The myths of transformation

Martin Creaner
10 Mar 2010

Business model transformation is in many ways the most fundamental form of transformation, as it tends to address the core of how the business makes and recognizes revenue. The most common form of business model transformation being considered at present is the shift from generation revenue from the users of a service, to providing the service free to the users and generating revenue from third-party advertisers.

The third myth is that transformation is all about squeezing costs, in particular labor costs, out of current operating models. Without a doubt, this is an attractive first port of call for any organization looking to reinvent itself or embark on a process of continuous improvement.

However, focusing entirely on the topic of cost reduction tends to produce short-term wins and longer-term stagnation. All transformation initiatives must keep their eyes firmly fixed on the three aspects in the eternal business effectiveness triangle that underpins our industry:  cost reduction, new revenue generation and customer experience. By placing too much emphasis on one aspect of this triangle, and ignoring the other aspects, we create an unbalanced business model.

For example, an organization that focuses too much on downsizing tends to create problems with customer service, which then causes customers to churn. Likewise, a company that focuses too strongly on new revenue growth tends to rapidly lose control of its cost base and ability to manage the customer experience.

History has shown us again and again that this sort of one-sided approach to business tends to require an eventual compensating activity, and in the process an organization often loses momentum. Undoubtedly, there are times when a myopic approach to one of the aspects becomes unavoidable, but at the very top of the organization, every on-going transformation effort has to bear in mind the three corners of the triangle and attempt to maintain a balance among them. The fourth myth about transformation is that it is solely an inward focused activity. In a communications world increasingly reliant on complex, multi-player value chains, all the transformation activities of an organization have to be both inwardly and outwardly focused.

While the bulk of the revenue from communications over the past century has derived from voice-related services, it is clear that the bulk of the profitability from the next two decades will come from much more complex services that involve content either generated by the user or delivered to the user in a timely fashion. It will also involve much more complex business models that extract an economic wage via differing mechanisms such as advertising-based models, etc.

Any company that has ambitions of being successful in this new environment has to accept the fact that they will be one of many players involved in the creation and delivery of a given service, and so their transformation activities must make them better capable of building effective, flexible partnerships with both suppliers, customers and competitors.

Martin Creaner is TM Forum president and COO