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Send  Share  RSS  Twitter  17 Feb 2012

COMMUNICATIONS: African Telecoms Risk Management Arrives on the Global Stage


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The ever-evolving nature of technology means risk in the telecoms industry is constantly changing. Managing this risk successfully requires knowing the industry so well that new risks are instantly anticipated even as technology evolves.

Being able to understand and model telecoms risk on a large and complex scale, while drawing on global experience and modelling techniques, enables senior telecoms teams to confidently anticipate multiple permutations of risk. It also allows senior telecoms teams to “develop and deploy mechanisms to mitigate key risks that apply specifically to integrated, globally connected, data networks – even as these are being built with new and constantly evolving technology” says Steven de Boer, Divisional Executive, Risk Corporate, Marsh (Pty) Ltd.

The Importance of Risk Management for African Telecoms

The Fukushima Daiichai Nuclear disaster following the Tōhoku earthquake and tsunami on 11 March 2011 illustrates just how complex risk modelling needs to be.

The power station had four defences against reactor meltdown. Since an earthquake and a tsunami of that size were never anticipated simultaneously the diesel generators designed to continue pumping cooling water in the event of national grid failure were also destroyed by the earthquake. The reactor overheated. A third, this time nuclear, disaster ensured. The chairman of Daiichai, taking full responsibility for not anticipating the full range of risks, resigned.

Applied to the telecoms industry this example illustrates that “senior teams simply asking what if‘ is not enough, unless informed by a thorough understanding of what real risk actually looks like in the telecoms industry - and how it can play out in an environment of constant technological change” says de Boer.

The telecoms industry is, in its simplest form, a spread business with data flowing through various geographically separated transmission hubs. As the data flows between hubs revenue is generated. When data flow is interrupted, revenue ceases. The risk to the business lies in the interruption of this data flow.

Since data flows through networks of hubs, losing the occasional hub to natural disaster, human error or technical failure is not a significant risk – the data can always be re-routed through other hubs in the network.

The danger of catastrophic risk, however, lies with critical source or relay hubs, like the major one on the Durban coast for example. “If this were to be hit by a cyclone or extreme floods it could endanger the entire network” says de Boer. This will become particularly pertinent as South Africa is connected, through these coastal hubs, to underground sea cables linking the country to global networks.

To deliver effective risk anticipation and cover in this rapidly evolving industry Marsh has developed a Global Technology Practice to assemble and apply specialist telecoms risk knowledge to clients around the world.

The philosophy was to assemble leading industry figures, who were specifically not insurers, but who had spent the bulk of their careers in senior positions at the coalface of real telecoms and IT businesses – “and allow them to lead our global risk research, anticipation and mitigation practice” says de Boer.

An intimate knowledge of the telecoms industry, how telecoms businesses make money, what the skills, cost, funding, infrastructure and technology requirements are, and how this can all go wrong is critical to Marsh’s global telecoms risk practice. Added to this is a world-wide database, or clearing house, of case studies, accumulated knowledge and on-going research. This keeps Marsh’s telecoms risk practice in step with the world’s rapidly evolving telecoms industry and the technology that drives it.

African Telecoms Know That Understanding the Industry is Key

For example, a mobile phone operator investing in a developing country faces political or legislative risk not faced by competitors in developed economies. Should a host government decide, only a few years after granting its first mobile phone license, to approve a licence for a second operator in the same territory it is likely that the initial operator would suffer a loss of projected revenue for the recovery of the initial infrastructural development costs.

“While you can’t insure against competition risk, you can assist telecoms players recognise risk scenarios like this - and then help them develop a high volume, low cost business strategy” says de Boer. In this way by the time a competitor comes on board their market share is established and unassailable.

A local example of how technological innovation can alter exposure in the telecoms business is the way in which data exchange technology has changed. Previously exchange equipment was housed in substantial structures, built to withstand terrorist attack, insured at considerable cost. Being abreast of technological change “allows us to advise clients that modern exchange technology can be housed in different types of premise at significantly lower costs.” says de Boer. This frees the telecoms client from maintaining unnecessary cover on obsolete buildings, liberating revenue to manage real risks elsewhere – or plough back into the business.

Understanding the significance of technological change in determining competitiveness in the telecoms industry is equally critical in identifying both risk and opportunity.

In the United Kingdom in the 1980’s, for example, a new mobile phone provider developed software that enabled it to locate signal transmission masts for optimum reception coverage – and then buy or hire these locations. Its established competitor merely placed masts on its existing properties and structures. The result was that for similar infrastructure spend the new mobile phone provider achieved wider and better quality coverage than its established rival – attracting a larger share of subscribers.

Certainly, being able to demonstrate this kind of detailed and intimate industry knowledge to prospective clients immediately raises the value of advice and insights provided. This is especially so as it talks directly to the business issues that are keeping senior telecoms teams awake at night.

Even more powerfully, Marsh’s global telecoms business expertise often identifies risks that senior teams had not anticipated. “Identifying and managing these often unforeseen risks, through correctly structured and professionally written cover, is a key advantage in the highly competitive and rapidly changing technology sector” concludes de Boer.

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