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SAS TIS SPM implementation at MTS and KPI analysis system for C-level executives

SAS Forum InternationalCopenhagen,15-17June 2004

Alexander GorbunovMTS, Director of Strategy

© 2004 Mobile TeleSystems. All rights reserved. 1

GROWTH STORY

MTS’ Consolidated Subscriber Base, 1998 – Q1 2004 (in MM)

RussiaUkraine

1998 1999 2000 2001 2002 2003 Q1 2004

0.1 0.31.2

2.7

6.6

16.7

19.2

13.4

3.3

15.3

3.9

• MTS is largest Eastern European mobile operator (consolidated 19.2MM subscribers as of March 31, 2004).

• In addition, MTS’ unconsolidated subsidiaries in Russia served 163,300 subscribers and its unconsolidated joint-venture in Belarus served 592,600 subscribers at the end of Q1 2004

• Leading market shares in Russia (#1) with 37%, Ukraine (#1) with 53%, and Belarus (#2) with 44% in Q1 2004


HIGH MARGINS

• MTS has enjoyed a combination of stellar growth and high marginsdue to the leading position on attractive market

Market features:

5%

10%

20%

50%

100%

20% 40% 60%

Vimpelcom

mmO2

MTS

Telefonica Moviles

TIM

T-mobile

Vodafone

Revenue growth (log, %)

EBITDA (%)

Area of circle is proportional to the revenue

forecast for 2004

No term contracts (regulatory driven)

High churn and limited customer loyalty

Limited operators’ credit available to subscribers

“Grey” handset market

No handset subsidies

Dealers account for over 80% of sales

Most subscribers prepays for their services

No CPP

Loosely regulated and overpriced interconnect


CORE AND PROSPECTIVE MARKETS FOR MTS

• Three core markets (Russia, Ukraine, and Belarus) with a total pop. over 200 mm. people• Neighboring CIS countries (total pop. = 78 mm. people) are tied to MTS’s core markets by historical, cultural and economic relationships

Ukrainepop. 48.7 mmpen. 12%*

Belaruspop. 10.4 mmpen. 11%*

Moldovapop. 4.4 mmpen. 11%*

Russiapop. 144.5 mmpen. 29%**

Kazakhstanpop. 16.7 mmpen. 8%*

Kyrgyzstanpop. 4.8 mmpen. 3%*

Tajikistanpop. 6.6 mmpen. 0.2%*

Armeniapop. 3.3 mmpen. 2%*

Azerbaijanpop. 7.8 mmpen. 14%*

Georgiapop. 5.0 mmpen. 14%*

Turkmenistanpop. 4.6 mmpen. 0.2%*

Uzbekistanpop. 25.1 mmpen. 1%*

* - 2003 actual; European Mobile Communication Report, Jan 2004** - March 2004 actual; AC&M March 2004 Cellular Estimates


POSITIVE MACROECONOMIC ENVIRONMENT

Russia GDP growth, (%)

5,0%

4,3%

6,7%7,5%

6,0%

0%

1%

2%

3%

4%

5%

6%

7%

8%

01 02 03 04F 05F

Capital returning (direct and portfolio investment)

Structural reforms in the spheres of: taxation, land and residential property rights, pensions, Customs

Increased international reserves (from USD 12 bn in 1998 to USD 62 bn in 2003)

EMBI+ Russia spread over T-bonds

The fifth consecutive year of growth

Declining inflation

Improved fiscal performance

Debt ratios have improved

Moody's Investors Service upgraded Russia's sovereign rating form Ba2 to Baa3 (investment grade)


MARKET CONSOLIDATION

Mobile standards:Russian Mobile Market (mm subs)

3.4

8.0

18.0

31.9

12%16%

23%

37%35% 33%37%

10

20

30

40

97 98 99 00 01 02 Oct.03

Market share (MTS)

Initially two mobile standards: NMT-450 and AMPS-800

Separate GSM licenses for different operators in 80+ regions

Multiple GSM licenses were granted in all regions (900/1800 Mhz)

CDMA with limited mobility (less than 1% of the market)

Emergence of “big three”:Russian Mobile Market Breakdown By Subscribers

Moscow mobile market accounted for -50+% of subs

Two Moscow GSM operators (MTS and Vimpelcom) launched active regional expansion

IPOs on the NYSE to fuel aggressive capex plans

St-Petersburg based operator Northwest GSM under the Megafon brand was granted nationwide license

