Swisscom IT Services

Contents

Pictures

1 Introduction

2 The Swiss Telecommunications Industry Structure
2.1 Key developments
2.1.1 A maturing voice market
2.1.2 An increasing demand from customers for converged services
2.1.3 New market segments
2.2 Changing shape of competition
2.2.1 The Industry forces in Switzerland
2.2.2 Increasing competition by players from other segments

3 Client relative positioning - Swisscom‘s Key challenges
3.1.1 Swisscom‘s transformation challenge
3.2 Increasing shareholder value
3.2.1 Driving growth
3.3 Strategic priorities
3.4 Swisscom‘s organisational setup - and how IT services does fit into
3.5 Swisscom‘s Value Chain
3.5.1 Swisscom and its key processes
3.6 Swisscom IT Services
3.7 Swisscom IT Services - the status quo
3.8 The challenge

4 Strategic Choices for growth
4.1 The ICT value chain
4.2 The Target Market Small and Medium Businesses
4.3 The Swiss Midmarket and Size:
4.4 The IT Market opportunity in Switzerland
4.5 Scale and importance
4.5.1 Scale and characteristics of the opportunity
4.6 What is the competitive environment?
4.7 Sidenote: Why do Small Companies outsource so rarely?
4.8 Willingness to Pay for Service
4.9 Swisscom‘s perceived Value Curve
4.9.1 Current value curve
4.9.2 Future value curve

5 Recommendation
5.1 Expanding Swisscom‘s offerings portfolio to generate more revenue
5.2 Examples of potential services to be offered by Swisscom IT Services
5.2.1 Example 1: Desktop Services
5.2.2 Example 2: ERP Horizontal packages
5.2.3 Example 3: CRM packages and Sales Force Automation

6 Implementing the change
6.1 Transformation of the Business model - The On Demand model
6.2 The structural delivery
6.2.1 Deployment platform focus
6.2.2 Enterprise Server Hardware
6.2.3 Mass Server Hardware
6.2.4 Desktops and Laptops
6.3 Changing the organisation
6.3.1 Sales and marketing
6.3.2 Platform Delivery
6.3.3 Project Management
6.3.4 Portfolio management
6.4 Time- Sequencing the change:
6.4.1 Selecting the right entry markets
6.5 Setting vital Checkpoints
6.5.1 Market segmentation checkpoint
6.5.2 Checkpoints on organisational readyness
6.6 Overcoming obstacles - systematising the change

7 Conclusion

Appendix 1: Information on Swisscom and IBM projects, March

Appendix 2: 2003 Annual Results of the Swisscom Group

Index and abbreviations

References

Pictures

Picture 1 - Swisscom and the Macro environment - Key is here the national setting and the

governmental imposure as a still 60% publicly owned company

Picture 2 - Swiss Telecommunications Industry Market Structure - ―Porter‘s Five Forces Diagram

Picture 3 - The organisation chart of the Swisscom Group. Swisscom has a ―Nose In-.Hands- Out governance model, which leads to a selective top-down independence of the related businesses

Picture 4 - The Value Chain of Swisscom AG in total - after eTOM (e Telecom Operators Map)

Core elements are hidden in subsidiaries, which are interlinked

Picture 5 - Swisscom IT Services Portfolio is dominated by Data Center services and desktop services, mostly brought inhouse

Picture 6 - As Swisscom notes itself, the net internal revenue declines and the external revenue is not growing

Picture 7 - Swisscom‘s Generic Strategy Choices and its competitive stance

Picture 8 - The ICT Value chain. Growth opportunities that are still ―easy to capture are in the Managed Services arena. Consulting and Integration hence tends to be highly specialised and lives from key individuals

Picture 9 - Market by Segments in Switzerland, 2003

Picture 10 - Enterprise Spending into IT is increasing, mainly in IT Services

Picture 11 - The Global IT Opportunity in more detail - - Revenue in Millions

Picture 12 - Midmarket Spending for Solutions

Picture 13 - Market Opportunity in Medium Businesses Solutions and Services

Picture 14 - Market growth is back on track and it appears to grow again

Picture 15 - Services stack and competitive environment

Picture 16 - The application landscape of Swisscom Fixnet, provided mainly by Swisscom IT Services cannot be depicted any other than evolutionary

