Being a service provider to the major telecos has proved an onerous business during the last few years.

-Jenny Ruth

Tuesday 12th December 2006

From an onlookers perspective, it appears that the big telecos have been using their service providers as whipping boys in their efforts to cut costs.

Both the listed service companies, Cabletalk and GDC Communications, suffered bitter blows in late 2003 when Telecom decided not to renew their maintenance contracts, opting instead for Downer and what is now Transfield.

The Telecom contracts had accounted for more than 70 per cent of both companies' revenue. Cabletalk had had a 14-year relationship with Telecom while GDC had been working for it since 1999.

GDC struggled on, partly by sub-contracting to the successful tenderers at lower rates than previously, but it was eventually forced into receivership in March this year.

Cabletalk was more fortunate in that it had a much stronger balance sheet and it had already recognised that its dependence on Telecom made it vulnerable. It was working on diversifying both by seeking service contracts with other telecos and by expanding into related businesses.

The same month it lost the Telecom contract it was able to announce a three-year contract, renewable for a further two years, with TelstraClear.

The Telecom contract had been worth $37.4 million in revenue in the year ended March 2004 and the Telstra-Clear contract was worth between $20 million and $30 million a year. It had also further diversified by buying a security business.

For a while it looked as if Cabletalk's future was assured. Net profit jumped from $1.89 million in the year ended March 2004 to $2.26 million in 2005. Then it notched up a $1.22 million result for the six months ended September last year with directors talking about "excellent momentum."

But then things began to unravel again. By March this year, the company had to issue a profit warning about its second half and its annual report shows it made a $164,000 net loss for those six months.

Then last month Cabletalk reported a 93.6 per cent drop in this year's first half profit to $83,000.

The big problem was that TelstraClear changed its focus from the business market onto its consumer markets in Wellington and Christchurch.

Cabletalk, at TelstraClear's request, had been building up its technician staff numbers but then found itself in a position where they were under-employed and it still needed to scramble to acquire the different kind of skills TelstraClear needed in the consumer market.

It was also hit by other rising costs including fuel costs - it runs about 190 vehicles - and its profit margin was squeezed out of existence.

Nevertheless, managing director Peter Wilson believes his company is now in a better position than previously and that its investment in technicians will start to pay off. The company has continued to hire staff, boosting numbers from about 140 in September last year to more than 220.

Cabletalk has also gained a relatively small service contract with Vodaphone and, last November, TelstraClear opted to renew its contract for a further two years. And, ironically, Cabletalk is working on the Telecom network again, the part that Transfield won the tender for.

Wilson says that its work for Telecom is paid at higher rates than it had tendered previously. "I believe that Telecom now recognises the value that the service companies provide to their customers," he says.

Reading between the lines, it appears that although Telecom had managed to screw down its costs, the service levels Transfield had been providing were inadequate - otherwise why would Cabletalk's services be required?

Telecom says that only a handful of Cabletalk's staff had been required, up to six out of a 1,500 total workforce, to "help out in extreme weather conditions this winter." But even past winter, Cabletalk staff have continued in a sub-contract role to Transfield, but again at higher rates.

Telecom says it "has worked hard with Transfield to develop the current model we are working under which has seen a dramatic improvement in service levels, lead times and viability to Transfield."

Wilson is on record as saying that one result of the 2003 tendering process was that the under-valuing of technicians' skills has led to a severe skills shortage. He told the annual meeting in July that New Zealand now only has about 75% of the telecommunications technicians it needs.

Wilson says working on the Telecom network allows Cabletalk to keep its foot in the door and that the opportunity is there for it to do more work for Telecom "if we want to throw more staff at it. That's the dilemma. We're not going to throw more staff at it unless we can get those guarantees" that it won't suffer a repeat of the last tendering process.

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