Supply Chain Restructuring at Portugal Telecom A

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Supply Chain Restructuring

at Portugal Telecom (A)
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This case was written by José Alves Machado, former Chief Purchasing Officer of Portugal Telecom, Ingemar
Dierickx, Professor of Negotiation Analysis at INSEAD, and Luís Almeida Costa, Professor at Universidade Nova de
Lisboa. The authors thank João Pedro Guimarães, Cesar Pestana and Helder Paiva for their support.
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Introduction
February 2000. José Alves Machado, aged 33, had just returned from the Netherlands to his
home country, Portugal. Working for a major consulting firm, he had been living in
Amsterdam for almost a year, helping a major Dutch financial institution improve its
procurement operations. Because he wanted to be closer to his family, he had approached
Portugal Telecom (PT) with an offer to help the company improve its procurement. Much to
his surprise, PT accepted his proposal.
As he familiarised himself with his new job, José Alves Machado quickly realised that a great
deal of work needed to be done. For all practical purposes, PT did not have an organised
procurement operation. He would have to start from scratch.

By the end of 2003, the success of PT’s Purchasing Department was making headlines in the
Portuguese and Brazilian press. Major Portuguese companies and the Portuguese government
were asking PT how they had achieved such an impressive outcome. The case even made
primetime news on national television.
Company Background
Created in 1994 from the merger of three companies, PT had become Portugal's dominant
telecommunications company. The company’s business embraced the full range of
telecommunications operations: fixed, mobile, multimedia, data and corporate solutions. By
1999, PT had achieved a solid position in the Portuguese telecom market: it was the only
fixed line telephony operator in Portugal, the sole provider of cable TV, and its mobile
business unit (PT Móveis) had achieved a 50% share of the Portuguese market.
PT had also succeeded in extending its operations internationally, acquiring in July 1998
Telesp Celular (the leading mobile operator in Sao Paulo, Brazil’s wealthiest state with a
population of more than 15 million) and Global Telecom (the leading mobile operator in the
neighbouring wealthy states of Paraná and Santa Catarina). PT extended its international
presence to emerging markets, including Angola, Cape Verde, China, Guinea Bissau, Kenya,
Morocco, Mozambique, and São Tomé e Principe.
By the beginning of year 2000, PT was, by all measures, a highly successful company. Its
market value had increased from €2.7 billion in 1995 to €15.8 billion by the end of 1999.
Notwithstanding the instability of financial markets, which had had a particularly strong
impact on the telecom sector, PT was the best performing telecom operator on global stock
markets, outperforming the DJ Stoxx Telecom Index by 42%.
PT had undergone an extensive and successful internal reorganisation process. Its fixed line
operations had been able to reduce its staff from approximately 17,000 employees to 10,000
over two years. The ratio of the number of employees per line, a key performance indicator
(KPI) widely used in the telecommunications sector, had reached approximately 300, one of
the best in Europe at that time.
Copyright © 2009 INSEAD 1 04/2013-5578

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However, additional cost-cutting efforts were still required since significant reductions in
tariffs were expected as a result of the deregulation of the fixed line telephony business,
which accounted for more than 50% of PT’s total revenue.
PT had managed to push the limits of its own employees’ productivity and efficiency. Oddly
enough, however, little had been done in relation to the group’s supply chain, despite the fact
that suppliers represented a major cost centre for telecommunication companies (see Exhibit
1). PT’s purchases amounted to €2 billion a year, out of total annual sales of €5 billion. The
response required to deregulation and the demand for increased competitiveness was obvious:
the supply chain would also have to contribute to efficiency improvements, cost savings and
faster time-to-market.
In February 2000, PT decided it was time to trigger a fully-fledged strategic sourcing project
at Group level and to establish a world-class Purchasing Department. At this time, there was

no procurement department in the PT Group. A major challenge would be to find a way to set
up a centralised procurement process within PT’s highly decentralised management model.
Indeed, PT’s strength lay in its decentralised organisation – a strong corporate culture and
subsidiaries that competed vigorously with each other.
Sourcing Opportunity Assessment

The procurement centralisation project began with eight weeks of assessment, scoping and
planning. A small team of four executives was assembled. After the first two weeks and
several interviews, the team concluded that, as there was no organised procurement operation
either at group or business unit level, significant gains could be anticipated. However, it had
also become clear that PT’s decentralised structure would make it difficult to set this up.
The PT Group comprised several independent companies (a fixed line company – PT

