Telecom Transformation

In the popular reality TV show Survivor, participants go through a series of contests, knowing that only a handful of winners will ultimately be allowed to stay on the island where the competitions occur. In the late ’90s, SureWest Communications – originally known as the Roseville Telephone Co. – realized that it would have to play in its own version of Survivor to remain viable in the telecommunications business.

Growing demand for new technologies such as cellular phones, broadband, mobile Internet, and satellite TV were eroding demand for traditional wired phone and cable TV services, while requiring new investments in infrastructure. As the number of new products and smarter technologies grew, customers expected more service packages to choose from and advanced technical assistance. After several years of wrenching and not always successful change, a very different SureWest (SW) is still surviving and, even prospering “on the island.”

Telecommunications isn’t the only industry to experience a game-changing shift. Electric utilities face the most disruptive changes to their supply chains and business models in history, as developments in clean energy and energy efficiency requirements continue to drive new infrastructure investment. Eventual deployment of smart grid technologies will support these changes, while redefining how customers interact with utilities.

Some progressive utilities are responding to these changes and considering long-term strategies to stay competitive. So far few utilities have begun seriously altering their business models and missions in response to these challenges. For utility executives considering examples of how other industries have adapted to new challenges and opportunities, some of SW’s tactics might hold lessons for their ability to survive and succeed

Wireless Revolution
No immediate crisis triggered SW’s transformation, nor did it occur rapidly or without hiccups. Throughout the 1990s, the company enjoyed growth in its traditional business as a copper-based landline voice and data provider to 83 square miles of suburban Sacramento, Calif. Yet the company saw new technologies and competitors rapidly emerging as threats to its core landline business. SureWest’s leaders realized that public policy supports for incumbent local-exchange carriers were likely to wither over time. In particular, SW saw wireless communications poised for very rapid growth, with a host of new competitors entering the voice and data markets, including the cable TV companies, satellite services, and other rivals, large and small.

As with many utility incumbents, including most electric utilities, SW had relatively high brand recognition and customer satisfaction – assets it knew it must leverage to fend off larger, better-financed competitors. As it didn’t expect to be able to compete on price alone, SW knew it would have to compete on the quality of customer service.

Along with its name change, SW adopted an extensive and ambitious suite of product and strategy changes. It invested heavily in a local wireless system, placing it in competition with a number of established and emerging wireless rivals; eventually SW sold that wireless business to Verizon Wireless in 2008.[i] It purchased the assets of a bankrupt fiber over-builder in its own territory in 2002, giving it immediate fiber to the home (FTTH) passing 42,000 households and 5,000 triple-play customers – i.e., those purchasing voice, broadband Internet, and TV services.[ii] Finally, it purchased a second service area in metropolitan Kansas City that had overbuilt an early hybrid fiber coax (HFC) network passing roughly 100,000 customers.[iii]

As it made these changes, SW came to agree with many others in its industry that offering triple-play service over one delivery network was the safest route to a sustainable competitive niche. This decision was neither unique nor surprising; to this day, triple play remains the nexus of residential communications competition. What was surprising, however, was its choice of delivery technology. Instead of the much more common RF-based video and cable modem approach, it chose to be among the pioneers of digital video over broadband (IP-based video).[iv]

This option played to the company’s advantage, but it presented a huge implementation challenge. IP video runs over a home computer network wired with CAT-5 cable. Every single TV in SW’s customers’ homes had to be hard-wired by technicians to SW’s proprietary network. (Customers’ computers also had to be connected, but these connections were more common, and could be wireless). To add to the challenge, IP video was more susceptible to interference than other systems, so the wiring had to be isolated and installed with care. And then there was the utterly crucial issue of making sure customers knew how to use the system, and could get their inevitable questions and problems dealt with quickly and effectively.

Invading Customers’ Premises
Once upon a time, prior to telephone deregulation, the one and only phone company that served your home installed and maintained all of its phones. In that ancient era, telephone company employees sporting the ubiquitous Bell Telephone logo were an occasional and not unfamiliar sight within homes and offices. Their technological and wiring challenges were modest, but they cheerfully made sure every phone in your house was located where you wanted it and that it worked reliably.

In the early 1980s, when telecom deregulation began in earnest, SW and every other phone company stopped entering customers’ homes or even thinking about what technology sat inside them. As with today’s electric utilities, their responsibility began and ended at the network interface on the outside of the house. Telephone companies kept their fleet of trucks, but their crews stopped doing inside wiring, and weren’t recruited, trained, or provisioned for anything other than outside work.

