T-Systems’ Analyst Summit 2011: Getting Past A Lost Year

T-Systems’ Analyst Summit 2011 in Frankfurt was dominated by updates on the progress the company made regarding its restructuring projects. As a result of these efforts, T-Systems has created the basis to become a more efficient and agile ICT services provider going forward. Still, in our view, the period between mid-2010 to mid-2011 was a lost year for T-Systems — despite the obvious progress T-Systems made in addressing its past challenges.

In some respects, T-Systems had become a victim of its own success in 2009 and 2010. T-Systems was clearly overwhelmed by its multibillion deals (with clients including Linde, BP, Shell, E.ON, MAN, Continental, etc). Delivery capacities were stretched to the limit, manifesting in serious transition and transformation challenges. T-Systems was forced to allocate more capacities to big deals, thus depressing margins to just over 2% in Q3 2011 (see chart below). T-Systems still aims to reach the peer-group average EBIT margin.

Source: company reports

About a year ago, T-Systems began to restructure its entire operations in a mammoth project, effectively redrawing the entire organisational structure and reshuffling the top management team, except for the CEO and CFO. The Analyst Summit provided some insights that these efforts are beginning to bear fruit:

  • The sales organisation now concentrates on the task of hunting. T-Systems also introduced a greater vertical focus on automotive, communications and utilities, and public and health for global accounts and reshaped the regional focus on Germany, EMEA, the Americas, and Asia Pacific. Importantly, there is also a closer integration between sales, marketing, and production in order to ensure that marketing campaigns support sales activities better and that offerings can also be delivered on time and cost. Still, we believe that T-Systems should sharpen its go-to-market approach where it lacks the scale of its key competitors, as for instance in the US, and consider embracing channels or closer partnerships.
  • The services division is responsible for service delivery as well as farming of existing customers. The organisational setup between hunters and farmers is matched for the sales and services divisions. Hunters and farmers share targets and are cross-incentivised. In our view, this is a sensible setup. It addition, services has the responsibility for portfolio development. Interestingly, T-Systems wants to become a leading player in specific vertical niches, such as in car dealership solutions in the automotive sector. These specific vertical niches are in addition to its offerings like Dynamic Services, UCC, IP-VPN, etc. This niche strategy is a clever approach to avoid taking the largest competitors head-on. But this approach also highlights the challenges of driving the top line through niche offerings. T-Systems would require dozens of successful niche offerings to lift its €9B revenue base significantly. This would be a slow process, if T-Systems’ current innovation offerings in the energy, healthcare, and car spaces are any indication.
  • Production is a pure cost-centre and focuses on a build-to-order process, based on quality and price. The division managed to get the incidence-level down by 80% since late 2010. Production will play the central role in boosting margin targets.

T-Systems’ strategy has not changed much since 2009, essentially focusing on fixing the operational efficiencies and transforming the business whilst selectively pursuing innovation topics. However, T-Systems has lost some sales and innovation momentum during 2010/2011, whilst sending out a message of an overly inward-focused business. Despite recent customer and staff surveys indicating an uptick in satisfaction levels, we believe it is too early to give an “all-clear.”

Longer term, we believe, T-Systems should move even closer to its parent company and take on the lead innovator role for the entire Deutsche Telekom Group, including B2B2C offerings such as home area networking. The announcement that Deutsche Telekom’s technology chief is stepping down only increases this opportunity for T-Systems.