Picture 17 - The new strategy to deliver standardised IT Services in the SME Market space is depending on key success factors - in order to stand those factors, some resources marked in red need to be replenished

INSEAD CEP: Swisscom IT Services, Fuelling Growth Christoph von Gamm

Picture 18 - Potential Services - the communication centric services are mostly commodity like priced and are highly competitive, whereas the managed services tend to be custom made and thus have a tendency to de-focus

Picture 19 - The Siebel ―stack of pictures is quite exhaustive - several granular IT services can be provided around it and delivered to SMBs as packages

Picture 20 - Service Provider Delivery Environment - needed to deliver those multimodal IT Services to a mass of users

Picture 21 - the Services Provieder Delivery Environment (SPDE) of above is besides a platform strategy also a means to deploy services more rapidly (Source IBM)

Picture 22 - It is important to understand that Switzerland even though it is so small is divided into cultural zones. Swisscom, mainly residing in Bern should focus onto its Bernese region first and foremost to become successful in IT Services

Picture 23 - Setting vital Checkpoints during services creation

1 Introduction

Swisscom, Switzerland‘s largest Telecommunications provider released its annual results for 2003 on March 27, 2004. Swisscom states that has almost doubled net profits and have one of the most stable financial bases of all Telcos in Europe. With revenues of ca. 14,5 billion Swiss Francs (ca. 10 billion Euros), there was virtually no growth year over year. The total net profits after taxes did amount to 1.56 billion Swiss Francs, means, Net Profits of 11% on revenues after a 2002 respectable result of 824 million Swiss Francs. At the same time, Swisscom did release 6,2 percent of its personnel to now 19,207 people.

Yet the underlying growth assumptions on both revenue and profit remain shaky in light of increased competition and market saturation in all segments besides the advent of new disruptive technologies such as VoIP which are expected to erode the enterprise market voice segments, a key segment very soon.

In 2003, most profit growth came from less depreciation - which probably did indicate a prolongation of investment cycles in 2003. Strong revenue decreases happened in the large account sales segment Enterprise Solutions Segment already indicate a first sign of erosion of the enterprise market - be it to competition or to new technologies. Lower revenues in Swisscom Systems, the Telco Services arm. Swisscom IT Services generated 214 MCHF from external customers, of which 165 MCHF to AGI Banken, Real external customer 49 Million CHF revenues.

Its foreign Subsidy Debitel has been sold to the investor Premira soon, yet Swisscom took an extra goodwill depreciation of ca. 200 MCHF again.

Top line growth is still the issue. Mobile revenues also remained flat due to price erosion and despite the introduction of Vodafone-Live.

Swisscom is currently active in the three core ―product areas:

- Fixline: Swisscom‘s Fixnet subsidiary has a market share of 90%. Normal Telephony fixline and DSL / Data traffic fixline is under competitive threat by a major cable operator and under scrutinised investigation by the Swiss Monopoly Commission for Telecommunications (ComCom), which alleges Swisscom to overcharge access for the so-called ―last mile, the telecommunications access lines from the main branches to the homes. Double Numbers of subscribers in DSL do add growth yet do not compensate for price shortfalls and increased competitions in fixline business.
- Mobile: Swisscom Mobile - owned to 25% by the international operator Vodafone is currently having a marketshare of 65% whilst there is a market saturation of 82% of all Swiss population with GSM mobile phones. Currently two other operators compete for growth in a now saturated market. The current try of Swisscom to upsell its existing customer base through the introduction of Vodafone Live - Vodafone owns Swisscom Mobile by 25% is not offsetting the overall price decline. The introduction of a new Technology for mobile access ―EDGE together with Public Wireless LANs starts yet] does not show significant revenue impacts, yet.
- IT and Telco Services: Still, 85% of the IT Services arm ―Swisscom IT Services of Swisscom is ―captive, means that the internal IT of mainly the fixline division generating that revenues, whilst being under pressure to lower prices and rationalise. As a result, Swisscom IT Services undertook a major consolidation exercise and a reorganisation. The overall aim is to cut costs and to become more competitive on the external market. Swisscom‘s Telco Services arm, Swisscom Systems is trying to capture attention on the external market through PBX services, yet the overall revenues are still negligible.