Comunicações, a mobile company – TMN, a cable TV company – TV Cabo, and an internet
service provider – Telepac, among others). These business units were at very different stages
in their life cycles. While the fixed line business was mature, mobile and cable TV were fast-
growing emerging business units that also competed vigorously with each other. For example,
fixed line and mobile competed for voice business, while cable TV and fixed line competed
for internet access subscribers. PT had embraced a decentralised management model
believing that the pressure of competition within the Group created greater value than the
synergies that could be harnessed by running the different companies in a more centralised
way.
Interviews at company level showed that the companies’ CEOs appeared to worry a great deal
about losing future operating autonomy, as well as flexibility in running their businesses.
They showed less enthusiasm for the potential advantages of the procurement project
compared with other executives. The team was aware that centralising procurement would
require a huge management effort. It also anticipated that the process – a critical step in
achieving results – was likely to meet significant resistance. In addition to the organisational
factors mentioned earlier, two other considerations came into play. Firstly, most people tend
to see negotiation skills as a core competency and are not keen for a professional negotiator to
negotiate on their behalf (one apparent exception is when people use lawyers, but they have
the excuse that they need legal expertise, not a negotiator). Secondly, much internal

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inefficiency can be resolved with a little help from suppliers without too much trouble or
effort – but at a price. When procurement delves into cozy relationships, inefficiencies – and
their costs – are inevitably revealed.
Taking all this into consideration, it was decided to go ahead with the project in only one
business unit: fixed line operations (PT Comunicações). Starting at Group level was
considered too ambitious. Furthermore, it was felt that this would pose several corporate
governance problems – “territorial” questions such as: Who will cover the costs of the
project? How will the costs be divided? Should the companies with larger purchase volumes
pay more or pay less? Could companies be certain that they could buy what they needed?
Such discussions could easily kill the project before it had even started and would divert the
focus away from external and onto internal negotiations.
Several factors contributed to the choice of the fixed line company as a “nest” for the

embryonic procurement department. The fixed line business represented significant
purchasing volume in its own right (more than €0.5 billion/year). There were tremendous
pressures on the revenue side: voice tariffs were decreasing every day, clients were switching
to mobile, and new entrants were competing for the fixed line business. To maintain profit
margins something had to be done on the expenditure side. The business was mature, not
many urgent purchases needed to be made, and most purchases involved recurrent operating
expenditures where it would be easy to prove savings as a result of actions taken. Above all,
the company had the perfect champion/sponsor for the project: Manuel Lancastre, an
INSEAD MBA and former McKinsey consultant, who immediately saw the potential of the
project, embraced the idea, and was eager to get started. He also benefited from the active and
decisive support of Francisco Murteira Nabo, President of PT Group.
As a result of this decision, within two weeks of start the project the scope of the expenditure
analysis was narrowed to the purchases of the fixed line business unit – PT Comunicações.
Analysing PT’s Fixed Line Procurement

The first task was to answer three simple questions: Who was buying what? From whom?
And how?
The team knew from previous experience that this task would be quite complex. In ‘the real
world’, data is not readily available in the format needed to answer such questions. In many
large companies, obtaining answers to such ‘simple’ questions is not easy – and PT was no
different.
PT had good financial records (general ledger) and expenditure-by-supplier could be easily
extracted. However, it was not possible to extract from the existing information system what
was bought from suppliers and who had bought it. This small nuance made a big difference,
because major suppliers were supplying a wide range of equipment and services to several
different departments. Thus, for example, in the case of an important supplier like Alcatel, it
was not possible to know if the money spent was used to buy handsets, network services,
Sonet, SDH, switching or other services or equipment.

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At this stage, the main objective of the procurement team was to assess the amount of
spending for each category and to grasp the magnitude of the corresponding savings
opportunities. Conscious that was quite common initially to sink into the “valley of despair”
and fall victim to “analysis paralysis”, the team had to be creative to make rapid progress in
gathering information (both formal and informal).
Ironically, the suppliers themselves proved to be an excellent source of information – they

knew exactly what they had been selling to whom and at what price. They also knew where
PT’s inefficiencies and waste lay and whether the products they sold to PT were over-
specified, misused or sometimes not used at all (a clear-cut case of information asymmetry).
Examples of misuse pointed out by suppliers included electricity wastage, under-utilisation of
cameras and a consequent excessive use of human surveillance in security, and the use of
unnecessary corrosion protection on some network materials.

