Tele2: a chase for Big Three

23-07-2019
and what painful reforms the race has cost it
 
July 20, 10:24 a.m.
Yuliana Petrova, Vedomosti
 
Eight subsidiary mobile telephony providers of Rostelecom were merged into Tele2 following the company’s acquisition by Rostelecom and VTB in 2013. Tele2 expanded its footprint from 41 to more than 60 cities (currently 67), added approximately 12 million subscribers to the 23.7 million it already had, obtained licenses for 3G communications in all federal districts of Russia, including Moscow, and a 4G license for the whole country – and that after 10 years of hard-discount operation with second generation networks.
Within five years, Tele2 (T2 RTK Holding) integrated the subsidiaries, changed the strategy abandoning the discounter model, created new products, rolled out a new 3G network in Moscow / Moscow region and upgraded the networks in regions.
Tele2 went through continuous reforms all these years. Four chief executive officers succeeded one another. One-third of the staff at Rostelecom subsidiaries stayed employed by the end of 2015 and hardly any of the subs’ top managers continued in office at Tele2. 40% of the managers have been replaced since 2015, and a single SAP ERP system was launched. What was actually done and did the sweeping reforms work out as expected?
 
One size fits all
According to Sergey Emdin, CEO of Tele2, the company featured a healthy organizational culture and high efficiency. It was way ahead of the Big Three Group in terms of revenue per employee: RUB 18.6 million versus RUB 10.6 million at VimpelCom. Many corporate functions were centralized, assigned to common service centers, or outsourced.
After the integration, Tele2 had to face the problem of loss-making regions, which it did not have before: the company absorbed unwieldy businesses with large teams, low efficiency and a different corporate culture. From about 3,600, Tele2’s headcount soared to almost 9,700 immediately after the merger.
Rostelecom’s subsidiaries were completely self-sufficient, with own top managers, HQ, accounting, technical and administrative services, branches, etc. Irkutsk-based Baikalwestcom (BWC) and Nizhegorodskaya Sotovaya Svyaz (NSS, literally translated as Nizhny Novgorod Cellular Communications) were the top performers with a large market share and a solid network.
Tele2 aimed at implementing its operating model and business processes across the board, removing non-core activities and duplicate functions, integrating the subsidiaries into its three-level corporate structure (“region – macro region – HQ”) while preserving its organizational efficiency and home-grown corporate culture. In most cases, Tele2 put its team members in key positions and drove rapid transformation of business processes according to in-house standards, Emdin says.
According to the CEO, Tele2 optimized the contact centers and the retail chain (the subsidiaries had owned retail stores while Tele2 employed a franchising scheme), as well as the technical services. Tele2 centralized the network planning and monitoring activities, billing, IT, and the contact centers, the regional branches being only responsible for operational activities.
“Jerry Calmes, the then CEO of Tele2, and I arrived in Irkutsk and met with BWC employees in a cinema theatre. We said: do not be scared, we are normal people, we are ready to listen to you," a manager of Tele2 recollects.
We were to assess the staff as soon as possible, to understand who can and wants to continue their careers with Tele2, who is ready to change the location. This work was directed by Elena Ivanova, HR Director of Tele2, who joined Tele2 in 2013 when the company was early into the integration process.
According to Ivanova, employees of the merged companies were invited to meetings with the executive management of Tele2 and teams consisting of 8-10 members (labor lawyers, representatives of commercial or technical departments, HR managers). The group offered employees a choice between re-employment with another entity or employment contract termination.
“We avoided glaring scandals by offering everyone clear and equal rules,” Ivanova says. “We offered two discharge options: redundancy dismissal or dismissal upon agreement of the parties, with favorable discharge recommendations – and job search assistance, too.”
The reshuffled team in Irkutsk shrank from 800 to 80 employees. In Nizhny Novgorod, the NSS head office and the HQ for Volga Tele2 operations were restructured into one company. At Volgograd-GSM, all the functions subject to centralization at Tele2 were dropped.
On the contrary, new jobs were created where necessary: two new contact centers were opened in Irkutsk and Saransk, the network planning and monitoring center in Nizhny Novgorod expanded. In 2014-2015, 3,500 jobs were closed, and about 1,800 new jobs created.
According to Alexander Shevchuk, Executive Director of the Association of Institutional Investors (API), some of the previous management teams at Rostelecom’s cellular subsidiaries were quite effective. For example, the NSS management team outperformed the federal players even with scarce funding before the integration as it managed to retain and even increase the local market share. The resignation of such managers is a heavy loss, Shevchuk notes.
 