The mandate of the main stock owners is to steadily increase profits. As a result of the overall trend to commoditisation of the offered products and an increase of competition in a saturated market, Swisscom is undergoing severe cost cutting exercises in the fixline and mobile area, which have shown already some fruits, as the 2003 results impressively demonstrate.

With Swisscom basically assuming the strategic position of a full-scale telecommunications provider and having the three core dimensions Fixline, Mobile and IT Services Provisioning in its portfolio, all three Dimensions are under increasing competitive threat.

Having deep cash pockets but no signs of domestic growth in the existing business, Swisscom is put onto Crossroads. The fundamental question is: Should it invest internationally or should it remain mainly in Switzerland or - lastly should it give back all the profits and cash to its investors through dividends or share buybacks. The perception does exist inside Swisscom that the Telecommunications Industry, as it is defined today is a stable and flat business which is under severe pricing competition and tends to commoditise.

The ―international equation, often suggested as a means to allow for growth would not necessarily add value to the main shareholder of Switzerland, the Swiss Eidgenossenschaft (Government), which owns Swisscom to more than 60 Percent. A again heavily discussed recent merger with Telekom Austria would have meant unforeseeable charges for the main shareholder, the Swiss Eidgenossenschaft. In essence, it would have meant to be a subsidy of several billions into the neighboured country. Here, amongst others a setup of a second headquarter in Vienna and a long-term employment guarantee for Telekom Austria employees would have not been accepted by the board of governors.

The central problem in Swisscom is lastly twofold:

- How can it transform itself to a revenue growth company whilst preserving its financial profitable base?
- And secondly, what would be the areas Swisscom should invest into in light of a series of new technologies which have a view to be disruptive, sooner or later.

All fields Swisscom might expand into are no ―green fields, which means - in whatever way Swisscom might expand - more revenues from its existing customer base - new services on top of the existing products - new services as a means of diversification - are subject to fierce competition and of course necessarily imply a strategic stretch.¹

All activities Swisscom might undertake in order to get for revenue growth, is stimulated by dissatisfaction, the perception of a gap between current and desired performance. In this Thesis we will look at the performance gap Swisscom has and will quantify this statement of the shortfall between current business results and those that should be expected.

In this paper, we will enlighten the opportunity for growth through an investment into IT Services and check that opportunity gap and try to quantify it. In this quantified assessment the discrepancy between current business results and those achievable with a new business design will be looked at whilst encompassing the looming new disruptive technologies - Voice Over IP and Public Wireless LAN above.

Those two disruptive technologies - Public Wireless LAN and Voice over IP are perceived to be the key killer applications for Telcos looming on the Horizon: PWLan, almost giving access to data without any burden of ownership - with free PWLAN islands now popping up in street cafés, hotels and fast food restaurants, whilst Voice over IP giving a very inexpensive way to place domestic and international calls and even having a sense to abolish a key revenue generator for Telcos - Enterprise customers with PBXes, those two technologies seem to have a ―disruptive effect on Telecommunications companies. New ―fre VoIP offerings from Skype or VonAge already reach millions of people. This shows evidence of the first erosion of the traditional voice revenues.

Already, a key field of growth has been identified by Swisscom in the IT Services arena - an area where Swisscom is currently adding ca. 250 Million Swiss Francs to the revenue equation, of which ca. 200 Million Swiss Francs are purely internal. Thus the external equation is a top line of 50 Million Swiss Francs to the 14,5 billions, less than a third Percent, actually. Thus, if that is an opportunity for growth, there is a business design gap to capture this growth, fundamentally.

The author assumes that whilst a performance gap can often be closed by focusing on superior execution, with no change to business design, closing an opportunity gap requires a new business design. Here, we will look what this new business design might look like.

It is also assumed that this new business design must be executed at the same time whilst even accelerating cost savings in its base businesses. Simply investing now in a planned way and taking away profits from the investors is not an option any company - especially not Swisscom - might pursue.

