The Telecom industry has done a horrible job in developing organizational structures around P&Ls. It might not know it has this problem, but it does.
The “network” is the biggest cost of most telecom companies. The network consists of five major cost categories: construction, equipment, leased services from other telecom suppliers, day to day costs associated with operating the network, and developing IT systems to help design and operate the network. The super-majority of a telecom company’s capital budget and operating expenses fall in these five buckets.
In most telecom companies, the head of IT, the CTO, and the head of network are three of the most powerful positions. They report to the CEO/COO. The executives have sprawling organizations and huge budgets. Their personality types tend to be authoritarian—not surprisingly since they have so much to do.
Who are the P&L owners? Typically, telecom companies organize their “P&Ls” around geography, product line or perhaps customer channel. Nextlink/XO was known for organizing around geography. Level 3 circa 2003 was organized around product line. Over the past year, Level 3 tried channels.
Executives might tell the P&L owner that they are accountable for their “businesses”. But what does this mean in practice? The cost centers control most of the company’s resources. This, in and of itself, isn’t necessarily a problem. It becomes a problem when (a) the cost center does not associate costs with P&Ls in a meaningful manner and (b) the cost centers resist the P&L manager making decisions which affects the cost center’s cost. P&L financial reports rarely get beyond questions around why costs are allocated the way they are.
“Our costs are too high,” conclude the P&L manager. The retort from the cost center: “We are much more efficient than our competitors. The problem must be one of the following: we aren’t selling enough, our prices are too low or the cost allocation methodology is misleading.”
How would anyone know?
Now the P&L manager wants to do something different. Change a product. Improve cost structure. Introduce a creative partner relationship. Look out! The cost is staggering. More resources are needed. And the work must be prioritized across everything else the other P&L managers want to get done. By the time requirements are approved and the work is slotted, the business opportunity has passed. The work is done anyway since it has now made it way into everyone’s objectives.
Sound familiar?
So that gets us back to the Telecom P&L. The P&L manager does not get meaningful P&L financial reports. The reports, if they exist at all, almost certainly exclude capital. Most expenses are allocated using somewhat arbitrary and ambiguous methodologies. The organization as a whole views the P&L financials as an interesting but most inconsequential activity.
Do you doubt this? Reflect on whether the CEO/COO of the company pays attention to the bottom line financials of their P&Ls. By bottom line, I mean down to the cash flow level. Do they hold their P&L managers accountable for how much profit and cash flow they deliver to the company? If not, P&L is simply a glorified product management or sales management position.
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This makes a lot of sense.
IMHO it sounds like only the CEO will have true visibility into the P&L (any P&L’s below the consolidated view would have too many allocations to be a useful tool) I’ll even venture that some companies have a lot of managers who are all surpassing their financial goals, while the consolidated view shows that the overall company isn’t meeting its financial objectives.
Why do you think it’s so difficult to get to meaningful P&L’s?
Is it because companies value the savings from shared organizations (eg shared field operations or shared customer care across geographies, product lines, or channels) vs. the benefits a company would receive by having a pure P&L? Is it because the CEO wants to have a CFO, CTO, CIO, COO and then P&L owners organized separately? My guess is that it is harder to attract strong C level talent at a subsidiary level than at the corporate level.
Can you have shared resources across the organization and still achieve a meaningful P&L?