From an organisational perspective, the study revealed that purchasing was totally
decentralised. Every department was issuing RFPs (Requests for Proposals) and conducting
individual negotiations with suppliers (as illustrated by Exhibit 2). The same department
would often draw up specifications, issue RFPs, analyse proposals, negotiate with suppliers
and take delivery of goods.
The existing Purchasing Department possessed only clerical and administrative skills and was
focused on order processing and administrative work. In 1999, PT had received more than
250,000 invoices from more than 6,000 suppliers (that is 6,000 suppliers being managed by
10,000 employees). Of these 250,000 invoices, more than 70% had no matching order or
certification that the good(s) had been received, making payment a nightmare. About 300
employees were occupied by tasks related to paying invoices. Records of RFPs, proposals and
letters of intent were kept on paper and archives were almost impossible to consult.
Major purchases were being made by an IT outsourcer and by the Engineering Department.
Both lacked negotiation skills. Strategic purchases were made by engineers whose priority
was “making things work”. They were not particularly concerned with negotiating efficient
contracts or studying supply industry dynamics or material/service economics. Little or no
information was shared between departments, notwithstanding the fact that many of them
shared suppliers. For example, IT hardware suppliers were supplying the IT Department and
the Engineering Department at the same time (Hewlett Packard and Compaq were important
suppliers of both IT and telecommunications hardware).
There was no history of price benchmarking. For instance, the Public Telephone Department
was buying advertising at the same time as the Home & Small Office Department but they
never compared prices. Other opportunities for benchmarking within the group were
neglected. For example, the mobile operator, with headquarters just two blocks away, was a
huge investor in advertising, but prices had never been compared with those obtained by other
companies in the Group – not to mention the question of bundling volumes.
Little or no effort was made to develop new suppliers. Most suppliers had been around for
years, providing the same products and services with little evolution.
The specifications for many products were outdated, which made global sourcing impossible.
Simple standardised products such as cables or telephone handsets were produced specifically

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for PT at high cost. Because of specificities, many products were traditionally sourced mainly
from local suppliers. Many products were over-specified. Specifications were mostly
prescriptive (specifying materials, production methodologies) instead of functional
(specifying the function the product should perform). As a result, products that could be made
in plastic were made in metal (because this was mandated by the specification). The same
problem was found in the specification of services. For example, the contract for cleaning and
janitorial services specified the way these services should be performed instead of the
expected outcomes of the service. This gave suppliers no reason to improve and become more
efficient. When working to a contract specifying how many cleaners are supposed to be
cleaning and for how many hours, there was little incentive for the supplier to change work
practices or to introduce new products or machines.
Sourcing Opportunity Assessment by Category

Six weeks of crunching data extracted from the general ledger and from interviews with
suppliers enabled the project team to map the external expenditures of PT Comunicações (see
Exhibit 3). In 1999, more than 60% of the addressable expenditures of PT Comunicações had
been in highly complex categories, mostly related to construction engineering and installation
services, IT, and switching and transmission. Travel, a category for which many people had
great expectations, represented less than 0.1% of total spending.

Spending was re-organised into sourcing groups. For each group, savings potential (minimum
and maximum) was calculated using benchmarks when available and by observing the
existing level of competition, among other measures. In addition, sourcing groups were
classified in terms of the complexity or ease of implementing improvements (see Exhibit 4).
However, as José Alves Machado put it, “Estimating potential savings at this phase is like
looking through a keyhole and trying to determine what is inside a room.”
The ‘Keyhole View’: Software
In December 1999, just four months before the start of the procurement project, PT had
decided to outsource IT. Software development and maintenance was outsourced to a single
provider (PT-SI) and hardware was outsourced to IBM. Ten-year contracts had been signed
and implementation had just begun. This had been a strategic decision. It was discussed in the
1999 Annual Report and had been given wide publicity, even making headlines in the
Portuguese press (see Exhibit 5).
Under the agreement, two new companies were created: PT-SI (PT Information Systems) and
DCSI (Data, Computers and Information Solutions). PT-SI became responsible for software
applications management and development. IT was managed by a consortium of two leading
companies in systems integration and information technology. DCSI, managed by IBM, took
responsibility for managing hardware infrastructure.
According to all the parties involved, the contract, although complex, was simple to manage
as pricing units were based on IT consumption and were simple and transparent. For example,
for PT-SI, pricing for software maintenance and development was based on headcount, while
pricing for hardware was based on MIPS, Gigabytes, etc - units that were objective and easy
to measure and audit.

