Telco tussle

The sale meant Telstra was not big enough to compete with the global services companies, but was still too big to compete against the nimble smaller players, admits KAZ Group CEO Mike Foster. "We were in no man’s land, and that’s why we decided to look for taking on some more local capability and scale," Foster says.

"KAZ was looking for a larger parent and partner and Telstra was looking for growth in the services business."

Already the head of Telstra Services Solutions, Foster was appointed joint managing director of the combined IT services business along with KAZ Group founder Peter Kazacos. Kazacos had been KAZ Group deputy chairman, having stepped down as chief executive and managing director the year before.

Telstra’s partnership experiences convinced Foster that acquisition was ‘absolutely’ the right course of action for its next play in the IT services market.

"IBM GSA had some success but, at the end of the day, it was companies working together rather than a company bring some sort of converged solution to the market," Foster says.

"As a joint venture I think Advantra struggled to grow, it struggled to get a brand in the market and it really didn’t have a tight enough engagement model with any of its owners. When Advantra was bought by Telstra and became Telstra Enterprise Services, it then became too close to the telco."

"The lessons learned were about keeping the business close to the parent, but still running it separately -- because the processes and the metrics are different. These lessons were certainly well enforced to us when we looked at taking on KAZ."

Six months after its acquisition, KAZ Group was merged with Telstra’s Services Solutions group, with almost 1000 Telstra staff moved into KAZ Group to make up a quarter of its total workforce.

Six months later, in February this year, Foster was appointed KAZ Group CEO, and founder Peter Kazacos went from joint managing director to an executive director responsible for leading the KAZ Solutions and Innovation team. At the same time, Telstra’s Rob Roe replaced KAZ Group managing director Andrew Richardson and KAZ Group’s Asian operations began reporting to Telstra global business managing director Drew Kelton.

While its business structure has changed significantly, KAZ Group still exists -- unlike some other Telstra acquisitions. Even so, KAZ Group’s future as an independent entity is less than secure, says IDC Australia’s Fevre.

"They’ve kept KAZ separate so far but anything could happen now there’s a new Telstra CEO. They could merge it into Telstra or they could spin it off, it’s hard to know," Fevre says.

"I think KAZ is really trying hard, they’ve hired a very high flying top management. That’s good, but it’s not enough. Integrating an IT services company is never easy, because you’re talking about people rather than acquiring a product or a technology. You need to integrate the people and the culture. Customers that have been attracted to these types of smaller IT companies, compared to the big giants, don’t want to lose that feeling of working closely with a smaller company."

Lessons to learn

This is a lesson that both Telstra and Optus must remember as they move into the IT services market, warns Robert Schwarz, former managing director of 2004 Telstra acquisition Damovo.

After Damovo’s acquisition, Telstra Business Systems managing director Malcolm Flanagan took over Schwarz’s role and his office.

Schwarz stayed on for five months to assist with the transition, at which time Damovo was merged with Telstra’s Customer Premises Equipment business and relaunched as Telstra Business Systems.

In August, Schwarz was appointed chief executive of Canberra software developer
The Distillery.

One of the threats such telcos bring to the businesses they acquire is that their focus is
not the same as those of their acquisition, Schwarz warns.

"Those acquired companies got to where they were because of their focus on their clients and the ability to be flexible and a fairly tight focus on what their product offering was," he says.

"I think with the telcos that potentially gets diluted and the old internal politics start to come into play. They’re obviously going to want to try to push other services and other telco offerings through those channels, which I think starts to dilute the customer service."

Telcos need to let an acquisition ‘do what it does best’ and draw up a clear charter of where it fits into the larger organisation, Schwarz says.

"If Alphawest does go into Optus, for example, it’s got to be very clear about how they work and they need to have, I would think, a level of autonomy. If they don’t then what you’ll find is other parts of Optus’ business will start interfering with it and all that does is take away people’s time from a customer focus to an internal focus, and that’s where it all starts to suffer."

Telstra’s acquisition of Damovo to regain the PABX maintenance contracts it earlier sold to Damovo highlights another major issue confronting telcos: losing ‘face time’ with customers.

While rejecting the idea that the initial sale of the PABX contracts was a mistake, Telstra’s Foster admits their loss made it clear how important such regular customer contact is to a telco looking to claim a greater share of its customers’ wallets.

"I think there was an awareness as time went by that we still need to be in front of our customer on a regular basis," Foster says.

"The more you move away from that customer interface, whether it is PABXs or managing other end points of the network, you tend to get forgotten about and the customer doesn’t associate you with that particular service they want."

With the KAZ Group and Damovo within the Telstra fold, today KAZ Group wants to be seen as a "network services business", Foster says.

"We’re not interested in taking on mainframes and data centres, we don’t see it as our core to be doing huge application development. What I do see as our core is when someone says they’re moving their whole network to an IP capability. All of a sudden, the network and the application become more intertwined and that’s where I see KAZ playing."

Telstra works closely with several companies aside from KAZ Group in the IT services market, but Foster says there are no partnership agreements in place.

"The market is small and I think you’ve got to pick your partners and you can only go with one," he says.