At a glance
As the telecommunications sector faces pressure to monetize its massive infrastructure investments, operators’ IT and tech capabilities are more critical than ever. To understand what separates telecom technology leaders from laggards and how IT performance can make a real difference, including with cost performance, McKinsey has benchmarked more than 20 operators worldwide to develop an IT Excellence Diagnostic. The diagnostic spans six dimensions: business functionality, operating model, engineering excellence, IT architecture, cloud, and data and AI capabilities.
The key insights from the research include the following:
- Operators in the top quartile of tech capabilities spend less on IT than their peers, boasting an average IT cost-efficiency ratio (spending divided by revenues) that is nearly 30 percent lower. This represents an opportunity to reduce costs by 1 to 2 percent of revenues.
- Leading operators succeed by taking a holistic approach to outperforming across each IT dimension, rather than excelling in just one or focusing only on costs. Instead of modernizing IT in isolation, they drive a joint business–IT product, process, and architecture transformation.
- Telecom tech leaders realize the full business benefits of adopting an agile operating model by going beyond how teams are composed and collaborating to include portfolio management, talent management, and architecture simplification.
- Even though most operators are shifting workloads to the public cloud, the bulk are taking a simplistic “lift and shift” approach. Only tech leaders are capturing the benefits by developing a comprehensive strategy that leverages cloud-native development and gen AI.
- Operators are working on many gen AI use cases, but most have yet to build the data and AI foundations to achieve EBITDA impact at scale. To scale the impact of gen AI to the whole business effectively, operators must balance investments in use cases with building robust data and AI foundation capabilities.
As the telecommunications industry continues to grapple with the massive costs of deploying 5G, fiber, and other advanced network technologies, the role of operators’ internal IT capabilities has never been more critical to success. The significant pressure operators face to monetize their massive infrastructure investments means the ability to swiftly build and integrate new technologies into their operations is no longer a luxury but a necessity.
To understand what distinguishes technology leaders from laggards in this rapidly evolving industry, including but not limited to cost performance, McKinsey has benchmarked more than 20 operators worldwide through an IT Excellence Diagnostic across six dimensions: business functionality, operating model, engineering excellence, IT architecture, cloud, and data and AI capabilities.
With such a comprehensive assessment, the industry and individual operators may be in a better position to begin to answer important questions, such as the following:
- Do current tech capabilities enable effective monetization of 5G—for example, the selling of network slices and speed tier differentiation?
- Is there a comprehensive strategy to transition to fiber while cost-effectively phasing out legacy fixed systems?
- Are the foundations in place to become a digital-native operator, leveraging simple processes, AI, and an agile operating model to enable a superior, personalized customer experience and sales of products that go beyond core connectivity?
- And most important, is there a holistic, strategic approach toward IT simplification that will result in higher efficiencies and cost reduction, rather than merely slashing costs in isolated areas?
Operators hope to reach their desired levels of innovation by better understanding the industry’s current capabilities and what distinguishes those that outperform their peers.
Being a telecom technology leader also delivers clear financial benefits. Our research identified a strong correlation between high IT maturity and IT cost efficiency (measured in IT spending divided by revenues) (Exhibit 1). Operators in the top quartile of IT maturity, on average, grow revenues three percentage points more year over year compared with the whole group, and they do so at a higher rate of profitability (roughly 15.5 percent net operating profit after tax versus 14 percent) and with increased customer satisfaction.
What telecom tech leaders can teach laggards
The benchmarking assessment of operators’ IT capabilities has yielded a wide range of findings, which we have distilled into six core insights that can help operators along their tech modernization journeys.
Operators consistently outperform—or underperform—across all dimensions
Consistent performance across almost all tech capabilities is a key driver of success for leading, cost-efficient operators. As tempting as it may be for operators to start their IT modernization journey by focusing on just one or two dimensions, that approach generally hasn’t worked. Focusing exclusively on IT cost reduction without having a holistic and orchestrated approach to improving a wide range of tech capabilities may be self-defeating. Operators that have achieved stronger IT cost performance have done so by reaching a higher level of tech maturity across the board (Exhibit 2); these high-performing operators boast an average IT cost efficiency (spending divided by revenue) ratio of 3.7 percent, compared with 5.2 percent for their peers. One operator transformed its IT programmatically across all capabilities and reduced IT spending by as much as 40 percent.
There is one notable exception to this dynamic. Several operators have made significant progress in transitioning to the cloud without seeing improved cost performance. These cost laggards have a relatively high share of workloads in the cloud, but their lift and shift approach inherently limits their ability to capture the full value of the cloud. In contrast, while telecom IT leaders migrate more slowly, they build entirely new systems in the cloud or adapt existing applications to leverage native cloud functionalities.