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A residual IT management team consisting of two IT experts managed daily activities related
to the outsourcing contract. Besides these daily contract management activities, PT-SI
reported to committees rather than to a functionally accountable manager. These were
comprised of groups of managers with only part-time involvement and often too senior to
have an operational focus. There was no IT strategy or planning team within PT as this role
was left to PT-SI.
One core software application remained outside the scope of the outsourcing contract: the
billing system, which was maintained in the US. The newly created PT-SI had already
presented a business proposal for the maintenance of the billing system but no agreement had
yet been finalised. Essentially, PT-SI proposed to maintain the application, integrating it into
the outsourcing contract, until 2009. The following table, extracted from the proposal,
compares the cost of maintaining the system in the US (Actual) with the cost of the PT-SI
alternative:

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Actual 20,446 20,298 20,939 21,605 22,296 24,011 23,760 24,535 25,340 26,178
Proposed
by PT-SI 28,611 34,132 20,093 16,988 17,542 18,393 19,161 19,332 20,655 21,630
The PT-SI alternative would prove more expensive in the first two years but would
subsequently pay off. According to mainstream opinion, this was a clear case of “low-hanging
fruit”.
The ‘Keyhole View’: Switching
In switching operations, Alcatel and Siemens were the sole providers and no alternatives were
available, unless, of course, the network was replaced. If anyone tried to reduce costs in this
area, the supplier would immediately remind them how sensitive switching equipment was
and how unwise it would be. Switching involved a set of proprietary hardware and software
that could be maintained only by the manufacturer and was the heart of the network. For
example, the voice communications of schools, hospitals, fire departments, major
corporations, homes and others all depend on switching.
Until 2000, PT had regularly bought new equipment and new software releases. It did not pay
maintenance services because the new releases were under warranty. In early 2000, suppliers
told PT that these warranties were expiring because the group’s new investments were
decreasing. They also said that as suppliers had to bear the cost of a large number of people
performing maintenance services, maintenance costs should be unbundled from new
purchases and pricing made more transparent.
An agreement was easily reached. As PT knew how much new equipment it needed to buy in
the coming years and how much this would cost (based on past prices), it was ready to accept
an unbundled proposal as long as the corresponding bundled price for the coming year was
greater than the unbundled one. A fixed €15 million was agreed for maintenance and a
significant two-digit price reduction was agreed for new acquisitions. This satisfied PT
because it knew that, after adding capital expenses to maintenance expenses, total expenditure
would be lower than in the past.

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The ‘Keyhole View’: Outside Plant
PT Comunicações’ annual demand for construction engineering and installation services for
outside plant accounted for more than €50 million. This included services related to outside
plant and customer premises equipment. Activities were performed by specialised labour
divided into different categories (see Exhibit 6).
Seven consortia met PT’s demand. These were led by major firms (such as Alcatel, Fujitsu
and Siemens) and typically included six or seven small regional firms, sometimes family
businesses, called empreiteiros (building contractors). Viatel was an exception as it was not
really a consortium but a major Portuguese company in its own right. It accounted for the
highest spend: more than 43% of the total. Viatel and another 14 empreiteiros together
accounted for more than 80% of total spend (see Exhibit 7).

PT’s existing sourcing model for consortia had been in place since early 1999. A three-year
contract, valid until May 2002, had been signed. The model had the following characteristics:
• Pricing was based on a ‘pay-per-task’ model. In order to reduce management complexity,

frame agreements for a period of three years had been established. Price per task was
fixed and had been calculated on the basis of man-hours per labour category, with class
rates depending on geography and type of labour. These had been agreed with suppliers
using data from the previous model, a ‘bid-by-bid’ model where a competitive bidding
process was organised for each daily task.

• 42 geographic areas were defined, with a single supplier/consortia working in each. A
second supplier could be used only in pre-defined extreme situations (see Exhibit 8).
• Equipment (handsets, wires, cables, poles, etc.) was bought by PT. Suppliers had to order
this equipment from PT’s central warehouse.
When established in 1999, the contracting model had several objectives:
• Achieve economies of scale. PT wanted to concentrate spending on a reduced number of

qualified suppliers to enable suppliers to achieve economies of scale and to increase
efficiency and quality. (The three-year period, according to the Engineering Department,
would give the consortia room to invest and improve both efficiency and quality.)
• Reduce management complexity. Another goal was the reduction of vendor
management complexity by decreasing the number of suppliers and eliminating the bid-
by-bid procedure.
• Set clear accountability. An additional goal was the setting of clear accountability for
installation and maintenance services in each geographic area, with one sole entity being
responsible for mistakes and breakdowns. This would allow suppliers to be evaluated.
• Introduce best practices. Since its supplier base was fragmented (many suppliers were
family businesses or groups of former PT workers), PT thought that by grouping these
small companies together in consortia and putting a major company (such as Siemens,
Alcatel or Fujitsu) into each consortia, it would induce the large company to introduce
best management practices (in logistics, contact centres, etc.), thereby improving
efficiency and quality.