To make things even worse: Now Swisscom investors - public funds and the Swiss Eidgenossenschaft - are being used to Swisscom as a cash cow paper which is generating growing profits. Thus this stakeholders‘ perception must be remained until the first signs of growth become real evident.

Closing the performance or opportunity gap requires Strategy to assess especially that IT Services opportunity that is out in the market - domestic and non-domestic - and design the business to effectively address them, but as importantly, it requires execution, to assess and build the organizational capabilities needed to deliver market results.

This thesis looks onto which new tasks must be defined, which new skills built, and also whether a new culture must be nurtured. Inattention to organizational capabilities will almost ensure that a promising strategy delivers disappointing results, as a result, we will go out from the Status Quo Swisscom has and see what strategic chasm needs to be bridged.

During this course of the thesis, four fundamental questions will be enlightened:

- In order to grow in the IT Services market, is the competitive situation of Swisscom sustainable or would the new trends - Voice over IP - Commoditisation of IT Services, Next Generation Wireless and Wireline Networks affect the competitive stance so fundamentally that this design also should be looked at?
- If there is time enough to spurt this growth, what should Swisscom change especially in the IT Services market - here especially in the segment of Small and Medium Business, in order to stay competitive and even increase its position? What segments should Swisscom enrich, especially domestically, going out from the status quo?
- This paper uses the value chain analysis of Swisscom and especially its IT Services part in order to depict potentials of changes, (make or buy), outsourcing or in-sourcing, focus on core competencies and Value grids that affect this competitiveness.
- Then, this paper describes a likely ascension of Swisscom IT Services in the value chain to capture a sizable market share in the SMB (small and medium businesses) IT services market. The services recommended are communications-centric services, horizontal applications, some selected vertical applications to be delivered and more complex managed services.
- In order to deliver those services effectively, it is suggested to utilise a Services Provider Delivery Model (SPDE) - a business framework for Telecoms and IT providers - for the implementation, provisioning and billing of those services.

2 The Swiss Telecommunications Industry Structure

The telecommunications industry continues to evolve at a rapid rate driven by changes in the pattern of customer demand, technological innovation, regulatory intervention and the entry of new players. Since 2003, global investor confidence is slowly returning after the turmoil of recent years but operators remain under intense pressure to deliver on their commitments.

2.1 Key developments

The Macro Environment at Swisscom - leaned onto Grant² - and to the Swiss telecommunications market is determined by the following settings:

- Demographic: Switzerland‘s population is 7.3 million users, slightly increasing through immigration from Germany, ex Former Republic of Yugoslavia and Portugal.
- Social Structure: Switzerland is - depending on how it is counted - always among the top 20 wealthiest economies per inhabitant, despite its
- Geographical Layout: Only 40% of the area can be called to be habitable, the rest is mountains or lakes.
- Government: the democratic government of Switzerland has liberalised the telecommunications industry and enabled in most of the areas free selection of carriers which as a result of
- Technological Progress is now both happening on the Fixline - with Voice over IP
Technologies and Next Generation Mobile (WiLan and WiMax technologies and UMTS as 3rd Generation).
- The National Economy with being a key hub for International Traffic due to large multinational corporations operating out of Switzerland requires those Factor endowments in its infrastructure and vice versa.

Abbildung in dieser Leseprobe nicht enthalten

Picture 1 - Swisscom and the Macro environment - Key is here the national setting and the governmental imposure as a still 60% publicly owned company.

As a result, Switzerland has one of the most advanced Telecommunications and IT Services systems which are prone to increasing competition.

The key developments shaping operator strategy in this dynamic market situation - and that we believe apply to Swisscom - the leader and incumbent player in the small Swiss market - are as follows:

2.1.1 A maturing voice market

In the fixed market, this is leading to stagnating or falling revenues. In the mobile space, the effect is a dramatic slowing in the rate of growth of voice revenues. We expect to see further pressure on voice prices over time as mobile operators look to increase the rate of substitution of fixed traffic and VoIP begins to disrupt traditional pricing models even further.

