tough conversations with the corporation, and tough conversations with the organization. So you need to put yourself under a bit of pressure. But I think as long as you’re honest and driven and clear, you can probably achieve your objective, assuming it’s attainable.

    Derek, thanks for your time.

    My pleasure.

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