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In this manner, all the necessary conditions for success would be assembled: the consortia
would benefit from economies of scale; vendor complexity would be reduced; each of the
consortia would have a well-defined geographic area; clear accountability would be
established; a three-year horizon for investment and improvement would be defined; and a
major international firm would contribute know-how and management experience.
The Engineering Department was convinced that this arrangement should remain untouched
for two more years, until the end of the contract in 2002, as the conditions for success were
already in place and any attempt to “squeeze” an already precarious workforce would almost
certainly trigger a major shift into other industries (gas, electricity, construction, etc.) or to
Spain.
The ‘Keyhole View’: Advertising & Media

Media (TV, radio, newspapers and outdoors) is often bought through a central purchasing
agency, which can obtain better rates through bulk purchasing for their combined portfolio of
clients. Furthermore, as they are in permanent contact with television broadcasters, radio
stations, leading newspapers and magazines, and other media, they can quickly and reliably
place ads to meet tight deadlines. As this can be time consuming, using a central purchasing
agency frees up management time. An agency will usually offer additional services such as
media planning and media investment evaluation, among others.

Total spending on media by the PT group accounted for more than 5% of the total Portuguese
media market. PT used an agency that negotiated on its behalf, assuring that PT enjoyed the
best conditions in the market. The agency was also said to be contributing expertise in
developing media strategies and enabling marketers to reach their target audiences with an
optimal media mix, using TV, radio, print, internet, direct mail, outdoor, kiosks and other
outlets.
The ‘Keyhole View’: Customer Premises Equipment (CPE)
CPE is defined as equipment belonging to a telephone or other service provider that is

physically located at the customer’s (rather than the provider’s) premises, or somewhere
between the two. Telephone handsets, cable TV set-top boxes and digital subscriber line
routers are typical examples.
At PT Comunicações, the equipment at the customer’s end was the handset, although it was
owned by the telephone company. Providing a handset to the client at no extra cost was
mandatory and PT fulfilled this obligation by supplying the most basic model. Because
handset repairs were at PT’s expense and costs were difficult to control, PT insisted on robust
equipment with the lowest possible failure rate.
In order to function on the Portuguese network and to meet the high standards set by the
company, basic handsets were specifically made for PT. There were three approved
suppliers/models. The Engineering Department argued that this ensured competition between
suppliers and also that there would be no shortage in the event of one supplier failing. Orders
had to be placed six months in advance because the handsets were produced in China and had
to comply with specific non-standard technical requirements imposed by PT.

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The ‘Keyhole View’: Cables
PT’s cables supplier base was as follows: Cabelte, a Portuguese plant based in northern
Portugal, supplied about 30% of requirements; Celcat, a southern Portuguese factory owned
by a British Group, supplied about 30%; three other factories also based in Portugal – one of
which belonged to Aberdere Cables, a big South African cable manufacturing group –
supplied the other 40%.
The Portuguese network, like those of other countries, had its own specificities. The cables PT
bought were specially manufactured for PT. As many new cables were intended to replace old
ones, it was not possible to escape from these specificities (See Exhibit 9).
Benchmark data showed that most European incumbents had two to three cable suppliers. PT
had five. PT accounted for a large share of the revenue of these suppliers, even though some

suppliers had begun to supply significant quantities to new entrants.
At that time, the internet boom and the increasing demand for broadband had led to a shortage
of optical fibre in the market. As a result, suppliers and PT’s Engineering Department were
convinced that the price of optical cables would rise. PT was buying on the basis of frame-
agreement contracts for which prices and service levels had been defined three years earlier,
following a bidding process. The Engineering Department was convinced that it was unwise
to seek savings when supplies were short. PT needed all the suppliers it could get: if it tried to
“squeeze” the supplier base, it could easily shift to new entrants who also needed cable.
The ‘Keyhole View’: Office Supplies
Office supplies were acquired periodically using a competitive bidding process.

Approximately 350 items and were bought and stored at PT’s central warehouse and
distributed on demand. PT had 15 employees and two old cars to cover the internal logistics
of office supplies. Average inventory at the central warehouse was valued at approximately
€2 million, which did not include inventory located elsewhere. Requisitions were made on
paper and it was not easy to analyse consumption. It was known, however, that there was a
sharp upturn in demand for office supplies in September.
The ‘Keyhole View’: Security
Security covered simple, standardised guard services and cash handling. For quite some time,
suppliers, when pressured to reduce their prices and rates, had indicated that the standardised
guard services PT required could be replaced by more specialised services combined with
technological security systems. Technological developments, they said, had created advanced
functionality at lower cost and should be used to rationalise guard services.
PT had not moved to this combined solution of IT systems with traditional guard services
because it believed that once the supplier had installed its own equipment, PT would be
locked in to that supplier forever.
The ‘Keyhole View’: Fleet Services
Fleet services covered car rental and a full maintenance programme. A monthly rate covered
all vehicle expenses, such as comprehensive insurance and repairs (from light bulbs, tires,

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fuses and hoses to transmission overhauls). For cars such as Renault Clio, Citroen Saxo and
Opel Corsa, the monthly rate was approximately €175 (excluding VAT).
PT’s fleet comprised more than 2,000 vehicles, the biggest fleet in Portugal. A three-year
contract for approximately 800 vehicles was about to be renewed. Contract renewal was
usually time consuming. When PT returned the vehicles, the supplier often claimed there was
a need for repairs or respray. A number of other suppliers had shown an interest in bidding
when the contract came up for renewal.
Miscellaneous
Post was not considered an addressable spend as most tariffs were regulated. However, it was
considered that some work could be done on the demand side.

