So it appears that we are at the beginning of the end of the financial crisis. There are some worries that we may go into a long period of stagnation – much like Japan did since the 1990’s. I have read opinions that if Japan had not held onto the belief that the bad investments behind the crisis could be recovered eventually, they would have done much better economically – in fact thrived. (See the Bank of International Settlements report http://www.bis.org/publ/bppdf/bispap06.pdf).
Japan has often been compared to Sweden who suffered a similar crisis – but dealt with it in a very different way. Sweden took the bad loans for what they were and forced banks to write down their losses. Banks had to accept government warrants to take them off their books – a big hit on shareholders but it turns out quite good for the Swedish taxpayer. These bad assets essentially ended up in Securum - a “Bad Bank”.
So I began to think… are there analogies with Telecoms and its bubble burst in 2000? Maybe not but I have to give it a try.
A large part of IT expenditure is capital and therefore could be considered an investment. The assets purchased are supposed to provide a good ROI over their lifetime. You could say that the Operator is like a bank lending money to the most lucrative investments – IT, Network, etc.
I have noticed that in the BSS area (Billing and CRM primarily) the vast majority of new “loans” were made before the bubble burst. After which new investment pretty much stopped. I think a lot of companies knew they were sitting on top of bad (by which I really mean “uneconomic”) investments. In some cases, these investments contributed to companywide viability issues and a few firms declared themselves bankrupt.
A few companies realized that their BSS “portfolio” was a bad investment and tried to sell these to other companies in the terms of outsourcing or literally as a sale. This was analogous to one bank saying to another – “take my bad investments…. No discount”. A “win win” scenario was just not “in the books”. Most companies have ended up nursing these investments for over 10 years now – fixing, extending, customizing. In some ways – the way we have treated uneconomic BSS is the way Japan treated its bad loans. And in many ways the stagnation in BSS as a strategic asset – in both CRM and Billing – is like the stagnation that Japan suffered in its economy as a whole.
So, you would think that a Swedish strategy – putting bad loans under separate management – leaving the banks with clean balance sheets – would have been a good strategy: a bad bank strategy for uneconomic BSS. This is an approach is not unknown in other industries, Computer Associates (CA) acted as a bad bank for old mainframe software and did quite well at it.
I have to be honest and recognize that this analogy is very crude – we do have large Telcos investing in BSS programs in the 2000’s. I would say that these Telcos were most often sitting on top of good investments made in the 1980’s that became uneconomic in their old age and in dire need of replacement.
So why haven’t we embraced a “bad bank” strategy in Telco? I think using Ireland’s current situation may be useful. The stakeholders in the Irish “Celtic Tiger” boom – the property developers (the recipients of the loans) should be taking the “hair cut” (as they would have in Sweden) but they are not really. The taxpayer (through NAMA) is ultimately taking the hit.
In some ways you can consider the BSS “property developers” to be the vendors. And make no mistake, these developers – through maintenance and forced upgrades – have no interest in being “CA’ed” or as I call it “Bad Banked”.
So much for the analogy. I do think “transformation” misses the point. The bad assets must be “managed out” – they can’t be replaced. And when they are managed out, companies must realize that they will take a hit – and their vendors will as well. Bad bank strategies are not pleasant but they may be the only way forward.