Selling IP video meant that SW would have to dramatically evolve its installation orientation. To deliver high-quality, highly reliable IP video straight to the screen, the company had to own every bit of the installation, maintenance, and performance of the delivery network. This not only meant creating a workforce that learned to install a whole new in-home technology; it also required the company to engage far more intimately with its customers, installing complex wiring all across their homes and making sure the installation experience, installation aesthetics, and especially the ongoing viewing experience was pleasing to the customer.

These imperatives caused SW to revise its installation and customer care procedures from top to bottom. While the full chronicle of these changes would fill many pages, the changes can be placed in five categories:

• A totally revamped sales force and strategy;
• New install scheduling and provisioning methods;
• New installer hiring and training;
• Expanded customer education, troubleshooting and customer care; and
• A completely retooled back-office system.

All these change areas are essential for success. However, changes in the sales operation and SW’s unusual changes in installation and customer education illustrate how the company shifted its focus, resources, and strategy –  and transformed its fundamental competitive character.

Selling From a Standing Start
Back in its traditional telco days before 1982 and ’83, SW didn’t need to do much selling. Even as late as the 1990s, its wireline installations – on which it has an exclusive franchise – were growing handsomely because of growth in the highly desirable area north of Sacramento up to the foothills of the Sierra Nevada mountains. But during the past decade, with its entrance into and focus on the business of being a competitive network provider, SW has had to build and hone its marketing strategies – particularly for the residential market, which is very different from the business market. Marketing to households is divided into three areas: a pull strategy via advertising; a retention strategy for existing customers considering switching away; and a direct sales strategy – pursued by the team of foot soldiers who are the main source of SW’s enviable growth.

At SW, compensation for marketing and sales people is highly weighted on individual and group performance in getting and retaining customers. As a result of the company’s overall marketing strategy, SW has a lower turnover rate than its competitors do – a key factor for the company’s success.[v]

The direct team faces the challenge of going door to door to talk to the people in each new neighborhood where SW has committed significant capital investment and laid down its fiber network past every home or apartment. The direct team also has the goal of knocking on every door at least once each year. This is sometimes called the “loneliest job,” as each visit has only a modest chance of acceptance.

An important part of SW’s marketing strategy is to maintain its positive image as a small but high-quality regional company. The salesmen and women must be able to reinforce that image, while they communicate the superior performance of a fiber optic connection. SW has tried to create a real team spirit in its direct marketers and, remarkably, reports relatively little turnover.

As a regional company, SW takes an active role in its communities, both within the Sacramento region and in the Kansas City area where it provides service. The company frequently sponsors charity fundraisers through the SureWest Foundation, and actively participates in local commerce organizations, such as the Sacramento Metro Chamber of Commerce. SW has used so-called “guerilla” marketing, including customer appreciation events at Sacramento River Cats minor league baseball games. The strategy is successful; surveys show SureWest is positively viewed as an involved, local company.

Intensive training is essential to the direct team. A new member of the direct team starts with four weeks of classroom training, becoming completely familiar with the SW service offerings, the network and technology behind it, and the billing system and back room operations. Then the new person goes out into the field, spending several more weeks working with an experienced supervisor. Any gaps in training can be identified and more training can be instituted. Door-to-door selling is a job of the most intense kind and, with its team approach, SW has developed the ability to find people who thrive at it.

SW’s pull strategy uses the call center to make calls on potential customers. And the retention channel has shown through experience that when existing customers call to discuss disconnection, the situation can be controlled. Phone representatives are trained to learn the source of the concern that’s leading the customer to switch. In many cases, the phone rep then can get a SureWest Pro service person into the loop and rectify the situation. As a result, SW’s residential broadband customer turnover rate is lower than the industry average, at 1.4% per month during the first quarter of 2011.[vi]

Installation and Education
SW’s transition from very little inside-premises work to a major in-home presence required a top-to-bottom revision of the installation and care experience.

The changes began with two key revisions in the installation process. First, each installation is coordinated in real time with the back office, so that each element of the installed service is connected and tested at the network operations center as the install progresses. Without automating these pre-provisioning tasks, testing and troubleshooting the install couldn’ begin until after all the inside wiring was completed, which would stretch the install well beyond the target maximum of four hours – the longest period SW likes to require its customers to remain at home while they install.