Law was considered outside scope of the project due to the specificity of this kind of service.
Other purchasing categories were considered less relevant and were not the subject of any
detailed study.
The Assignment
After six weeks of assessment, the team had gathered a great deal of information and was
struggling with a number of questions:

• Where and how to start? Which purchasing categories deserved most attention? How to
approach the different categories?
• What about the timing? It seemed that apart from fleet services, where a major contract
was about to be renewed, it was not the best time to introduce any major changes.
• Should a Purchasing Department be established immediately? With what scope? What
organisational chart should be established?
• What kind of procurement policies should be implemented?
• What kinds of skills were needed? Should PT hire people with these skills at the same
time as it was implementing a downsizing programme?
• Should PT invest in information systems? Which systems would best support the new
purchasing department? Which systems would help most to streamline the procurement/
purchasing process?
• How should negotiations be taken away from “the experts” without creating major
disruptions and internal conflicts?


School of Business at Arizona State University.
11
Exhibit 1
Purchasing Spend as a Percentage of Sales
(*) Reprinted with permission from the publishers, the Institute for Supply Management and the W. P. Carey
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Exhibit 2
Negotiation-Related Activities at PT Comunicações
Board
Resources Finance Mkt & Sales Engineering
Quality Dpt
Logistics Negotiate at
Regional level

Network Software (DSG)
Facilities
Network Development
Budget Control
Outside Plant
IT Coordination
Core Network
Human Resources
Management Control
Shared Services to other BUs
Specifying
Operations Zone 1
Negotiating
Operations Zone 2
Ordering
Ordering from Logistics


13
Exhibit 3
Segmentation of the Sourcing Categories of PT Comunicações
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Exhibit 4
Classification of Sourcing Groups
Eas e of
Sour cing Gr oups Spe nd M ínim o Agr e s s ive M ínim um Agr e s s ivo Im ple m e ntation
Sof tw are* 112 12% 25% 13,5 28,0 2
Sw itc hing 89 8% 24% 7,0 21,5 2
Outs ide Plant 54 8% 20% 4,3 10,8 2
A dvertis ing & Media 23 10% 20% 2,9 5,8 1
Cus tomer Premiss es Equipment 29 10% 30% 2,3 6,8 3

Cables 12 4% 8% 0,8 1,5 4
Trans mis s ion ( SDH, Sonet) 21 6% 18% 1,3 3,8 1
Buildings Maintenanc e 12 15% 30% 1,9 3,7 2
Of f ic e Supplies 5 3% 8% 0,4 1,0 5
Law 22 10% 20% 1,2 2,3 1
Sec urity 4 20% 35% 1,0 1,7 2
Post 12 8% 16% 0,4 0,7 2
Trav ell 2 8% 15% 0,3 0,6 4
Fleet Serv ic es 4 6% 15% 0,2 0,5 3

Des ktops, Laptops and Printers 3 2% 4% 0,1 0,2 5

A ir Conditioning 2 10% 25% 0,3 0,6 3
Furniture 2 8% 20% 0,3 0,4 3

Temporaty Labour 1 10% 20% 0,2 0,4 3
Poles 2 15% 25% 0,3 0,4 2
Energy Equipement 2 10% 20% 0,2 0,3 2
Fuel & Gaz 3 15% 25% 0,2 0,4 2

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Exhibit 5
Press Release on the IT Outsourced Contracts
“PORTUGAL TELECOM SIGNS INFORMATION TECHNOLOGY SERVICES AGREEMENT

WITH CASE, CGI AND IBM”
Lisbon, Portugal, November 3, 1999 - Portugal Telecom, IBM, CGI and Case today announced that
an agreement was signed on 29 October 1999, creating a systems and information technology
partnership worth US$1 billion over 10 years. The largest such contract ever signed in Portugal.
In a competitive market undergoing major change demanding specialization and focus, Portugal
Telecom (PT) has elected to partner with systems integration and information technology leaders,

CGI, Case, and IBM, to promote its position in the info-communications market.

