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On September 28, 2016, Harvard Business Review China (HBR China) interviewed Eric Xu in Shenzhen, China. The interview concentrated on a single topic: telco transformation.
By Wang Feng, Chief Writer, Harvard Business Review, China
Key takeaways:
Huawei was founded in 1987. In 2011, it began to expand beyond its telecom operator business into the enterprise and consumer spaces. Since then it has evolved from a telecom equipment vendor into a leading global provider of information and communications technology (ICT) solutions, with its products and services reaching almost every corner of the globe. In 2015, the company's sales revenue hit US$60.8 billion (395 billion yuan), of which 58 percent was from outside of China.
At the National Science and Technology Innovation Conference held in Beijing last May, Huawei CEO Ren Zhengfei predicted that the company's revenue would soar to US$150 billion by the year 2020. While this revenue target is acting as a new spur for increasing efforts in Huawei, it also brings with it new challenges. Over the past few years, the telecom industry has come under great pressure, as the fast-growing OTT industry has chipped away at telecom markets. Threatened telcos are in dire need of end-to-end digital transformation.
In early 2016, Huawei launched its All Cloud Strategy, which focuses on ICT infrastructure. This strategy positions Huawei as an enabler of both the intelligent world as well as enterprise cloudification and digitalization. Its goal is to help its partners achieve digital transformation, digitalize their operations, and deliver a ROADS experience – a Huawei concept that stands for Real-time, On-demand, All-online, Do-it-yourself, and Social.
On September 28, 2016, Harvard Business Review China (HBR China) interviewed Eric Xu at the company's headquarters in Shenzhen, China. The interview concentrated on a single topic: telco transformation.
HBR China: Many Internet companies born in the cloud have appeared over the past decade. They deliver a premium user experience and innovate through rapid iteration. These companies have transformed the business models of many vertical sectors, and represent a significant shock to the telecom industry. What is the state of the telecom industry today?
Eric Xu: The entire telecom industry is under pressure to transform. This pressure comes from stakeholders' demand for a better experience, and from the ecosystem. There are six aspects worth noting.
First, consumers think that data services are too expensive and the experience is unsatisfactory. For enterprise customers, it often takes a month or more just to get a private line installed. Their needs for connectivity, bandwidth, reliability, and security are still not being met.
Second, Internet service providers use telecom networks to serve their customers, but they think they're paying too much for bandwidth and data traffic throughput. This is a global problem.
Third, governments are trying to cut the prices of telecom services. The EU is in the process of abolishing mobile roaming charges within Europe. The Chinese government is pushing for cheaper telecom services. Other governments around the world are trying to find ways to lower prices.
Fourth, telcos are having a hard time because growth and profitability across the industry are in a downward spiral.
Fifth, telecom equipment vendors are suffering because their fate is tied to that of telcos.
Sixth, investors are struggling due to low ROI.
HBR China: Then what is the way forward?
Eric Xu: There are only two options: The industry either takes action to resolve these issues, or it lies down and waits for others to send it the way of the dinosaurs. Obviously, telcos are at the heart of the industry. The telecom industry can only become healthy when telcos themselves are healthy. In the same way, the industry can only complete its digital transformation once telcos have successfully gone digital. The situation is urgent: Google and Facebook are trying to build entirely new types of networks so as to bypass telcos and deliver services directly to their users. If this attempt proves successful, they could consign the entire telecom industry to the dustbin of history.
HBR China: What is the key to resolving these issues?
Eric Xu: Customer satisfaction is the key. Once issues around customer satisfaction are resolved, everything else will fall into place. But how can telcos ensure customer satisfaction? The key is a significant improvement in user experience when consumers buy and use services.
In the past, telcos focused on experience mainly in terms of usage: how users were making phone calls, sending texts, or using the Internet. But customer satisfaction often also depends on their experience with gaining access to those services in the first place: finding out about the services, purchasing, making payments, after-sales service requests, and so on. Complicated procedures and long waiting periods before a new service is activated make customers lose interest. The ability to deliver a superior experience when consumers buy services is what sets OTT players apart from telcos.
HBR China: What is the key challenge to improving user experience at the purchase stage?
Eric Xu: The key challenge lies in whether telcos can engineer user-centric digital transformation. The operations systems of almost all telcos today serve their own employees – sales staff and maintenance engineers. These systems have been digitalized, but they're still called "internal IT systems." If telcos hope to future-proof their businesses, they must go beyond the digitalization of technologies and products. Telcos must become digital enterprises that are able to offer users a ROADS experience throughout the process of buying and using telecom products and services. Huawei has developed the ROADS experience model based on its own experience and the best practices of Internet companies. We believe that once telcos can deliver the ROADS experience, they can resolve all the issues that affect customer satisfaction. We can think of ROADS as the goal of digital transformation.
HBR China: What does it take to deliver the ROADS experience?