“Big three” operators have steadily grown their combined market share and currently control over 85%

MTS37%

Megafon18%

Others13%

Vimpelcom32%

Source: AC&M-Consulting as of May 1, 2004


CURRENT COMPETITIVE ENVIRONMENT

Moscow St-Petersburg

Russian mobile market

0%

20%

40%

60%

80%

100%

Volga

South

- MTS

- Vimpelcom

- Megafon

- Regional players

- AMPS,NMT

Ural

Siberia

Far EastCenter

North-East

Revenue: USD 1335 mm (2003)ARPU: USD 13.6 (2003)License: 134 mmShareholders: TeleNor, Alfa (significant financial resources)Image: ”cheap, convenient, easy to deal with”

Revenue: USD 749 mm. (2003F)ARPU: USD 14.3 (2Q03)License: 144.5 mm (full country license granted for free in 2001)Shareholders: TeliaSonera, Alfa (shareholders problems, current financial limitations)Image: ”young”

Revenue: 2550 mm (2003)ARPU: 17.1 (2003)License: 206 mmImage: “solid, high quality”

As the first GSM operator in the market, MTS initially had a license only for the Moscow region. The company expanded through a combination of acquisitions and greenfields to build a pan-Russian operator

last to St. Petersburg market

last to Moscow market


MTS COVERAGE

During 2003, the license coverage of the Company and its subsidiaries increased 60% from 116.4MM to 186.3MM as a result of the acquisition of Ukraine Mobile Communications (“UMC”) in Ukraine (population 47.6MM) and several acquisitions in Russia

The MTS license area in Russia now covers 142.7MM people, 98.2% of the country’s population


BUILDING NATIONAL OPERATOR

Strategic priorities shift from regional operator acquisitions to their integration and establishing base for further growth beyond the core MTS market

96 97 98 99 00 01 02 03 04 05 06 070

500

1,000

1,500

2,000

2,500

3,000

Year

MTS became the largest mobile operatorin Eastern Europe due to:

• GSM standard• Access to capital• Mix of foreign and

Russian strategic investors • Regional acquisitions

Revenue( USD MM.)

Phase 4Integrating

national operator

Phase 5Growing outside

core markets

Phase 2Gaining market

leadership

Phase 3Expanding

regional footprint

Phase 1Establishingthe company

• Regional expansion

• New regional management structure aimed at standardized and streamlined operations• Unified positioning of MTS brand• Implementation of management and control systems

• International expansion• Strategy of migrating GSM standard into 3G• Active developmentof VAS and adjacentbusinesses

Today


Cur

rent

pen

etra

tion

leve

l (lo

g sc

ale)

Aggressive promotional marketing and investments to obtain 35+% market share

Maintenanceof market share

Prevent deteriorating of market share by VAS development and premium service

PORTFOLIO OF REGIONAL OPERATIONS

5%

10%

20%

50%

100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

MOSCOWSt-PetersburgLong term fair share (35-50%)

MTS Market Share

Regional Operations Portfolio

Regional markets are very different in their market development and competitive dynamics and require different approach, most of them are cash negative currently

-2

-1

0

1

2

Net Adds (regions sorted by FCF per net add)

FCF per net add (00’ USD)


AMBITIOUS CHANGE PROGRAM

• Overtime resolves a problem of different legal structures of regional operations (subsidiaries, affiliates, countries)

• Provides for consistent quality of management

• Provides better communication stream and control levers for morethan 70 regional companies

• Provides the organizational mechanisms for integrating and harmonizing operations nation-wide

Creation of 10 macro-regional management structures

• Separates and ensures higher quality of strategic and operating processes

• Delegates operational decision-making control and authority to macro-regions within strict corporate center guidelines

• Focuses macro regions and regions on front-line execution excellence

Responsibility split between different management levels

• Sets company-wide standards in processes and procedures

• Ensures consistent decision-making process across the company/regions

• Provides for increased transparency, efficiency and speed

Business processesstandardization

• Establishes stronger links between compensation and specific performance objectives

• Provides for wider delegation of responsibilities with appropriate controls

• Focuses on ongoing capability building and talent management

New approach to HR and performance management

SPM related


SAS SPM Solution

Taking into account long-term relationships with SAS Institute and its experience with DWHSAS was engaged for KPI system design and implementation