The agreement involves the creation of two companies: PT-SI (PT Information Systems) and DCSI
(Data, Computers and Information Solutions). The information systems and data-processing functions
of the PT Group companies will be outsourced to these new companies.
"With this partnership, PT strengthens its position in information technology both as a crucial support
element for its business, and as an integrated and innovative solutions supplier in the market. The
concentration of the information and technology systems of PT Group in these two new companies will
enable increased specialization by the multiple enterprise units of the Group in our core business. In
addition, we will benefit from increased efficiency in our information systems and IT operations
thanks to the experience and know-how of our new partners," said Francisco Padinha, Member of the
Board of Directors, Portugal Telecom.
PT-SI (PT Information Systems) will mainly act in the Portugal Telecom Group market, giving
simultaneous expertise support in the area of the information technology and telecommunications
convergence, while supporting the business strategy of PT Prime / Soluções Empresariais (the new
company of the PT Group for the enterprise market), namely in the integration system and end-to-end
solutions area.
In the scope of this agreement, the CGI and Case consortium will manage the IT functions of PT-SI on
behalf of PT Group, including applications management and support. In addition to the support PT-SI
will provide to PT, IBM will work with PT to develop data processing and physical infrastructure
requirements. About 500 employees will be transferred to the two companies.”

309-123-1
Exhibit 6
Relative Importance of Different Labour Classes in Outside Plant
Labor Class Weight

Class “T” – Labour specialised in customer premises accounting for 37% of spend.
equipment tasks Services at customer premises
include: Installing, wiring and repairing handsets or
ISDN equipment at customer premises)
Class “L” – Labour specialised in the installation of accounting for 33% of spend.
poles and cables.
Class “C” – Labour specialised in the joining of fibre accounting for 16% of spend
optic cables (16%)

Class “S” – Labour specialised in subsoil civil accounting for 8% of spend
construction
Class “A” – Labour specialised in auxiliary tasks accounting for 5% of spend
Class “CM” – Labour specialised in Multiplex. accounting for 0,5% of spend
Class “CO” – Labour specialised in the installation of accounting for 0,5% of spend
fiber optic cables
Most performed tasks – Accounting for more than 50% of spend

1 – Home installation of voice handsets
2 – Handset repairs at customers’ premises
3 – Wooden telephone pole installation
4 – Minor network repairs at customers’ premises.

FUJITSU
10,7%
11%
8,3%
(9)
9%
FUJITSU
(10)
ENTENT
7,3%
AP (11)
7%
AP

PPT
SIEMENS
23%
22,9%
4,1%
4%
PPT
(3)
SIEMENS (10)
3% 3%
ASTEM
3,5%
Spend
ASTEM
ASTEM(3)
by consortium
43%
VIATEL
43,2%
VIATEL (1)
0%
100%
20%
40%
60%
80%
17
Viatel
Geada & Babo, lda
Exhibit 7
Renet
Telic
Sinteme, SA
Silva Martins & Duque, SA
Tecnicabo
Emilio da Costa & Filho, Lda
15
Raiocoop, Lda
500MD-Inst. Elect. Telecom, Lda
CME-Const. Electromec‰nicas
Santos & Cordeiro, Lda
Viscentro
Telcabo, Lda
Telemon, Lda
Porfirio Fernandes
Telejas, Lda
Alvecabo, Lda
Metalurgica, Lda
Sanpirtel, Lda
Atena-Servi Telecom
13
Rui Pinheiro & C, Lda

Elotecnico, Lda
os
Fabel, SA
Luztel, Lda
Meci, Lda
Matb, Lda
Divel, Lda
Painhas &Arieira, Lda
Diamantino Costa Duarte
ABC analysis
Empreitel, Lda
Electro Progresso
by ÒempreiteirosÓ
Teljap
Tegael SA
Engeco, Lda
N.P.-Telecomunica Lda
Tecnoservi Bejense, Lda
19
Sociedade TSO
STE-Serv. Telecom. Elect.
Rodritel-Inst. Material Telec.
o
Fujitsu/Elot
Joaquim & Fernandes
›es,

Relative Importance of Outside Suppliers (by Consortia and “Empreiteiros”)
Teljota, Lda
J. Rebelo & Barbosa, Lda
cnico

Telxiscom Telecomunic., Lda
Sotervenda, Lda
Ent.-Emp. Nacional Telecom.
04/2013-5578
309-123-1