2.1.2 An increasing demand from customers for converged services

This convergence will take several forms. In the enterprise market, companies are already looking for converged voice and data services as the norm. We also expect to see an increasing demand for converged fixed and mobile offers in the enterprise space across fixed, mobile and semi-mobile (WiFi / WiMax) environments. In the consumer space, we expect an increasing demand for converged data services, so that a customer can access the same services using various combinations of device and access network depending on their location and needs at a particular time. On top, more unified messaging and multimodal solutions emerge and will enhance the functionality of the mobile phone. The mobile phone appears to have such a strong loyalty as a personal device amongst consumers that it probably will be the focus of such convergence, especially in the enterprise space.

2.1.3 New market segments

The emergence of a key segment of ‗power users‗, highly demanding users, and ‗prosumers‘, professional users of services who regularly switch between their professional and consumer modes on the same device and will increasingly demand more and more sophisticated functionality (e.g. billing, authentication, transaction services, separate ring tones, separate portals) to manage their various profiles.

2.2 Changing shape of competition

Competition is changing. Once the Telco Services providers mostly fought with each other on clearly defined market segments - fixline and mobile and data traffic services, now these services do intermix and merge and on top of that, value added resellers and bundlers do package those services into several packages.

2.2.1 The Industry forces in Switzerland

The Swiss Telecommunications Market is segmented into the following players (Picture 2³ ): Industry rivalry does exist between the key domestic players Swisscom (60% market share), Sunrise and Orange with both ca. 15% market share in the mobile space, and Sunrise and Cablecom and Tele2 in the Fixline market space. In the IT Services arena, Swisscom IT Services is fighting against incumbents such as IBM as largest player, HP Services and T- Systems, the latter probably with the most similar shape and portfolio, let IT Services all alone. In the IT Services market especially, competition is increasing, as the ―big deals- outsourcing contracts over five years for large enterprises are now increasingly taken for those candidates in Switzerland who do consider outsourcing. Smaller IT Services activities - we will look at the IT Services chain later - are still open and well in competition. Yet here prices are declining due to commoditisation.

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Picture 2 - Swiss Telecommunications Industry Market Structure - “Porter’s Five Forces” Diagram

The supplier side - on the Telecom front-end we talk about the typical Network Equipment providers (NEPs) such as Alcatel, Siemens and Cisco has shown almost a collapse in the last years due to declining global demand on equipment. Due to the need to supply, the prices on this corner have been dwindling down at astounding double digit rates.

The IT Supplier side - a different set of players - mainly IBM, HP, Sun, Microsoft and Oracle is competing fiercly, yet the margin pressures here are still lower due to a higher overall innovation yield. Here, it shows that some suppliers to the ICT (IT and Telecommunications market) are also players in the IT Services side - thus vertical integration does happen here to some extent and to some market segments - mainly in the larger account space.

New entrants into the Telco space - such as ―3, Tele2 and maybe even T-Mobile are a continuous threat to the almost well protected oligopoly of three to four players in the Swiss Telecommunications market. The total Market opportunity for Telecom Services in Switzerland amounts to ca. 22 bln Swiss francs (Source IBM and IDC), the total market opportunity for IT Services in Switzerland is ca 18 bln Swiss francs, whilst the growth rates show a different picture.

In essence, the Telco Market in Switzerland, due to its unique situation with a high barrier to entry, customers who really cannot choose that much between suppliers and also have a vendor-lock in sometimes due to long-time contracts, three to four major players who ―behave, low pressure from the Telco supply side and a lot of money on the street is amongst the most attractive markets inside this industry in the World, which can be shown on the growing profits all the three major companies do produce.

Still the honeymoon is over soon. The model per se is not sustainable, and changes are looming on the horizon through government impostures that are threatening the market dominance of Swisscom, new technologies such as Voice over IP and last but not least also a recovering outside Telco economy which might discover Switzerland as place to be. Thus, action is needed strategically for a Telco in order to reap the fruits now.

