Three Ways TMT Companies Can Simplify To Improve Profits and Scale
Three Ways TMT Companies Can Simplify To Improve Profits and Scale
Three Ways TMT Companies Can Simplify To Improve Profits and Scale
companies
can simplify to
improve profits
and scale
Strategic decisions made today
on intelligent scaling can lay the
foundation for a successful future.
For the past decade, many successful, fast- How to reduce complexity
growing technology, media and entertainment,
and telecommunications (TMT) companies and sustain profitability
deployed a grow-at-all-costs strategy. They fueled TMT companies can leverage the
this strategy with acquisitions, new product lines
current crisis as the impetus to reduce
and new business capabilities. They expanded
into new geographies and customer segments, all
complexity in their organizations and lay
aimed at supporting the growth trajectory. During the foundation for sustained profitability.
the past five years, TMT companies generated a Specifically, we recommend CEOs
median total shareholder return of approximately and C-suite executives of high-growth
13%, greater than that of all other sectors in this TMT companies:
period.1 Further, the TMT sector reported the
highest levels of transaction volume of any sector ake a top-down enterprise view of
T
in recent years, with over 11,000 transactions in 1 the company’s operating model
2018 and 2019.2
Enter the pandemic, and the dramatic changes
we’ve witnessed over the past several months. Align operations to the future
Overnight, the reduction in revenue across 2 strategic priorities of the business
certain segments exposed a high fixed cost
structure driven by complex and inefficient Assess the current portfolio and
operating models that have evolved at many TMT 3 reallocate investments where
companies. These complexities were not planned:
needed
they were the result of rapid growth, requiring
the addition of headcount, vendors, systems and
entire ecosystems to enable the growth of
the business.
Many TMT companies are using the opportunity
presented by the current environment to identify
areas to reduce costs and preserve liquidity.
However, the traditional approach to assign cost-
reduction targets to individual business functions
has shown significant limitations — principally that
the costs often quickly “grow back” in the short to 1
EY analysis; data set comprised companies with market cap greater than $500m.
medium term. 2
Dealogic, Mergermarket, secondary research, EY analysis.
How operating models become cumbersome and obsolete
An operating model is a snapshot of an enterprise at a given Over time, infrastructure can build extensively throughout the
point in time — a graphical representation of how a company organization. The existence of additional sub-functions, bolt-
is run and structured across people, processes and systems. on systems, reporting requirements and other costs comes
It is how the company organizes its core business and support into place to solve problems as they arise. At a certain point,
functions across the value delivery chain. The operating however, the cumulative complexity of these operations begins
model captures the current state of operations and provides a to hold back the very growth they enabled. Our suggestion is
vantage point for leadership to identify areas of redundancy to look at the whole operations of a company and simplify the
or misalignment. way the company runs — less patchwork, less redundancy and
less cost — with the future in mind.
Financial
Product Product Sales Opportunity Talent Financial Procurement
Development Desktop HR operations Litigation Contracting planning & Security
development research forecasting management acquisition accounting & leasing
analysis
management accounting
Treasury Tax
Systems
Real estate
party
Third
2. Does
it look across the entire company and identify areas
of structural change (vs. marginal changes to the
existing structure)?
Three ways TMT companies can simplify to improve profits and scale | 1
Figure 1: Enterprise vs. functional approach to cost takeout
2 | Three ways TMT companies can simplify to improve profits and scale
Figure 2: Financial value creation levers
Three ways TMT companies can simplify to improve profits and scale | 3
4 | Three ways TMT companies can simplify to improve profits and scale
Assess the current portfolio
Companies often have highly complex portfolios and struggle In another example, a large media conglomerate simplified
to maintain focus across the entirety of the portfolio to its global operating model by changing its global business
deliver sustainable results. Increasingly complex portfolio model to run each region as a subsidiary and scaled down
size and scope can make it difficult to achieve business operations in low-growth geographies. The costs saved
objectives and enable sustainable growth. While the were deployed to expand into new business models and new
main driver of operating model simplification is to reduce markets. Operating income grew at a CAGR of 14%.
operating costs, we have seen that this approach may lead
In the current environment, companies have an opportunity
to increased investment in certain areas. A recent EY study
to make targeted capital investments to advance strategic
found that during the Great Recession of 2008, technology
priorities. Implementing a top-down sustainable approach
companies that generated the highest total shareholder
to cost reduction provides fuel to accelerate strategic
returns continued investments in future growth even
investments during this period of uncertainty.
during such turbulent times. These companies continued
R&D investments throughout the crisis, minimized overall
operating expense cuts and quickly ramped up revenues after
the recession.
100
159%
50
78% 63%
0
Restructuring
S&P 500 IT S&P 500 cohort
Index Index N+120 3
EY analysis.
Three ways TMT companies can simplify to improve profits and scale | 5
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