Three ways TMT

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
point in time — a graphical representation of how a company
is run and structured across people, processes and systems.
It is how the company organizes its core business and support
functions across the value delivery chain. The operating
model captures the current state of operations and provides a
vantage point for leadership to identify areas of redundancy
or misalignment.
Over time, infrastructure can build extensively throughout the
organization. The existence of additional sub-functions, bolt-
on systems, reporting requirements and other costs comes
into place to solve problems as they arise. At a certain point,
however, the cumulative complexity of these operations begins
to hold back the very growth they enabled. Our suggestion is
to look at the whole operations of a company and simplify the
way the company runs — less patchwork, less redundancy and
less cost — with the future in mind.

Operating model dynamics

R&D Sales & marketing IT HR Legal Finance Real estate

Financial
Product Product Sales Opportunity Talent Financial Procurement
Development Desktop HR operations Litigation Contracting planning & Security
development research forecasting management acquisition accounting & leasing
analysis

Product life Regulatory &

Product Product Data Benefits Performance Intellectual Accounts
cycle change Marketing Telecom Compliance statutory Signage
engineering management storage admin & rewards property payable
Processes

management accounting

Sales Security HR direct Com- Accounts

Infrastructure Licensing Registration Payroll
operations management & consulting munications receivable

Treasury Tax
Systems

Case Contract Budgeting & Transfer Facilities

Development
CRM ERP HRIS management management forecasting pricing management
tool
system system solution solution system

Real estate
party
Third

Branding Benefits Job posting Legal portfolio

agency provider site provider counsel management
company

Take an enterprise view of operations

Successful companies take an enterprise approach to This approach seems straightforward but is often abandoned
operating model simplification driven by the CEO, CFO and in favor of cost targets that are handed off to middle
C-suite to create lasting cost savings. An enterprise approach management to execute. Figure 1 on page two provides
involves asking: a contrast of these two approaches.

1. Is it driven top-down by the CEO or CFO, with buy-in across

senior leadership?

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

Enterprise approach Functional approach

• Driven by CEO and CFO • Driven by middle management

Ownership • Free to make bolder, cross-functional changes in • More challenging to abandon “the way things have
alignment with strategy been done”

• Narrow, function-focused marginal improvements

• End-to-end, cross-functional, cost-savings initiatives
Scope • Can shift burdens to other functions and result in
• Identifies redundancies or areas of strategic
abandonment of capabilities that add value to other
misalignment to eliminate, not transfer, costs
parts of the enterprise

• Long-term focus on operational improvement to

• Short-term focus on “getting to the number” in the
enhance process maturity and scalability
current period
Sustainability • Simplifies the underlying operating model by
• Often temporary, with costs quick to return when
holistically addressing organizational design, process
focus on reduction abates
maturity and technology enablement

We have seen that a comprehensive enterprise view often

requires leaders of high-growth TMT companies to consider
priorities and execution strategies across functions to identify
opportunities that can create sustainable value (see Figure 2
on page three for a list of opportunity areas and cost levers).
By employing this approach, leaders can identify areas of
redundancy or strategic misalignment and drive scalable,
cross-functional change. CEOs, CFOs and the C-suite of high-
growth TMT companies can use this opportunity to be explicit
in defining where the company will strive to be “best in class.”

Take, for example, a US-based semiconductor company that

launched a large-scale cost restructuring effort. The company
consolidated and simplified its supply chain and new product
development operations and elected to outsource non-core
business operations to a third party. This approach helped
the company realize an increase in operating margin of
approximately 1,000 bps over a period of seven years.

2 | Three ways TMT companies can simplify to improve profits and scale
Figure 2: Financial value creation levers

Pillar Opportunity area Key cost levers

• SKU and customer optimization
• Virtual and digital selling
Customer demand • Channel strategies
• Sales force effectiveness
• New products and markets
Revenue and
Price and promotions • Pricing strategies • Streamlined cost to serve
gross margin
• Strategic sourcing of direct categories
• Footprint optimization
COGS • Labor productivity
• Automation and robotics
• Asset utilization
• Operating model redesign
• Distribution, network and logistics
Operating model • Shared services
optimization
• Outsourcing

Operations • Labor optimization

Labor productivity • Compensation and incentives alignment
and SG&A • Process efficiency and automation

• Strategic sourcing of indirect categories

• IT system rationalization
Third-party spend • Controls and demand management
• Real estate portfolio rationalization
• Marketing productivity
• Optimizing the supplier credit cycle
• Cash flow visibility and uses
Working capital • Inventory management
• Enhanced cash flow management
• Sales to cash improvement
• Capital initiative portfolio rationalization
CapEx and cash Capital portfolio • Real estate optimization • Process and governance restructured
• Decision rules

• Tax credits, grants and incentives • Mobility

Tax savings
• Indirect taxes • Transfer pricing

Link the operating model to future strategic priorities

While company strategy is often communicated across the
organization, the details of how that strategy will be realized
(growth markets, strategic partnerships, acquisitions,
divestitures, new business models, etc.) may be less known.
When examining enterprise operations, executives may
ask themselves: “Do my product, commercial and support
functions enable our business of the future?” and “Can these
capabilities scale at the rate we need them to grow?” A
critical component in developing a simplified operating model
is to clearly define and lay out the results that the model will
be designed to deliver.
products that were delivered to customers through a direct-
to-consumer channel. The company enacted a restructuring
agenda that eliminated operations of three unprofitable
franchises and established a new business unit, all intended
to fuel investments into digital initiatives for core brands.
Efforts focused on aligning and streamlining critical product
development processes to advance future initiatives. This
simplification in operations and increased focus helped the
company realize a more than 10% increase in operating
margin and the company stock price more than doubled over
five years.