2.2.2 Increasing competition by players from other segments

These see opportunities based around convergence to enter the market. Examples include:  Cable operators with rich broadband and VoIP services

- Established Internet companies such as Yahoo moving into mobile as well as fixed services
- Fixed voice resellers moving to sell mobile voice services as MVNOs, as well as new entrants with free‘ phone services such as Skype and Free
- IT companies exploiting the convergence of voice and data, IT and telecommunications in the office environment with VoIP impacting traditional voice business, as well as exerting their influence on the selection of data network services and the supporting applications

The emerging telecommunications market environment is therefore likely to be more complex, more competitive and more uncertain than the current situation. Whereas the telecommunications marketplace has historically comprised companies with very similar strategies, we are already seeing increasing diversity in the strategies adopted as operators react to the more challenging competitive environment.

3 Client relative positioning - Swisscom’s Key challenges

The most significant challenge for Swisscom is topline growth. In section 5, we see whether and how this growth requirement can be addressed by letting the IT Services provider grow. Here, we discuss the challenges ahead: The current growth outlook in revenues and free cash flow are modest and in some cases declining.

3.1.1 Swisscom’s transformation challenge

Analysts have recently commented that, "Coupled with the high unattractive trading metrics,

Swisscom is offering one of the lowest growth rates in the sector. 2003A-2006E revenue CAGR is 1.2%, the lowest in the sector after BT. 2003A-2006E EBITDA CAGR is 0.9%, the lowest in the sector, while 2003A-2006E EPS CAGR is 6.3%, boosted by our expectations of ongoing share buyback programmes, and in line with the European incumbent operators average of 6.7%."⁴

In common with every other geography, competition is intensifying. However, again according to BNP Paribas, "this should not translate into strong margin pressure, as all operators focus on profitability and Swisscom puts quality subscriber growth before market share gains at any price".

In essence, one of Swisscom‘s core competencies has been its ability to preserve margins. In order to do so Swisscom needs to be able to control costs and competition, of course aided by the relatively high pricing in its market, and a sluggish regulatory environment."⁵

Clearly, Swisscom‘s profitability and market share position is enviable in comparison to other operators.

3.2 Increasing shareholder value

In order to grow its stock value compared to forecasts and/or its peers, Swisscom has to exceed expectations. Achieving this pre-supposes gaining market share, making further, more radical improvements in the cost structure, entering new markets and/or achieving new revenue streams through launching new products. To drive increases in the current valuation we believe a series of short term actions are required to secure the base, as well as growth initiatives to improve free cash flow quickly, coupled with longer term transformational actions that will bring sustainable benefits to the business.

3.2.1 Driving growth

In 2003, the revenue analysis by Swisscom - taken from the annual report⁶ - depicts the following three main aspects⁷:

- Enterprise revenues declined by 11.7% as voice and data network revenues faced
intense price competition and new IT services revenues could not grow fast enough to address the shortfall from changing price points. Revenues took their toll with tougher procurement practices in corporations, inevitable cannibalisation through VoIP and VPN substituting traditional networks, and ADSL providing ‗good enough‘ services especially in SMBs.
- Broadband revenues did grow significantly as Swisscom overtook Cablecom⁸ and there is significant space in this market for further growth. However, if the level of demand for ADSL services is lower than expected, or if Swisscom was forced to significantly reduce its access tariffs for ADSL services due to strong competition, the revenues and profitability of its Fixnet business would be affected negatively. In order to compete with other broadband access operators more effectively, Swisscom has already had to reduce its ADSL access tariffs significantly. Further price reductions due to the increasing competition from Cablecom or other broadband access providers would adversely affect the revenues and profitability of Swisscom‘s fixed-line business.
- Mobile revenues were also under pressure with usage declining 4.0% from 124 minutes per month per customer in 2002 to 119 minutes per month in 2003⁹. This compares to usage growth of around 7% in Europe in 2003. Swisscom faces competition primarily from the other two mobile licensees in Switzerland - Orange and TDC Switzerland Sunrise. Competition for business customers is particularly intense, as Orange and TDC have been increasing their efforts to win market share in this segment. In December 2003, the Federal Communications Commission (―ComCom) awarded GSM licenses to Tele2 and In&Phone, which will further intensify competition in the mobile business market. Moreover, with strong competition and the high rate of mobile penetration in Switzerland, customer retention costs have increased substantially, which is putting additional pressure on margins.