Building on a large scale
At the beginning of 2015, Tele2 started rolling out a network in Moscow using a fly-in-fly-out approach, with builders, network planners and IT specialists coming from other regions.
More than 1,000 Tele2 employees were engaged for the commercial launch of the network in November 2015. Tele2 summoned teams of employees from all regions it was operating in at that time, with nearly everyone capable of connecting subscribers at points of sale being involved, Ivanova recollects. The provider opened 300 outlets at once, along with more than 10,000 partner points in Pyaterochka, Svyaznoy, Russian Post retail chains.
In early 2016, the company’s debt load exceeded RUB 120 billion, while revenues were below RUB 100 billion, the debt to EBITDA ratio exceeded 7. According to Emdin, Tele2 was running at a loss when he joined the company in February 2016. As a voice discounter, Tele2 found itself unable to earn in the era of mobile Internet.
The telecom provider was busy creating the new business model throughout 2016. “Our idea was to surprise users every quarter with services our competitors do not offer,” Emdin recollects. He previously had an experience of what he calls “operations on a conscious patient”, being in charge of construction activities at Pulkovo airport amid continuing flights. Now the goal was, he goes on, to make voice subscribers paying 200 rubles per month active Internet users ready to spend 400 rubles monthly. The first step in implementing the new strategy was rolling over unused minutes and gigabytes to the next month, which drove the ARPU up in all regions. The other innovations such as exchange of minutes for gigabytes, transfer of gigabytes as a gift, etc., also did good service, Emdin says. The number of active users of data transfer services soared fourfold in four years from 2014 to 2018. In December 2018, the penetration of smartphones in the Tele2 network rose to 67% from almost zero in 2014.
 
Add, seize, reshuffle
As a discounter, Tele2 lacked many of the options the Big Three Group offered. The company needed competencies for serving corporations, using digital technologies, new customer premises equipment, and Big Data, Ivanova recollects.
The commercial business was expanded and split into B2C and the marketing and product development division, with B2B sales established as a stand-alone segment. Tele2’s services first came into use by the shareholders (VTB, Rostelecom and their subsidiaries), and other major players followed suit soon. Tele2’s new Big Data department, with 30 employees, plays a pivotal role in discussing matters such as network development and spatial distribution of outlets, Emdin notes.
From scratch, Tele2 managed to create a MVNO business churning out virtual communications providers. Rostelecom, Tinkoff Bank and Sberbank are the largest Tele2 clients spawning virtual operators.
Tele2 invited star-studded managers from among former executives of the Big Three Group, primarily MTS and MegaFon, to run the new divisions, Emdin notes.
In 2017, the telco started the second geographical redistribution of the functions. Product development and marketing responsibilities were assigned from the regions to the macroregions. Tele2 managers shuttled from region to region.
The key 2017 milestone was the transition from three (“region – macroregion – HQ”) to two management levels (“macroregion – HQ”). According to Emdin, the borders of the macroregions were redrawn: for example, the Far East where Tele2 did not have strong positions in a single city was attached to Irkutsk (previously part of the “Siberia” macro-region) where Tele2 had a large market share, and the latter was made the HQ of the “Baikal – Far East” macroregion.
In 2017, the company opened four new corporate centers in addition to the existing eight ones: an HR management center in Rostov-on-don, B2B sales and service support centers in Nizhny Novgorod and Irkutsk, and a contractual work center in Kazan. At the end of 2017, the Tele2 headcount reached about 6,700 shrinking by 1,200 employees against 2015.
Tele2’s competitors pursued similar transformations earlier. For example, VimpelCom had restructured eight macro-regions as five enlarged macro-regions by the end of 2015, centralized a large part of the functions at the HQ and launched competence centers for key businesses in the regions, the company’s representative said.
 
Cluster blockbuster
Last year, Tele2 embarked on the restructuring of product development departments within the framework of four clusters instead of nine macro-regions. All the regions were broken down into clusters by Tele2’s market share and EBITDA, with a separate strategy developed for each cluster. MTS moved to the cluster-based organizational pattern in 2016, MegaFon announced the launch of the cluster principle in the spring of 2017.
According to Ecopsy Consulting partner Grigory Finkelstein, all-at-once sweeping reforms based on employees’ loyalty and stamina are commonplace for Russia. This approach leads to overspending and often to failures – however, with careful planning, transformations require 3-4 times less effort. Tele2’s positive result in such major reforms is an evidence of their consistency and continuity, Finkelstein said.
The company’s top managers appreciate the healthy corporate culture of Tele2 initially established by the Swedish shareholders. “No intrigues or red tape on our side. The way we work here differs from other players’ philosophies like chalk and cheese. We benefit from openness, democracy, advanced horizontal links, and the ability to quickly resolve any issue without hindering formalities,” Emdin is proud to note.
That said, attempts to simultaneously implement more than three strategic initiatives pose extreme risks even to companies with a high management culture, Svyatoslav Biryulin, CEO of Sapiens Consulting, says adding that plans obviously did not always work out for Tele2 as intended, as the four CEO replacements in five years show.
Whatever organizational changes are on the agenda, be it back office centralization, transition to a cluster-based structure or other moves, one should always aim at minimizing losses, a representative of MTS notes.
According to Alexander Shevchuk, API Executive Director, the integration goals were not achieved. Back in 2013, Rostelecom announced plans for Tele2 to capture a 25% share of the mobile telephony market in Russia, with 56 million subscribers, before 2018. In reality, Tele2 had 15% of the market and 42.3 million subscribers in 2018. Last year, the merged company earned RUB 43.7 billion in EBITDA (against a target of RUB 73 billion), with an EBITDA margin of 30.5% (the desired level being 35%).
Nevertheless, Tele2 has obviously staged a breakthrough, primarily as a result of rolling out a 3G/4G network and entering the market of Moscow, Konstantin Ankilov, CEO of TMT Consulting, says adding that the team’s efforts are an indicator that is rather hard to assess.
 
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