Eric Xu: Ubiquitous connectivity is the prerequisite. There are two sides to it. One is internal: Within the company, there must be ubiquitous connections between people, between things, and between people and things. The other side is external connectivity: The company must be fully connected to its users, customers, partners, and suppliers.
HBR China: What value will ubiquitous connectivity create for telcos?
Eric Xu: First it will help slash operating expenditure (OPEX) and boost efficiency. With ubiquitous connectivity, your purchase order for a supplier will flow directly into their systems, and you can gain visibility into the end-to-end supply process. Your users can also directly access your systems. You can even connect your IT systems with those of partners. This will greatly reduce your OPEX and maximize efficiency. Based on our experience with the Honor brand, we believe ubiquitous connectivity can reduce OPEX by at least 10 percent. For telcos, a 10 percent reduction in OPEX will deliver immediate improvements in profitability.
Second, ubiquitous connectivity will foster innovation in operating models and business models. This will be vital to telcos' digitalization strategies, because it represents long-term value.
HBR China: Are telcos' existing operating models and business models outdated?
Eric Xu: Let's look back at what telcos have done. They've been taking a long, hard look at Internet companies, and they've launched numerous applications to specifically compete with these companies. But these applications haven't performed as they hoped. I think the fundamental cause is that their operating models can hardly support Internet products. Their DNA, technology architecture, and operating models are not Internet-based. Even if they copy the way the Internet companies make products, they are highly unlikely to succeed.
HBR China: Why don't Internet products fit well into telcos' existing operating models?
Eric Xu: Telcos' organizations and systems are old-fashioned and technology-centric. Barriers have built up between their marketing, network management, and IT functions, and their front-end and back-end systems aren't integrated. By contrast, Internet companies keep their eyes fixed on their users, and have streamlined their organizations to rapidly respond to user needs. As a result, a product that takes Internet companies a few months to develop and launch might take some telcos one or two years. With such a long time-to-market, telcos can hardly stay ahead of the competition in the Internet era, where everyone is fighting for rapid iteration and innovation.
HBR China: So transforming operating models is crucial to realizing the ROADS experience.
Eric Xu: Changing the mindset is important. Telcos need to learn from Internet companies, including their approaches to design, operations, and technology architecture. They need to overhaul the operating models of the telecom industry in the following three ways.
First, they need to shift the focus of their operations from "network experience" to "user experience". At present, user experience is often measured solely based on network performance indicators such as bandwidth, latency, and packet loss rate. In the future, telcos should look to end-to-end user experience, from how users find out about telecom offerings to how they buy them and obtain after-sales services.
Second, telcos need to introduce real-time, autonomous systems to replace human-operated systems. As telcos get better connected, they'll be able to make their operations simpler, more efficient, and more intelligent by building big data and AI systems that support real-time decision making.
Third, telcos need to evolve their closed IT architecture to a cloud-based, Internet architecture. Cloudification must be agile, intelligent, and open, so that telcos can effectively connect their internal and external operations systems and create a robust ecosystem in which telco staff, customers, partners, and suppliers can collaborate efficiently and openly to share success.
HBR China: What will future operations systems look like?
Eric Xu: First, they'll no longer be internal IT systems or support functions. They'll become production systems. An example is our Honor brand: Our online store directly engages with our customers. After the customer places an order online, the order is transmitted directly to our production line and, once the product is ready, it's shipped directly to the customer.
Second, future operations systems will be entirely user-oriented and fully open.
Third, how good an operations system is won't be judged by the telco itself, but by its users.
HBR China: Is the transformation of operations systems the key part of telcos' transformation journey?
Eric Xu: Yes. Digital transformation necessitates changes to telcos' organization, processes, and culture, and that will take a long time. Telcos face two roadblocks on their digital journey.
The first roadblock is the conflict between long-term transformation and the need for short-term performance. Most telcos are public companies. When they grow rapidly, their CEOs get to stay in place for a long time. But when these companies run into difficulties, CEOs are replaced frequently, and this is very unhelpful for a long-term project like digital transformation. Digitalization involves changes to the organization, corporate culture, processes, and IT systems. It may also mean redundancies and recruitment of employees with new skillsets. This deep re-engineering of a company takes at least five to ten years.
The second roadblock is resistance from within the organization. Most telcos worldwide have generally followed a common development path. They started as monopolies and have since been split up into several companies. As a result, they have similar organizational structures, and their monopoly mindset and culture remain unchanged. This will stifle transformation. Thus far, there are very few telcos that are willing to put their heart and soul into transformation.
HBR China: How can telcos overcome these two major obstacles?
Eric Xu: They'll find it hard to surmount the obstacles on their own. Usually, there are only three or four telcos within a country. Even if the business environment is changing, so long as none of their competitors are committed to change, telcos can continue to get by without transforming themselves. So telcos need external enablers. Once one telco takes action and transforms itself successfully, the others will suddenly realize that they need to change as well. And they will be able to move quickly, because they can learn from the lessons and experience of the first mover, and use the knowledge and the pool of workers with new skills that the first mover has created.