The system is scheduled to go live in a few months


SAS RELATIONSHIPS

Since 2001SAS Data Warehouse and

Business Intelligence– Intelligent Architecture– OLAP applications and analytics– web-OLAP and web-Portal solutions– Analytical tools and products

Accounting

Finances

Plan

Operations

Sales Force

Economists

Production

Since 2002SAS Telecommunication Intelligence Solutions

– Strategic Performance Management– Customer Retention– Marketing Automation– Segmentation and Behavior Analysis– Cross/Up Sell– Credit Scoring

Since 2002SAS Financial Management Solutions

– Financial Consolidation and Reporting

– Activity Based Management


CURRENT PROJECTS WITH SAS

• Customer Retention scoring and analytical reporting system (TIS module) for departments:

– Marketing– New Products and Services development– Financial Controlling– Customer Services (VIP and Corporate)– Information Systems and Services

• Marketing Automation and Campaign Management system (TIS module) for departments:

– All previous + Sales Force and Customer Care

• Financial Consolidation and reporting (FMS module) for:– Financial executives– Accounting (Russian and International (GAAP, IAS))

• Fraud analysis and prevention system– Information Systems and Services– Financial Controlling


STAGED APPROACH TO BSC

2004

List Methodology Revisions

Design

Basic Design Features

Manual Automation

Manual

Parallel

Revisions

2005

Weights Goals

Benchmarking

Mandatory

Now

SPM Phase 1

SPM Phase 2

Enterprise Guide

KPIs

BSCs

SPM

Data

Targets

Compensation

Strategy Map


APPROACH

• Portfolio of regional markets that are different in penetration level and competitive dynamics

• Complex influence of different process KPIs on company’s overall performance

• Numerous legacy systems and different data standards

• High business dynamics resulting in changing priorities

• Importance of communication of regional targets to all regional executives

MTS business specifics Approach taken

• All KPIs are tracked on regional level (even if full responsibility is concentrated in corporate)

• Split of KPIs into three different levels(companywide, functional, departmental)

• Limited number of KPIs to allow manual entry of data in the regions

• Tracking of all KPIs on a monthly basis,

• Region-specific weights for KPIs

• Intranet-based system accessible from the regions


OVERALL DESIGN

Company KPIs

A few KPIs for one employee (optimal 5-6, max

10)

A set of KPI is completeenough to protect “gaming

the system” KPIs level should in line with responsibility level

All key executives should be compensated on overall

company performance

Company Functional KPIs

Macro-regions(10)

Region(89)

Single region is a planning, account and control unit

Regional markets are very different in their stage of development

Macro-regional statistics can mask real situation

on regional markets

virtual

DepartmentalKPIs

virtual

virtual

Responsibility

5-10 KPIs in one BSCThree level of KPIs are tied to management compensation

1X 8X 31X

~210 KPIs


DATA FLOW

BenchmarkingBSC Standard reports

KPI Financial reporting

Operational indicators

Statistics by regions

Functional systems

Corporate functional data warehouses

Overall data warehouse (SAS)

Paper reports

Excel Web

Automated input Manual input

Standard unified system of manual input of regional data (including functional data)

completeness of data by regions

data entry from corporate functional areas (automated where possible)

CONCEPTUAL


BSC STRUCTURE EXAMPLE

Overall score(functional block)

Indicators

KPI 1

KPI 2

KPI3

KPI4

KPI

Regions

Region 1

Region 2

Region 3

Region 4

Region

......

Department 1

Department 2

Department 3

Department 4

Department 5

Overall score(company)

Indicators

KPI1

KPI2

KPI3

KPI4

KPI

Regions

Region 1

Region 2

Region 3

Region 4

Region

......

Drill-down

Area of responsibilityInformational area Informational area

Link to graphs Link to regional info


KPI “NORMALIZATION”

• Each KPI is measured against three numeric targets. Target values are set individually for every region• After normalization every KPI lays in the range 0-2 with 1 corresponds to basic target

«Red zone» «Yellow zone» «Green zone» «Bright green zone»

Border of failure zone, requires executive

involvement

Target (according to budget)

Stretched target

Fact

100%

200%

0%

KPI:

Bonus:

170%


KEY SUCCESS FACTORS

• CEO support• Part of change process• Link to 50-70% of compensation• Communication function for regions• Flexible in changing KPIs to BSC assignment• Different approach to every region• Straight-forward calculations• Standard data entry• Mirror of data from functional systems


THANK YOU

Alexander Gorbunov

[email protected]

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