PPT
ENT
Viatel
Alcatel
Fujitsu
ASTEM
Siemens
SIN
CAI
L1
L2
L3
CRNH
VFX
LOU
ALM
LR
BAR
P2
FIG
GA
P1
FML
VC
AV
SJMD
SB
ST
PTM
TNV
18
C
BG
PNF
Exhibit 8
VZ
BJ
VR
VS (SEI)
RGU
FR
CB (CVL)
EV
CB
GD
MRDL
Portuguese Map Showing the Geographic Areas Allocated to Each Consortium
04/2013-5578
309-123-1
309-123-1
Exhibit 9
Cable Construction Details 1
The coated optical fibers are housed in plastic tubes. This type of protection is known as a “Loose
Tube”. The tubes must be free from porosity, slits and other imperfections, to satisfy the ends for
which they will be used.
The Loose Tubes must be arranged in one or more concentric layers (as in point 4.1) about a central
reinforcement element. The type of winding should preferably be SZ type.
Tightness of the cable core must be ensured via the application of hydro-expansive materials in the
interstices of the core and/or on the cabled tubes, or other equivalent materials provided they are
“dry”, non metallic and that their application provides cable tightness, as defined in the Quality tests.

Also, the effect of ageing on the hydro-expansive material must be quantified by the manufacturer.
An interior polyethylene sheath must be applied to this layer so as to promote a better core solidity.
This sheath must have a minimum thickness of 0.8 mm.
Under the interior sheath, a non-metallic tearing thread must be incorporated by longitudinal
application, with a breaking force of at least 100 N, which will allow easy extraction from the sheath
in the process of cable termination.

The exterior sheath must be made of medium density polyethylene, and adhered to the additional
reinforcement elements. This is a fundamental condition so that the force applied to the cable through
the sheath is transmitted to the same reinforcement elements. This adherence must be achieved without
the use of additional materials.
The exterior sheath must have a minimum thickness of 1.5 mm.
The sheath must be free from holes, repairs, porosity, slits and other defects, of uniform tonality and
shine and with a suitable treatment to resist atmospheric agents and particularly UV radiation. The
material of the sheath must be black in color with a 2% to 3% content of uniformly distributed carbon
black.
A non-metallic tearing thread must be included under the exterior sheath for longitudinal application.
This tearing thread must have a breaking load of at least 150 N, which will allow it to be easily
extracted from the sheath during the process of terminating the cable. The cord may be in any of the
following colors: white, red, green, blue, yellow or orange.
In the case of cables for overhead installation, a metallic tensor must be incorporated under the
exterior sheath, which will offer a figure of eight shaped cross section.
The tensor cable must be made up of galvanized steel wires of the same diameter, cabled without
torsion, and no soldering in the elementary wires will be permitted after cabling. This tensor is laid out
in parallel with the set of tubes, interior sheath and additional reinforcements, both of which being
enveloped by the sheath and in compliance with the dimensional requirements defined in the following
chart and figure 2…
1
Excerpt from a 90 page text.
2
Chart and figure from the original document not included in this excerpt.

Supply Chain Restructuring at Portugal Telecom A

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309-123-1

Supply Chain Restructuring

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Sourcing Opportunity Assessment

The PT Group comprised several independent companies (a fixed line company – PT

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Analysing PT’s Fixed Line Procurement

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Ironically, the suppliers themselves proved to be an excellent source of information – they

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Sourcing Opportunity Assessment by Category

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great expectations, represented less than 0.1% of total spending.

The ‘Keyhole View’: Software

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The ‘Keyhole View’: Switching

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The ‘Keyhole View’: Outside Plant

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• Pricing was based on a ‘pay-per-task’ model. In order to reduce management complexity,

process was organised for each daily task.

• Achieve economies of scale. PT wanted to concentrate spending on a reduced number of

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The ‘Keyhole View’: Advertising & Media

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media planning and media investment evaluation, among others.

The ‘Keyhole View’: Customer Premises Equipment (CPE)

CPE is defined as equipment belonging to a telephone or other service provider that is

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The ‘Keyhole View’: Cables

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The ‘Keyhole View’: Office Supplies

Office supplies were acquired periodically using a competitive bidding process.

The ‘Keyhole View’: Security

The ‘Keyhole View’: Fleet Services

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struggling with a number of questions:

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Copyright © 2009 INSEAD

Resources Finance Mkt & Sales Engineering

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Copyright © 2009 INSEAD

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Fleet Serv ic es 4 6% 15% 0,2 0,5 3

Des ktops, Laptops and Printers 3 2% 4% 0,1 0,2 5

Furniture 2 8% 20% 0,3 0,4 3

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“PORTUGAL TELECOM SIGNS INFORMATION TECHNOLOGY SERVICES AGREEMENT

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Taught by QI Annabelle Feng, from 17-Aug-2020 to 18-Dec-2020. Order ref F387908.

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Labor Class Weight

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Most performed tasks – Accounting for more than 50% of spend

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