Capitalizing on Change through Performance Management
“Changes and challenges are seen as ‘business as usual’ for companies like ours that need to adapt to continuous technological shifts. We aim to gain the benefits of repeatability in our service delivery while still achieving creativity and nimbleness. The key is to adjust the organization to adapt to change.”
— Mr. Alexander Anthony Arena, Executive Director and Group Managing Director, Hong Kong Telecommunications
Hong Kong Telecommunications (“HKT”) is Hong Kong's premier telecommunications service provider. The Company serves the needs of the Hong Kong public as well as that of local and international businesses with a wide range of service offerings, including local telephony, local data and broadband, international telecommunications, mobile, and other services such as customer premises equipment sales, outsourcing, consulting, and contact centres. Together with the highly successful media business of its parent company, PCCW Limited, HKT further offers innovative media content and services across PCCW Group's unique quadruple-play platforms – fixed-line, broadband internet access, TV and mobile.
HKT is majority-held by PCCW Limited. The latter company operates a leading IT solutions business, in addition to the aforesaid media business, and holds interests in a Hong Kong-listed real estate company amongst its various investments. The ultimate parent company of the group is Pacific Century Group Holdings Limited. In November 2011, HKT was separately listed on Hong Kong Exchange in the form of Share Stapled Units. Headquartered in Hong Kong with presence in mainland China and other parts of the world, HKT currently employs approximately 14,900 staff. Mr. Richard Li is the Executive Chairman and Executive Director, while Mr. Alexander Anthony Arena is its Executive Director and Group Managing Director.
HKT finished the first half of 2012 with a strong position, achieving total revenue of HK$9,715 million and a total EBITDA of HK$3,736 million. Profit attributable to holders of Share Stapled Units amounted to HK$778 million, with basic earnings per Share Stapled Unit of 12.13 HK cents. The adjusted funds flow for the period was HK$1,430 million; adjusted funds flow per Share Stapled Unit was 22.29 HK cents and the interim distribution per Share Stapled Unit was 20.06 HK cents.
Managing Constant Change
Despite the volatility in the general market environment, the strong financial result is a testimony that HKT has done well since its spin-off and separate listing. Mr. Arena, the Group Managing Director explained: “Changes and challenges are seen as ‘business as usual’ for companies like ours that need to adapt to continuous technological shifts. We aim to gain the benefits of repeatability in our service delivery while still achieving creativity and nimbleness. The key is to adjust the organization to adapt to change.”
Under Mr. Arena’s leadership, HKT has showed resilience and innovation during the economic uncertainty of recent years by proactively responding to shifts in consumer spending patterns. For instance, during the downturn, consumers have generally cut their budgets for luxury products and overseas travel, while spending more time at home. Therefore, products that improve lifestyle, such as home entertainment, could effectively capture part of the consumers’ unspent budget. HKT responded to this market opportunity by producing a line of “Smart Living” products, leveraging on new technological advancements. This includes a “Home Automation” service that seeks to tap on emerging business opportunities in the residential market.
Unlike those who consider the fixed-line as a sunset business that would be replaced by the mobile business, Mr. Arena is of the opinion that the fixed-line business has potential to continue growing via technological innovation. He believes that the mobile business is not substituting, but is complementary to, the fixed-line business. In order to embrace change as they come, the Company established a well-managed performance management system that guides the management to continuously re-invent or adjust its offerings to its customers.
The Application of Corporate Performance Management
Utilizing financial statements for managing performance may not be adequate because of the inherent smoothing effects and intricacies of accounting for reporting purposes. According to Mr. Arena, HKT adopts a set of multi-dimensional KPIs that includes growth in terms of cash flow and distribution, as well as quality of service to customers. Performance management objectives are built across various lines of businesses that the Company operates. KPIs are then developed and filtered down to each specific part of the businesses.
One of the key steps is for the Company to chart out roadmaps for each of its business lines with reference to the stages of maturity in their respective product life cycles. For instance, for certain legacy businesses, the objective to be set would be to stretch out the decline phase of the product life cycle. The key to performance is how well the decline has been managed. Many times, this can achieved through innovation. In many other cases, the focus would be on the integration of technology and pooling of backend support to ensure that shifts in market trends are captured, and that consumer needs are accommodated. Overall, the Company strives to push its services through the access devices that customers use, i.e. via fixed line, broadband, mobile or TV.
HKT’s experience shows that effective management of corporate performance has contributed to success in this industry. Active management of performance drives the Company as a whole to keep up with stakeholders’ expectations. On the operational front, the Company is driven to proactively study the macro-environment and draw timely conclusions as to which sectors are expanding, shrinking or declining. This enhances the management’s understanding of how far HKT’s products are moving along their product life cycle curves, and prompts decisions to timely adjust its operations.
On the financial front, cost of debt is one important dimension that the management is concerned. This is monitored in conjunction with the loans, bonds, fixed deposits and various liquidity ratios. Another area of concern is the incremental earnings that can be made above the stable income and cash flows from conventional service offerings. Other KPIs include ability to achieve steady rates of engagement, minimising churn, quality of product development, etc. All these KPIs are ultimately tied back to the overall financial results and cash flows of the Company.
HKT has a wide range of product and service offerings, each of which are at different stages of maturity along their respective product life cycles. Products such as mobile telecommunications and data are shifting from ‘emerging’ to ‘mature’ stage, while others may be rolling off from ‘mature’ to ‘decline’ stage. The Company strives to manage all these evolutions strategically. The challenge lies in adopting the appropriate change strategies and building the right capabilities to adapt to market needs.
The Company is an integrated carrier. Mr. Arena differentiates HKT from other standalone mobile service providers via the fact that the latter providers have heavier capex to sales ratios. Integrated carriers, on the other hand, are able to share the capex (e.g. fibres connecting the cell sites) across both fixed and mobile networks. Being a leader in this industry, the advantage for HKT is that the existing infrastructure can be leveraged on for any modifications called for by significant market changes.
“Ultimately, the real challenge is still managing people and attitudes”, Mr. Arena said, “the consumer is at the centre of our universe.” In order to retain the customer accounts, the Company has to build products that are relevant with times and provide excellent services. In this respect, talent retention and management is another major challenge. One of the strategies adopted by HKT is to attract senior executives with good experience in different service sectors. Another way is to conscientiously rotate and develop internal talents.
To give a snapshot of the talent management initiatives, HKT recruited a new Chief Marketing Officer for its Wireless Business in early 2012 in order to generate new marketing strategies, service plans, and sales and market communications for the business. Another new talent that the Company attracted is the Managing Director of the Consumer Group, whose mission is to bring new ideas to product development, marketing and promotion, customer sales network, and improvement of customer service. At the same time, the Company also promoted several executives, who had been groomed internally, and assigned them new responsibilities.
Mr Arena believes that the Company needs to continue to be creative in overcoming changes and constraints. Being able to change people and attitudes is the key to overcoming other challenges, a factor which contributes significantly to the success of the Company.