The second, more unique feature of the revised install process was the division of SW’s installation force into two parts – physical installers and specially-trained customer education agents known as “SureWest Pros.” As the installation is wrapping up, the physical installer notifies the SW Pro and the latter comes to the home to meet the new customer. While the installer finishes the job, cleans up, and double checks to make sure everything is working properly, the Pro focuses on introducing the customer to the new system – demonstrating how each remote control works, explaining the menus and screens, double checking that all the computers and devices are working, and explaining customer care procedures in case any trouble crops up.

Technically, the division of the installer force in this fashion means that every installation requires two truck rolls rather than one. Nonetheless, SW has found that this approach allows it to train its installers to focus on the skills and customer interactions involving the physical location of network elements – “where would you like the set-top box, Mrs. Jones?” – while the Pros become experts in teaching customers how to get the best use out of their systems and how to self-diagnose the most common troubles. SW has found this approach is a nearly foolproof way of avoiding the worst possible install outcome: a customer who calls to say “it was working when the installer showed me but now I can’t get it to work.”

This continued innovation around the customer installation process also has supported meaningful results to the bottom line: 30-day go-backs, or repeat truck rolls to a customer’s home within 30 days of the original installation, have dropped from 12 to 15 percent a few years ago to below 7 percent today.

These changes are perhaps the most customer-visible among dozens of other complementary changes, including intensive training and monitoring of SW’s installers, redesign of its back-office systems, and cross-training of its 24-hour customer care specialists so that one phone call can diagnose and fix any part of the triple-play package. Together these changes have enabled SW to achieve 61 percent customer triple-play penetration, lower-than-average customer churn, and profitability sufficient to restore part of the dividend the company eliminated early in the Great Recession.[vii]

While there’s no such thing as a long-term victory in the communications business, SW remains “on the island” and is rated positively by its Wall Street analysts.

Lessons for Electric Utilities
There are many differences between the power and communications industries, and between today’s electric incumbents and a company like SW. Perhaps the largest difference is the fact that communications competition occurs via competing end-to-end networks, whereas we’re likely to have only a single power grid for decades to come. This means electric utility sales will be displaced by substitutes for network services, not rival networks – or in less abstract terms, by customers generating their own power coupled with on-site storage. Additional threats might come in the form of small, community-based generation startups.

A second, related difference is that electric utilities face threats from a new category of firms who want to provide services directly to customers that reduce electricity usage, including intensive hour-to-hour management of customers’ power demands. Many of these firms are already well-established in the commercial and industrial sector, including Gridpoint, Johnson Controls, EnerNoc, and many others, and a few are already selling to residential customers. There’s an analog between these energy service disintermediators and the so-called “over the top” video providers that are now coming on strong in the telecom market.

The first challenge – widespread exodus off the grid – is neither commercially nor technologically feasible at present, and probably a bit farther off in the distance than the threats that forced SW to adapt. Home-scale distributed generation (DG) is still substantially more expensive than utility-provided electric supply.[viii] For example, customer-installed photovoltaic power is at least 25 cents/kWh after today’s tax incentives, while power from utility scale natural gas-fired generators is only about 6 cents/kWh – excluding, in both cases, delivery and backup or firming power where needed. [ix] Nevertheless, DG has been getting successively cheaper, and it’s destined to continue eroding traditional grid-based sales in gradually increasing amounts.

The second set of challenges also differs between telecoms and power, as the exclusivity of the power network means that most customers will continue to buy service from electric utilities in one form or another. Independent energy service providers will position themselves between the utility and the customer, but they won’t eliminate the utility’s kilowatt-hour sales or delivery charges – they’ll only reduce them significantly, and in doing so gain the customer’s loyalty and trust.

Finally, the power industry remains far more regulated than the telecommunications sector has become, and is likely to remain so.

Nevertheless, despite these differences there are enough parallels between the old Roseville Telephone Co. and today’s electric utilities to draw one lesson: electric companies must either get much more involved managing their customers’ energy use or cede this part of the value chain – and the customer relationship that goes with it – to a wave of competitors.

The technology for in-home management, from smart meters to the microprocessors that every appliance manufacturer is already embedding in its products, continues to penetrate the addressable market rather quickly. Someday in the not-so-distant future, a representative from a company whose main mission is to help customers’ manage their energy use will be a familiar sight in American homes. Will that representative wear a shirt with the local utility’s label on it, or will the logo belong to a company that virtually no electric customer knows today?

Without proactive strategies by utilities and cooperation from their state regulators, the answer likely will be the latter.

ABOUT THE AUTHORS: Peter Fox-Penner is principal and chairman, and Joseph B. Wharton is a principal with The Brattle Group.