PricwaterhouseCoopers CASE

DISCUSSION

BUSINESS/STRATEGY
Interview Case Study #2

Telekenesis Inc. PricewaterhouseCoopers has recently proposed on, and appears to have won, a major engagement to create an information technology strategy for Telekenesis. PricwaterhouseCoopers has worked for Telekenesis in the past, but has not done any significant work for over a year and a half. This is PricwaterhouseCoopers first substantial engagement with the company. Company Background Telekenesis was formed in 1992 by executives from four former Regional Bell Operating Companies (RBOCs) and two principals in Silicon Valley technology start-ups. One of the principals is from a start-up company that pioneered a new kind of wireless propagation technology. Telekenesis was founded on the principle that the current telecommunications industry is populated with companies who are almost congenitally incapable of optimizing their form of organization and culture to meet the competitive challenges of the 1990s. The founders believe that local loop technology, which relies on communication devices which are peers in a large technology community, where every device has a permanent and unchangeable identification, is the silver bullet of the telecommunications industry, and that the RBOCs are not ready or willing to exploit it. Local loop technology (LLT) is considered by RBOC management to be radical, unproven and unreliable. Telekenesis Inc. is modestly profitable, with $131,000,000 in sales and approximately 200,000 customers spread out over four adjacent, mostly rural geographies. Approximately 90% of its sales come from four small local telephone companies. The company's strategy is to use the operating experience and customer positioning of the four local telephone companies to develop and implement local loop wireless service or LLWS (often pronounced "laws"). The concept behind this service is based on the fact that the current phone companies control wiring to and from a central office facility. This facility is in effect a big switching box. The central office acts like a big hub with many spokes radiating from it. LLWS eliminates the central office and substitutes simple, unobtrusive, premises wireless relay equipment. There is at least one local loop server facility that is somewhat analogous to a central office but not needed to maintain service. The server facility is used to monitor quality and provide a trap for billing. Local loop wireless services are fully integrated. They include telephonic communication as well as cellular, pager, on-demand video, and "highway" services. Highway services permit

companies within the local loop to communicate with each other as if they were on a large universal local area network. Computers located in both home and office are immediately interconnected by the local loop. Importantly, there are literally no wires involved in any of these services (except of course for plugging into the wall to get electricity). Physical customer hookups are non-existent. Customers are granted access, and services and information are secured through software interfaces in LLWS devices, such as television sets, laptop computers, pagers, etc. Telekenesis has a number of arrangements with software and hardware vendors to create LLWS devices. Understandably, the industry discounts LLWS as another "high tech California fantasy." Bell Core engineers, while acknowledging the future potential of local loop technology, dispute Telekenesis's claims that the bandwidth and quality is actually present in production, commercially available products to be installed in the real world. Telekenesis' doctrine is to completely convert all 200,000 current subscribers of the four local phone companies at once, with no phase in. Each of the four local companies will be converted separately. Telekenesis bought the four local phone companies in order to have large scale pilot sites for local loop wireless services. Telekenesis' fundamental business proposition is that the changing regulatory landscape will allow it to compete with local Bell telephone companies, providing a higher performance, lower cost alternative to the existing local phone companies for local and long-distance telephone service, paging, cable t.v., and cellular phones. Industry Trends The early 1980s were a time of turmoil for the telecommunications industry. For the first time in history, AT&T was deregulated and lost its monopoly status. This meant competition for AT&T where none had existed before. Long-distance was the arena of competition. "Telecommunications" includes much more than simply making a phone-call. It encompasses cable television service and network connectivity which brings interactive television, shopping forums, education and information services into the home. The phone lines that the telecommunications companies control enable computers to communicate from remote locations, and can gather information from databases and news services around the world within seconds. The possibilities for profits in this arena are practically limitless, and the sphere of competition is expanding. Up to 1994, only long-distance carriers were in competition, but local calling areas are going to be opened up for competition in the late 1990s. Telekenesis Organization There are currently three business units: 1) residential, which is divided into the "plain vanilla" customers that have only one phone line into the house and no add-ons such as cellular phones, pagers, additional lines, etc. and 2) residential customers who have add-on services and are good candidates for taking advantage of the new technology; and 3) small business. Each of Telekenesis's business units has a President who reports to the CEO. In addition, R&D and Technology Assurance, essentially a quality management program, also report directly to the CEO. Telekenesis is tightly controlled by the principals who founded the company and all the