Consider another example. A leading entertainment company

wrestling with changes to its competitive landscape and
advanced technologies led the market with next-generation

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.

The time is now

The EY study also found that the TMT sector, unlike other This last recession has taught us that strategic decisions
sectors, is resilient. In fact, TMT companies that restructured and actions made during a crisis can matter more than the
between 2008 and 2010 enjoyed five-year shareholder strength of a company going into a crisis. TMT CEOs, CFOs
returns almost double those of the S&P 500 IT Index (see and the C-suite have a window of opportunity to simplify
Figure 3 below). If companies are strategic about cost their company operating models and orient them toward the
management in the current environment, sustainable future instead of the past. Beyond improving profitability,
profitability improvements are far often more likely these efforts can also improve customer experience, ease
when revenues return, setting these companies up for deployment of breakthrough business models and defend
long-term success. against activist investors. This is an opportunity for high-
growth TMT companies to demonstrate to the investment
community, employees and other stakeholders that they
Figure3:3:Total
Figure Total Shareholder
shareholder Returns
returns of TMT
of TMT can both reduce costs and develop an efficient and scalable
Restructuring Cohort of 2008-2010
restructuring cohort, of 2008–10³ platform for the future. Many high-growth TMT companies are
200
undergoing their first-ever large-scale cost reduction effort. If
done strategically—it may also be their last.
150
Five-year median TSR

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
 EY | Assurance | Tax | Strategy and Transactions | Consulting

Contacts About EY
EY is a global leader in assurance, tax, strategy, transaction and consulting
services. The insights and quality services we deliver help build trust and
confidence in the capital markets and in economies the world over. We
develop outstanding leaders who team to deliver on our promises to all
of our stakeholders. In so doing, we play a critical role in building a better
working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the
member firms of Ernst & Young Global Limited, each of which is a separate
legal entity. Ernst & Young Global Limited, a UK company limited by
guarantee, does not provide services to clients. Information about how EY
collects and uses personal data and a description of the rights individuals
Barak Ravid Lukas Hoebarth have under data protection legislation are available via ey.com/privacy. For
EY Americas Technology, Principal more information about our organization, please visit ey.com.
Media & Entertainment, EY-Parthenon
Telecommunications Leader for Ernst & Young LLP
Ernst & Young LLP is a client-serving member firm of Ernst & Young Global
Strategy and Transactions +1 949 280 0276
Limited operating in the US.
Ernst & Young LLP lukas.hoebarth@parthenon.ey.com
+1 415 894 8070
barak.ravid@parthenon.ey.com About EY Strategy and Transactions
EY Strategy and Transactions teams work with clients to navigate
complexity by helping them to reimagine their ecosystems, reshape
their portfolios and reinvent themselves for a better future. With global
connectivity and scale, EY Strategy and Transactions teams help clients
drive corporate, capital, transaction and turnaround strategies through
to execution, supporting fast-track value creation in all types of market
environments. EY Strategy and Transactions teams help support the flow
of capital across borders and help bring new products and innovation
to market. In doing so, EY Strategy and Transactions teams help clients
to build a better working world by fostering long-term value. For more
Ray Anderson Nina Lapachet information, please visit ey.com/StrategyandTransactions.
Principal Principal
EY-Parthenon EY-Parthenon About EY-Parthenon
Ernst & Young LLP Ernst & Young LLP
EY-Parthenon teams work with clients to navigate complexity by helping
+1 312 879 3881 +1 916 712 3420
them to reimagine their ecosystems, reshape their portfolios and reinvent
raymond.anderson@parthenon.ey.com nina.lapachet@parthenon.ey.com
themselves for a better future. With global connectivity and scale,
EY-Parthenon teams focus on Strategy Realized — helping CEOs design
and deliver strategies to better manage challenges while maximizing
opportunities as they look to transform their businesses. From idea to
implementation, EY-Parthenon teams help organizations to build a better
working world by fostering long-term value. EY-Parthenon is a brand under
which a number of EY member firms across the globe provide strategy
consulting services. For more information, please visit ey.com/parthenon.

© 2020 Ernst & Young LLP.

All Rights Reserved.
Nejhla Ahmadi
Director US SCORE no. 10705-201US
EY-Parthenon CSG No. 2009-3595026
Ernst & Young LLP ED None
+1 310 487 0803
nejhla.ahmadi@parthenon.ey.com This material has been prepared for general informational purposes only and is not intended
to be relied upon as accounting, tax or other professional advice. Please refer to your advisors
for specific advice.

ey.com