HBR China: What specifically should telcos do?
Eric Xu: There are two key actions needed to overcome these obstacles.
First, the board of directors and CEOs must commit themselves to transformation, and use strong leadership to drive the initiative from the top down.
Second, telcos need the support of external enablers.
Huawei's carrier business has positioned itself as a driver and enabler for telcos' strategic transformations over the next decade. We're bringing together the industry's best minds; we're preparing the technologies and expertise that telcos will need. Globally there are three to four hundred telcos, and most of them are our customers. We hope to be a partner for any telco that is committed to transformation. We have the full set of end-to-end capabilities, from strategy development to execution, that telcos need in order to transform and become digital enterprises that can deliver the ROADS experience.
HBR China: What is Huawei's enablement roadmap?
Eric Xu: Our All Cloud Strategy, launched in early 2016, is essentially an enablement roadmap for telco transformation. Based on the ROADS experience model, we enable telcos to rebuild their telecom equipment, networks, services, and operations. This transformation will not only help telcos sharpen their competitive edge in new markets such as IoT, video, and cloud, it will also support the cloudification of networks and operations systems to make telcos more agile. Our enablement efforts will focus on three areas: expanding telecom networks to include more connections; increasing the traffic flow capacity across telecom networks; and transforming operating models to make telcos more competitive against OTT players.
HBR China: During this enablement process, what do you work on, specifically?
Eric Xu: We're currently working with several telcos. We don't perform big bang transformations. Instead, we make ongoing adjustments and improvements in specific areas, gradually stepping up investment and checking our progress to ensure that whatever we're doing is creating value. In practice, we focus on the following four key points:
First, solutions must primarily address small-scale, limited problems. Together we can use these solutions to pilot changes and quickly adapt them as necessary. We don't expect to create complete, fully-tested solutions by working with just one or two customers. We prefer to test different parts of our solutions with different customers. This is an ongoing process of learning and building up experience, and gradually the complete solutions emerge.
Second, the transformation of operations systems is a long process. It requires patience. Telcos should not expect their vendors to be able to immediately spit out a complete set of technologies, organizational architecture, corporate culture, and strategic solutions which they can simply plug in and achieve instant transformation. This is just impossible. Transformation is difficult, and it needs to be conducted one step at a time. Huawei is committed to helping our customers step up to the inherent challenges and progressively pick up speed, but we estimate that the process will take at least ten years.
Third, telcos should stay focused on the value of transformation and close the loop by creating value with each change. It must be made clear to everyone that every change, no matter how small it is, can bring demonstrable value. By doing so, telcos can create Internet-based operations systems with cloud architecture to deliver a ROADS experience.
Fourth, the value and positioning of Chief Information Officers (CIOs) should be redefined. CIOs oversee information technologies and systems, and they support corporate goals through the adoption of IT. But I think CIOs should become CI3Os, with the I3 representing Innovation, Interconnection, and Information.
HBR China: You mention the need to redefine the role of CIOs. This will clearly expand CIOs' duties, their influence on other executives and managers, and their weight within the organization. Why is this necessary?
Eric Xu: Let me explain the meaning of I3. The first I is Innovation. CIOs know more about technological changes than other executives. They have ICT expertise and understand cloud concepts and technologies, what benefits these technologies will bring, what the Internet model is, and how the company should sell products and deliver services following the Internet model. CEOs don't necessarily have this level of knowledge, so CIOs need to take on a bigger role. They're no longer the directors or managers of IT applications. They should become the major drivers, planners, and even enablers of transformation and innovation in operating models and business models. This change poses new challenges to CIOs: They need to convince CEOs about the need for transformation, and they must have the ability to help CEOs achieve transformation.
The second I is Interconnection: CIOs need to enable the interaction between the company and its customers and partners.
The third I is Information: It means CIOs must lead the cloudification of the company's IT architecture.
HBR China: Given this change in the role of the CIOs, how should functions be merged?
Eric Xu: Under telcos' existing organizational structure, the CIO's role is to oversee operations, the CTO manages networks, and the CMO manages marketing. After the digital transformation, the CIO, CTO, and CMO will need to collaborate closely and streamline processes to set up a user-centric production system. Based on what we've seen, telcos usually start by merging the CIO and CTO roles into a CTIO.
HBR China: In recent years, Huawei has emphasized the building of ecosystems as well as complementary and collaborative partnerships. Over the next five to ten years, what key value will Huawei create as a member of its ecosystem?
Eric Xu: The unstoppable rise of digital business is the key trend. Therefore, companies have to build strengths within their ecosystems. Huawei is committed to being an enabler of the intelligent world. We will actively contribute to the cloud ecosystem, promoting openness, collaboration, and shared success. We will be the enabler and preferred partner for enterprise cloudification and digitalization. We will stay customer-centric and help all companies and other ecosystem players contribute their unique value to a robust ecosystem for All Cloud and digital business.