senior positions just described are held by the founders. There are really no Corporate functional areas such as Finance, Purchasing, Distribution, and Human Resources. These functions exist in the original phone companies as they did before the companies were acquired. An outsider with the title of Chief Financial Officer runs the Corporate functional area. She had a brief tenure as the CFO of an RBOC. The Technology Assurance Group helps support the existing communications and networking infrastructure. Telekenesis Current Situation PricewaterhouseCoopers was retained because of their knowledge of the RBOCs and an audit relationship with the four local phone companies. They were retained by Telekenesis for special start-up services, legal and regulatory counsel and assistance in dealing with obtaining additional venture capital financing. Because of the technology nature of Telekenesis, the PricwaterhouseCoopers Financial Advisory Services partner contacted IT Strategic Services. The Firm has now been asked to deal with the operational dimensions of Telekenesis as it commences detailed tactical planning for LLWS activation. Another management consulting firm is providing some business strategy consulting to Telekenesis. PricewaterhouseCoopers has been asked to propose on three major stages of work: 1) process vision; 2) tactical doctrine; 3) infrastructure and value. These are meant to give Telekenesis "process efficacy." This is their language. The current company is, in effect, the combination of the four small southern telephone companies that were acquired and are now operated by Telekenesis. However, except for top management, the vast majority of employees of the telephone companies were retained, as were the administrative and operational support systems. Some of those employees are very excited to be able to participate in this opportunity, but a lot of the old timers are dubious and apprehensive. All telephone company processes and functions are essentially the same as before the acquisition by Telekenesis. Telekenesis concentrated on establishing a simple, "no frills" system for collecting financial and operating information on the telephone companies but did virtually nothing to change the actual operations of the companies. Marley and Cratchet (the two silicon valley entrepreneurs) expect that the consultant selected will be able to bring fresh creative ideas to the process of what they term is "...creating a 21st Century company for a 21st Century business." Included in their definition of process efficacy is the notion of "enterprise extensibility," or put more simply put the capability to seamless team with external suppliers in a variety of value-adding, integrative relationships that can be episodic or persistent. Particularly important is the aspect of Telekenesis strategy in which vendors will provide LLWS compatible devices to customers who will pay a one-time $15 fee for the equipment. All four Telekenesis executives expect that the process efficacy initiatives will include information systems and technology strategy and planning. They want the consultant to provide a guaranteed "operational profile" that states that the recommended configuration of hardware and software, costing $xx and operational by 19yy will be able to support the local loop wireless service business.

There are four distinct flavours of legacy systems across the four companies. Hardware and software is different, with three of the companies having an IBM mainframe in addition to other computers. Telekenesis installed IMRS on a high end x486 computer to provide financial consolidation and reporting of the four companies. Spreadsheet disks prepared at month end are FedExed to Telekenesis home office in Bernardsville, New Jersey and loaded into IMRS. Questions Do you believe you have enough information to develop an Business/IT strategy for this client? If no, what additional information would you require? What skills would the consulting team need to successfully complete this engagement? How would you structure the work for this engagement? What are the risks that Telekenesis faces? Should PwC guarantee an "operational profile"? If so, should there be any caveats included in the guarantee? What types of business processes will be needed? How would you integrate the processes of the four existing local phone companies and Telekenesis? What kinds of information systems will the company require? Where can PwC add the most value in the engagement? (i.e., of all the items that Telekenesis requested assistance with, where should we focus?)