Although most operators are adopting agile, only tech leaders are realizing the full business benefits
More than 60 percent of operators have widely embraced agile methodologies, yet most struggle to reap the rewards and fail to bring more innovations to market faster. While leading operators can industrialize a proof of concept into production in three to six months, their peers need, on average, 1.5 years.
To further shorten these innovation cycles and achieve faster releases, leading operators excel at two tech capabilities in particular. The first is IT architecture (for more information on this topic, see the related section below). Telecom leaders leverage out-of-the-box platform implementations to keep updated with the latest software releases and features while minimizing run costs. Additionally, they set up a centrally managed and fully integrated product catalog to effectively leverage master source data and oversee product changes.
A second tech capability that deserves focus is engineering excellence (for more information on this topic, see the related section below). Leading operators use technical enablers such as automated deployment pipelines and stable preproduction environments to support the agile operating model. They also automate testing across the entire IT landscape to detect and resolve issues quickly before they are deployed.
At the same time, operators aspiring to become tech and cost leaders must embrace the agile operating model both fully and uniformly across the entire organization. Top-performing operators have consistent (though not necessarily identical) delivery methodologies among all teams, a single and straightforward process for portfolio management based on objectives and key results (OKRs) and quarterly business reviews (QBRs), and a common approach to talent management and sourcing (Exhibit 3). Any nonuniform process can slow delivery and create a potential bottleneck that hinders operators from improving their time to market.
Engineering excellence leaders invest in a strong in-house engineering culture to build hands-on knowledge and expertise
The IT Excellence Diagnostic findings suggest an industry-wide shift from outsourcing to insourcing IT talent. Leading operators have strategically prioritized the growth of in-house, hands-on talent and the development of a strong internal engineering culture. Where operators typically used to oversee their vendor relationships through managerial roles, leading operators are now genuinely collaborating with their vendors to develop and maintain in-house expertise. This enables them to better control engineering processes and outcomes without relying on external parties for critical knowledge.
Engineering excellence leaders currently have 22 percentage points more insourced engineering roles than their peers. For steering and testing roles, in particular, the gap between those that outperform and their peers is eight percentage points and 11 percentage points, respectively. Although most operators plan to bring even more engineering roles in-house, that alone will not lead to success. Leading operators in this area take a comprehensive approach to sourcing and talent management for internal and external positions, outperforming other operators across all talent management dimensions (Exhibit 4). They use a strict framework to assess and track skill sets by function and role, including all engineers (internal and external), emphasizing a well-defined career path for IT talent that includes management skills and technical expertise.
With architecture leaders achieving superior performance across all dimensions, virtually all operators are working to simplify and modernize their IT setups
All operators understand that architecture simplification is critical to their future success. Over three-quarters of operators rank simplification as one of their top three priorities, and virtually all of them are already transforming (or planning to transform) their IT environment to some extent. The industry’s need for such transformation is glaring; 55 percent of operators have three or more different tech stacks, and most plan to consolidate them further (Exhibit 5).
While such a move is critical to becoming an architecture leader, so too are a centralized and integrated product catalog, a low degree of customization, and reduced complexity in network management systems.
A centralized product catalog, for instance, allows operators to manage all products efficiently by eliminating the need for increasingly complex synchronization logic across system domains and channels. Also, a higher degree of front-office/back-office integration across all stacks allows sales and customer agents to process orders automatically and helps increase customer self-service functionality. With the help of a comprehensive, 360-degree customer view, agents can resolve customer issues efficiently without needing to escalate requests to specialized back offices.
In addition to stack consolidation, reducing the number of external vendors is a key ingredient of outperforming in IT. Architecture leaders leverage only a few vendors across stacks to complement their homegrown solutions. On average, operators use six to seven vendors to cover front-end, business support systems (BSS), and operations support systems (OSS) functionalities, whereas industry leaders use three to four. By relying on a select number of vendors and a more unified technology setup, operators can limit software costs and flexibly utilize internal IT resources across different stacks.
As the telecom sector shifts toward a consolidated IT landscape, it remains crucial for operators to periodically assess whether their transformation is set up for success, particularly given the industry’s historically mixed track record of IT modernization. The prerequisites of a successful transformation are not limited to IT. It’s just as critical that product and business processes are also updated and simplified to enable out-of-the-box usage of IT systems with minimal customization and dependence on vendors. Telecom IT leaders know the importance of migrating or phasing out overly complex products, setting up a customer migration plan with clear communications, and establishing a portfolio management process that integrates IT as a core part of the business. Above all, they have proven that a successful transformation plan is not only strategic and comprehensive but also flexible so that it can be adjusted along the way.
