Smooth Operators

The Federal State of Switzerland, which owns 52% of Swisscom, has set the strategic goal that the firm’s long-term debt must not exceed 2.1 times EBITDA, explains CFO Ueli Dietiker.

"We have debts of CHF 9.4bn (€6.14bn) at the moment, which is in the region of double our EBITDA. So our headroom for further acquisitions is limited. We would really only look at M&A to strengthen our businesses in Switzerland and Italy."

Even so, last year Swisscom abandoned the idea of taking over Italian-based broadband supplier Tiscali. In 2007 Swisscom paid €3.1bn for Fastweb, a 19% premium on market value, which unsettled some investors, who protested they could have bought the shares directly. While he does not dispute the argument, Dietiker insists: "There were a number of reasons why the deal was better for us. First of all we were able to leverage our balance sheet because before we had almost no debt. Secondly, Fastweb’s profile fits ours perfectly."

In Switzerland, where Swisscom enjoys very high broadband penetration and increased competition, not least from cable, it has seen costs of price erosion year-on-year of up to €300m to €350m. By contrast, only 29% of Italian households have broadband and there is no cable competition. Dietiker says the strategy is to balance the declining returns from the fully mature Swiss broadband market with the considerable volume expansion opportunities in Italy. Fastweb remains a separate brand and has been run as a separate operation but Dietiker says one concession in Swisscom’s drive for cost saving was the creation of a common purchasing board for the Italian and Swiss organisations.

In January 2008 Swisscom completed a substantial reorganisation, rationalising its businesses around customer segments to produce four operating units: Swisscom Switzerland, Swisscom IT Services – specialising in the integration of complex corporate IT structures, Swisscom Participations, and Fastweb.

Dietiker points out that the changes were under way before the Fastweb acquisition but were adjusted to include it.

"Part of the rationale was the expectation that fixed line and mobile markets will converge and therefore it was better to have a single customer-focused organisation in Swisscom Switzerland than the previous infrastructural-based operating units."

"The reorganisation was the culmination of a process that had begun nine years before with the part privatisation of Swisscom and the liberalisation of the telecoms market." "We needed more transparency and to optimise our processing, which the new structure enables," says Dietiker, "now we have not only been able to prioritise our cost-cutting, we have also increased quality. We stressed service levels in areas like call centres yet over the past three years we have also made cost savings in these customer touch points."

Consolidating the back office, with the centralisation of accounting, financial control and human resources has produced a reduction of more than 100 back-office jobs. Ironically for a company whose leading corporate business takes the IT outsourcing of major companies, Swisscom set about outsourcing some of its own processes.

"We have outsourced many supporting functions," says Dietiker. "In March we outsourced all facilities management to Johnson Controls with a saving of 270 jobs. We also implemented a new SAP platform called Royale, in which we have realigned the process system with the new customer focus and with one company dealing with everything from mobiles to fixed net solutions."

By consolidating its business offers around the single Swisscom brand, the company has also cut marketing costs appreciably. However, as a pre-condition of combining its mobile and fixed line operations, he explains that Swisscom had to buy out Vodafone’s 25% stake in its mobile operation or otherwise go through a valuation of its fixed line assets. The purchase went ahead in December 2006 for €2.7bn and, with the Fastweb deal, soaked up much of Swisscom’s war chest.

Communication nation

The Economist magazine has rated Switzerland’s telephone and IT services among the best in the world. The focus therefore, says Dietiker, has to be on further improving the quality of Swisscom’s offer. Much of that boost will come from faster broadband with wider bandwidth through the installation of fibre networks.

Of Swisscom’s planned capital expenditure of up to €5.5bn in the next six years, around 30% will go into the creation of fibre networks for the next generation of fixed line communications. It will involve obtaining agreement from landlords in the country’s large rental market as well as persuading consumers to buy the new service. The rate of this "huge" fibre technology investment will, says Dietiker, depend on the pace of market penetration, which is being reviewed at least once a year.

Dietiker’s colleague Patrick Dudli, CFO of Swisscom IT Services reflects on its B2B offer Conextrade which, starting out in 2000 with a €6.53m investment, has grown to include over 1,000 companies participating in the Conextrade Trading Centre and met Swisscom’s expectations.

"We have seen a stable annual growth easily exceeding 30% over the last two or three years in both transactions and revenue. The market is still young. Although Swiss companies started quite early with e-invoicing in 2004 when the first e-invoicing-related legislation came into force, there was no major growth in the broad market."

Further legislation to boost e-invoicing by 2012 will, believes Dudli, bring about a major change, particularly for SMEs.

"It is still mainly large enterprises that focus on e-invoicing, often as part of ongoing process improvement programmes or due to budget cuts. SMEs generally only participate in electronic processes at the behest of their large customers. This government initiative will force them to deal actively with e-invoicing and e-procurement. And they will benefit from it and thus optimise their business processes."

The economic downturn, says Dudli, has played to other Swisscom IT Services’ products, particularly IT outsourcing and application service provision (ASP).

"Companies do not need any IT resources of their own but can benefit from Swisscom IT Services’ high performance information technology at calculable costs. Therefore, ASP means low and transparent costs instead of capital commitments." Swisscom, says Dudli has got its assessment of customer needs for IT outsourcing and ASP right, but he accepts that assessing the potential of a market that did not actually exist was not easy.

"Building services without including the customer’s point of view and needs is foolish. Providers can set a pace but new services will only be successful when there is a true market need for them. For example, we started to work on e-invoicing solutions as we know them today back in 2002, based on a strong foundation in EDI clearing and e-procurement. It was not a hot topic then but we believed that invoicing would benefit most from electronic processes. We had the first VAT compliant service in Switzerland, which has since become an international solution that is compliant in 32 countries."

To extract full value from Swisscom IT Service’s business, says Dudli, its management accounting system has two distinct pillars. For the data centre infrastructure, the most important indicators are the cost per unit and the volume of use. For IT projects, tight controls require that the project manager, the client and the account manager are regularly involved in assessing progress.

"Thanks to this 360-degree view the development of a project is very well under control and all necessary adjustments can be undertaken at every stage in order to guarantee the achievement of objectives."