In each of these areas, it is important for Swisscom to face the changes that are looming as a result of disruptive technologies and to develop a model that achieves revenue generation at a lower cost base.

3.3 Strategic priorities

It is clear from Swisscom‘s reports that the company has already started a transformation journey and in our recent meetings with members of the Management board - the author met the CEO, CFO, Chief Strategy Officer and Group CEOs in subsequent meetings during the last six months plus a variety of other industry participants - and from its analyst meeting presentations the following priorities have been described:

- Securing the base through voice and leased line development, with an intense focus on the core assets of the enterprise customer base, and customer loyalty through value and service quality.
- Managing the transition through careful OPEX and CAPEX management, intense focus on service execution and best-in-class performance, and leveraging the convergence of data and network services to give the customers greater choice, and present a broader and better integrated portfolio of services.

Driving towards the future with the next generation of services based on IP networks, value- added consumer and business services over broadband, ascending the ICT value chain, and creating and establishing strong presence in desktop and network outsourcing, deploying VoIP solutions that are tightly integrated with business applications, and enhancing overall profitability with ICT.

3.4 Swisscom’s organisational setup - and how IT services does fit into.

If there would be a value statement, it would say: Swisscom is generating value through providing services to end-users and to companies. This means: Swisscom does not manufacture goods or products, it is providing - mass commodity - basic services in the area of Fixline, Wireless and IT Services.

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Picture 3 - The organisation chart of the Swisscom Group. Swisscom has a “Nose In-.Hands-Out” governance model, which leads to a selective top-down independence of the related businesses.¹⁰

Swisscom‘s organisation is grouped into key subsidiaries, reporting into a Group CEO. The individual units, as seen in Picture 3 have its own CEO and report - mostly directly into the Group CEO, currently Jens Alder. The company tries to offer a portfolio of related services and essentially by focusing on some core capabilities - such as delivering services to a broad user range - generate more rent than others (see Grant).

Yet by nature, they are interlinked and interlocked - which can be seen in the process diagrams and descriptions and - also in the balance sheet - there are substantial intercompany revenues (500 mln CHF), which means that some parts of the Swisscom Group do rather act as internal suppliers, mainly Swisscom Systems and Swisscom IT Services. On Swisscom IT Services in 2003, 85% of the core business was internal.

As a result, a typical portfolio consideration, like with other holding structure companies of lowly related businesses, as Markowitz suggests cannot be found at Swisscom that much.

3.5 Swisscom’s Value Chain

Unlike many other services industries, the Telecommunications industry has a high degree of global standardisation in the way they describe their services, the way they provision their services and the way they market, sell and bill those services. This has led to two global effects:

- A set of standardisation bodies such as ITU¹¹ which have thoroughly described the services value chain in key blocks and sub - components - called the eTOM (electronic Telecom Operators Map) Business Processes Framework
- And a set of Telecom Application Package providers which map those services quite well - (at least compared to other services industries such as Insurance or Retail) - into pre-packaged applications.

This also affects Swisscom. Swisscom has grouped itself to a large extent around eTOM, notably also to off-spring the mobile arm and to get hold of the corporate processes. A larger endeveour in this standardisation is often where corporate processes do start and where they verticalise - IBM has been involved in early 2004 in a project that detailedly describes the start.

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¹ Lintner always puts a price to pay on diversification - managing more than one business is complex and the gains should be offset by more stability.

² Diagram taken from R. M. Grant, p. 53

³ Aligned to M.E. Porter, Five Forces, includes Government as Sixth Force

⁴ CSFB, 7 Apr 2004

⁵ BNP Paribas Analyst Report on Swisscom, p11

⁶ Swisscom Annual Report, p.31

⁷ Taken in parts from ―IBM and Swisscom, an alliance for growth 2004 - here, the focus is especially on returning triple play revenues back to growth and delivering a lean services model for converged mass services.

⁸ Cablecom had 900.000 broadband users, according to Cablecom, Swisscom slightly more than that.

⁹ Arthur D. Little Excerpt, p11 and following

¹⁰ taken from Swisscom Analyst reports home page, www.swisscom.com

¹¹ ITU – www.itu.int