Although most operators are already embracing lift-and-shift cloud migration, tech leaders are focusing on a more comprehensive transformation approach
Close to a third of all operator workloads (including software as a service) are running in the cloud these days, and the industry hopes to double that in the next three years. Yet many industry leaders still aren’t convinced of the benefits. Nearly three-quarters of those surveyed cite the lack of a compelling business case as the biggest obstacle to cloud transformations (Exhibit 6).
Much of the problem stems from most operators’ relatively simplistic lift-and-shift approach to migrations. Moving on-premises applications to the cloud can prove more costly without updating the architecture or operating model in parallel. Operators with the highest average cloud adoption rate achieve the worst IT cost efficiency ratios because of their lift-and-shift approach.
Telecom cloud leaders know that cloud-native development is essential for success. On average, the industry uses such practices for only 5 to 10 percent of all apps, but those that outperform are already at a rate of 10 to 25 percent. If they are going to achieve their goals of becoming almost entirely cloud native by 2027 in a cost-effective way, they recognize that they will have to speed up the adoption of such a holistic cloud transformation. As part of that shift, cloud-native development of applications can allow operators to industrialize a proof of concept more quickly and speed up time to market.
Operators should consider leveraging emerging technologies to reach their cloud ambitions. A McKinsey ROI analysis suggests that gen AI can reduce the investment and time needed to adopt cloud by 40 percent.
Operators are working on numerous gen AI use cases but lack a holistic, domain-based data and AI strategy
Given the ubiquitous nature of gen AI across industries in the past couple of years, virtually all operators are working on numerous gen AI use cases, with industry leaders expecting an annual EBITDA impact of up to 10 percent. However, the industry is still mainly in its experimental phase. Most players are deploying specific gen AI use cases (for example, call center agents, employee office/coding enhancements) without the aid of a comprehensive, domain-based data and AI strategy that is translated into a use case road map. This is essential for realizing the full financial benefits of the new technology.
A lack of established data foundations is a significant barrier to effectively scaling gen AI use cases (Exhibit 7). Although most operators have a data architecture and platform in place, less than 50 percent manage to achieve sufficient data quality to support use cases. The operating model most operators use also does not adequately support the quick deployment of gen AI use cases into production.
Operators can focus on adopting robust MLOps (machine learning operations) practices and standardizing AI development to further scale and successfully capture value from data and AI. Operators may automate all AI/ML life cycle steps with active monitoring and automated retraining processes to bring AI seamlessly into production. Additionally, AI development can follow organization-wide standards for model selection, access to large language models, reusable components, and risk mitigation. In this way, operators can bring AI use cases outside a proof of concept mode and scale development across the organization.
At a time when telecom operators face growing challenges, including monetizing their heavy infrastructure investments of the past decade, the need to increase their tech capabilities is becoming more pressing. Our IT Excellence Diagnostic benchmarking of more than 20 operators shows what separates telecom tech leaders from laggards, and how it pays off for operators to take a strategic approach to IT, enabling growth while responding to cost pressure. As they embark on this critical transformation to become digital natives, operators should concentrate on a number of priority moves, including the following:
- Ensure they have a holistic improvement plan across all tech capabilities, rather than focusing on only a single tech capability or blindly cutting costs.
- Extend their agile transformation beyond how teams are composed and collaborate—including portfolio management, talent management, and architecture simplification—to uniformly change the entire telecom organization and remove legacy processes and systems.
- Focus on a joint business–IT architecture transformation instead of modernizing IT in isolation. This can include a simplified product portfolio and legacy product migration plan that is frequently assessed to gauge if the transformation is still set up for success.
- Migrate their application landscape to the cloud beyond a lift-and-shift approach, along with an increased share of cloud-native development, to capture the entire cost and time benefits. As a result, operators can significantly improve their time to market and better justify the cloud transition business case. Additionally, operators can use gen AI to accelerate the cloud transition further and help reach their ambition to double cloud workloads in the next three years.
- Move from a use case and experimentation focus toward a holistic, domain-based data and AI strategy to achieve a higher EBITDA impact. Successful scaling requires having the data foundations and operating model in place to support standardized AI development and deployment.
Addressing these priorities will be crucial for achieving IT excellence, which is increasingly essential for operators to remain competitive in and beyond the telecommunications industry.
