A CFO's Perspective: How MCI Group Lowered its IT Cost Structure

The past two years of economic turmoil and uncertainty have challenged managers at all levels in corporate America. For MCI, that period has been no different. .....Recently, WorldCom announced the elimination of the MCI Group tracking stock. Prior to that, MCI Group implemented a new financial charter: to generate strong operating cash flow, reduce debt, and return excess cash flow to MCI Group shareholders through dividend distribution.

In 2000 we began a top-to-bottom review of our financial, development, engineering and operations organizations. Along the way, we aligned $14 billion in revenue coming from many disparate lines of business, along with nearly $2 billion in operating expenses.

Building on business synergies, while eliminating redundant or under-producing sales and marketing efforts, we reduced expenses by $450 million across all units—a tremendous accomplishment over a very short eight-month period.

As the CFO of the MCI Group, I challenged my team to deliver cost savings in three key ways: optimizing the use of existing resources; improving our operational support systems and operations; and expanding already profitable services while at the same time exiting unprofitable ones.

Optimizing Resources

To improve costs and optimize our resources, we reengineered our organization. By consolidating our call center operations, enhancing call flow technology and selectively outsourcing call center functions, we brought our overall cost structure down.

Centralization of call center operations resulted in requiring 47 percent fewer people than in 1999. Technology support functions that were once spread across more than 30 call centers were reduced to 24 call centers. Technology improvements to further automate existing call flow and fully automate new initiatives substantially reduced the number of calls handled.

In order to take advantage of lower labor costs, MCI started to outsource some call center operations to both domestic U.S. and international vendors. While the labor cost savings are significant (up to 70 percent in some countries), MCI has had to do a delicate balancing act between such outsourcing and making sure that reliable country infrastructure remained in place to ensure that neither quality of service nor sales productivity deteriorated. Overall, the technology improvements and the outsourcing of call centers for customer service, telemarketing, back-office and third-party verification processes will save MCI more than $350 million in costs in 2002.

Likewise, we catapulted our local service ahead to twice our prior market coverage by strategically outsourcing systems development to a company (Z-Tel) that had already built most of the necessary ILEC interfaces.

Improving Operations Support Systems and Automation

As we concentrated on optimizing current resources, we also sought to reduce our costs through improved business processes, while maintaining our focus on customer values through quality, service and time.

We relentlessly sought to simplify, standardize and share processes.

By reviewing every business process to determine its critical need, necessity, frequency and validity, we were able to simplify complex processes that took more time and involved greater expenditure of human and financial resources. For example, we began to eliminate reporting in business areas that had been de-emphasized, meaning that “nice to have” business metrics were no longer tracked.

In our call centers, we became more flexible in supporting various types of calling and lessened dependencies on the hardware and software installed in the centers. Trouble ticket platforms also were consolidated across the company into a single platform capable of supporting all of MCI’s needs while reducing costs and improving throughput. As a result, we automated a full 12 percent of incremental call volume, leading to $20 million in operating savings annually. We also reduced call handling times by 12 percent by providing up-front screens for customer self-help, generating $17 million more in savings.

As we examined our business processes, we also examined those “best practices” that could be implemented across business units. We eliminated costly, outdated practices such as providing dedicated queue support to specific call types, in favor of those that increased our ability to meet our financial targets by driving improved efficiencies across a widely distributed call queue. Automating certain call center functions has enabled us to drive cost savings by expanding to new segments and increasing functionality. Some of the new automation initiatives include Spanish Local, local provisioning and directory assistance lookup, and an automated voice response unit for sales verification. Overall, the move to automation has allowed MCI to handle more calls without the use of agents and has allowed us to save over $5 million each year just from those incremental calls alone.

We have also created several areas of billing efficiency by streamlining our approach to invoice design and delivery. For example, while we continue to offer a LEC billed product line, we have also continued to migrate toward an MCI remit invoice in areas where this is economically feasible.

At the same time, we sought ways to share services so that we could pool critical skills to increase efficiency. We examined ways to consolidate common activities such as finance and systems support, and ways to maximize knowledge sharing such as development, collections and fraud detection. The largest shared service success has been in our IT organization, where we combined the resources of three pre-existing IT organizations into one.

While some positions were ultimately eliminated, it was far fewer than originally projected, with the attendant benefit of new career development paths for remaining employees. Likewise, constituent groups benefited from new development approaches and skill sets applied to their business problems.

Expanding Profitable Services, Exiting Unprofitable Ones

Meeting our financial charter required not only managing costs, but also looking for growth opportunities. Despite a reduced level of capital expenditures, we focused our resources on aggressively expanding our local service offerings. This decision provided the MCI Group with an impressive growth engine while at the same time fortifying our core long-distance business.

Our research has shown that customers are more interested in communication packages with innovative pricing and features, than just the convenience of a LEC bill for long distance. So, on March 15, we launched the first nationwide “all distance” product, The Neighborhood, which allows us to leverage our back-office systems and infrastructure to support local and long-distance calling, all on the same bill. This has lowered our cost of billing and collection for local service by 34 percent over last year, with very little incremental capital, since we are leveraging agreements with Z-Tel to provide the ILEC interfaces needed.

We now have over 1.5 million local customers, with 83 percent of these customers also choosing MCI for long-distance service.

As we entered new markets, we made the difficult but necessary decision to exit those with lower profits. No line of business or product offering was left untouched as we undertook this reevaluation. On more than one occasion, we came to the difficult conclusion that certain products and lines of business should be eliminated or de-prioritized if they could not generate sufficient cash flow. In some cases, the products were too mature in their space to provide sufficient cash flows to justify the same level of investment as other opportunities. For example, we reviewed several types of agent programs which sold primarily small business products and determined that this portion of the market could not be efficiently served by a “feet on the street” sales force, given the levels of customer spending involved.

We decided to de-emphasize these programs as a result, and have shifted our focus to a joint marketing effort for small business, called Business Connect, which utilizes alternative distribution models for acquisition and also leverages combined billing, similar to the consumer Neighborhood product.

While “harvest” decisions such as the one we made regarding certain small business and agent programs were difficult, they were critically important to our ability to fund growth initiatives like local service.

And, in other areas, we made the decision to realign the business models of various business units in order to make them more profitable from a cash flow perspective. For example, we made a conscious decision to lose the revenue associated with some wholesale contracts, rather than sell capacity at a cash loss as many of our financially unstable competitors were doing.

As part of this process, we re-evaluated our marketing channels as well. In a competitive industry environment where large investments to generate new revenue opportunities are not an option, MCI leveraged existing marketing channels to grow its customer base, enhance customer retention and expand our product offerings.

Again, the best example is our drive to enter the residential local service market and even create new markets, such as the any-distance market we recently created with the launch of The Neighborhood.

Through our telemarketing channel, traditionally used for selling long-distance service, we were also able to quickly reconfigure to begin selling our new local service offering to our existing long-distance customer base as well as new customers.

The Future

The past year demonstrated to us that creating a fiscally strong and responsible organization requires more than just managing and reducing costs. As we learned, achieving maximum cost reduction and cost control cannot realistically occur without a sweeping reevaluation and reengineering of our business. Although it was a challenge, it has provided rewards to our shareholders and will continue to do so for years to come.



Victoria Harker, CFO of MCI, manages all financial planning, business development and analysis functions as well as information technology and operations. Since October 1998 her team has worked to ensure that the financial targets for the residential, small business, Internet, wholesale and specialty markets are achieved in both local and long distance services. Harker will be speaking at the Billing World 2002 show, which takes place June 18-20 in Baltimore, Md.