Sector reacts to Telefónica re-org
19 October 2011
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There was considerable coverage of Telefónica Group’s decision to reorganise its structure to tackle a decline in its traditional businesses, and to foster growth (Telefónicawatch, #57).
The moves were widely welcomed, although the strategy was interpreted differently across the stakeholder community.
Global Resources seen as aping Vodafone, Digital leading way
The creation of a Telefónica Global Resources was described as “better late than never, ” by analysts, and it was noted that Telefónica rival Vodafone has operated a similar division for several years.
However, it remains unclear to Telefónicawatch the extent to which the new division will offer additional benefits compared to those provided by the existing Global Services business, which had seen centralising of many functions, and has been in operation since 2009 (Telefónicawatch, 2009.05).
In contrast, the Telefónica Digital division was seen as more ground-breaking. It was noted after the Telefónica announcement on the new Digital division that Vodafone had opened a research and development centre in Silicon Valley, highlighting its pursuit of innovation (and originally reported in Vodafonewatch in 2010). The moves by the mobile giants were cited as evidence of a change in mood and attitude at the large European players, which has actually been evident for some time.
The Telefónica move was described in the Guardian as “far more daring” than Vodafone’s innovation and incubator launch, due to the role Matthew Key will play in running the programme — the presence of a perceived rising star with substantial senior management experience is seen to give the Telefónica Digital division gravitas.
Digital division about alliances as well as competition
Elsewhere, the understanding of the purpose of Telefónica Digital appears to have been focused solely on innovation and new product development, when a significant aspect of the role will be in its partnering with companies. When Telefónica announced its intention to work with players in areas where it could not effectively compete, the emphasis should have been seen to be on the cooperating aspect of the declaration. Telefónica management had been making some noises about cooperating more with internet giants, and while there appeared to be some resistance in practice to partnership, the Telefónica strategy as set out at its Investors Conference in April 2011 (Telefónicawatch, #54) assumed an increased level of partnership in the pursuit of new business.
Perception of Madrid devolving power misplaced
It was noted that the reaction in Spain seemed subdued following the news of Telefónica’s reorganisation, considering that it saw its home division vanish. However, this could be due to interpretation of events — there was an assumption made in the UK press that the creation of the Telefónica Digital division with its nominal headquarters in London, combined with the folding of Telefónica España into a European business that principally comprises O2 units, implied a shift in power from Madrid.
This view is unrealistic. Senior management are to remain in Spain; the running of European operations is in reality moving closer to the Spanish capital than London, and closer control of O2 businesses can be perhaps expected. The theory that Madrid is taking more of a role in the activities of O2 operating units could be seen to be supported by the apparent changes in strategy in recent quarters from Telefónica UK (O2 UK). Telefónicawatch has regularly noted that generating more profit from existing customers appears to have taken priority over the focus on strong performance through innovation, which had been the hallmark of the O2 business in the period that saw it grow to be the largest player in the market (before the Orange and T-Mobile merger). “Value not volume” is the mantra that emerged from Telefónica España as that business suffered in the markets, and it is now being taken up by Telefónica Europe. It was noted in the Spanish press that the introduction of Alvarez-Pallette to the leadership of Telefónica Europe is expected to support a programme to raise margins at the O2 businesses.
Telefónica Digital certainly appears to have been given a degree of independence to try and build new revenue streams, but it could also be seen as being left to ‘sink or swim’. Several reports indicated that Telefónica Digital’s 2, 500 staff will be based in London, but this appears to be far from the case. However, it is an impression the Group seems unworried about correcting, particularly in the UK environment. Telefónica already appears coy on the number of staff it employs in innovation centres across Latin America, Spain, and the UK, but it is unlikely that operations are set to up sticks and move to the UK any time soon.
Senior Group management are drawing the core businesses closer into their control, and having more involvement in the running of operations. The changes in structure could actually represent the opposite of Madrid trying to diversify its business, but instead represent a company panicking about its future and trying to counter this by taking a firmer grip.
[Further reference: Alierta da otro golpe de timón en Telefónica -- Cinco Dias, 5 September 2011; Spanish locals stay calm about global Telefónica -- Financial Times, 7 September 2011; Telefónica answers the call of London's attractions -- Financial Times, 7 September 2011; Vodafone flies flag for Britain in Silicon Valley -- Guardian, 9 September 2011; The Promise and Perils of Telefónica Digital -- Yankee Group, 6 September 2011.]
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