Business Tools Blog

The two words “Allocated Expense” strike fear in the hearts of Zayo’s business units.  Dan Caruso writes about de-integration.  He says, “Zayo Group was formed as very small corporate group that brings together the three autonomous business units [Zayo Bandwidth, Zayo Managed Services and Onvoy Voice Services].”

Zayo Group - aka corporate expenses - is the only expenses not 100% controlled by the business units AND the business units HATE seeing these expenses on their income statement.   

How much do we allocate?  Not much. 

Zayo Group has 10 people (3 are part time, and 1 doesn’t take a salary or bonus).  The only expenses, other than headcount related, are corporate governance (ex. annual audit, tax, regulatory filings, board meetings)  The following functions only exist within the business units: Sales & Marketing, IT, NOC, Engineering, Field Services, Inside and Outside Plant, Customer Care, and Service Delivery.  Legal, HR and Finance are run by the business units, but some of the 10 people in corporate handle governance and rollup functions.

Zayo’s corporate group seems like a bargain … but the business units still cringe every time they have to record their share of the corporate allocation on their P&L.  Why?  Because de-integrating the business gave each business 100% control of their expenses, and anything outside their direct control is extremely irritating to them.

Why is working at Zayo such a refreshing change from many Telecom companies?  Because we spend zero time prioritizing resources across companies.  We don’t waste energy on issues that arise from sharing a NOC, IT, financial systems, network planning, field operations, HR, legal, engineering, or sales.  Imagine not having to compete for resources?  Everyone is empowered to do what is necessary to grow the value of their business. 

For example, if we had a centralized IT group across the 3 business units, with a CIO who reported to the CEO running the show, IT’s objectives might look like this: 

• Cut IT costs as a % of revenue
• Align projects with executive management goals
• Develop fully integrated end to end solutions
• Achieve balanced results across stakeholder groups
• Achieve a % percentage of systems uptime and MTTR across all systems

With these objectives …

• Would the IT group try to build one order entry system across the 3 business units, or have 3 order entry systems?  Who decides? 
• If a business unit wanted to roll out a new product, who would decide on the prioritization? 
• If a global system was at the end of it’s useful life, and one of the business units didn’t want to pay for it anymore, who would determine how the unit would be charged?
• If a business unit wanted to hire experts in a particular area of IT to explore innovation, who would make the hiring decision?
• If the voice services product group wanted to audit their MOU rating tables, who would decide if this was a priority? How much time would be spent arguing?  Whose bonus would be impacted if the project never got prioritized?

At Zayo, the answers are simple.  Each business unit owns driving value.  They understand that value is created through Revenue and Free Cash Flow (bonuses are based on Revenue, EBITDA and FCF targets).  The business units have monthly forecasts that are detailed enough to understand where investments in systems are necessary to drive value.  We will never hear, “We don’t know when we can roll out the new product, because there are 100 projects in queue.  IT will get back to us in 2 weeks, or so, and then we will know if the project can be prioritized.”

Think for a minute about the impact that focus has across the organization.  Zayo’s salesforce is 100% focused on selling the business unit’s products.  If order entry or billing isn’t working, the business unit can make a fix without having to worry about how their fix impacts the other business units.  The legal team is 100% focused on the business unit’s contracts.  If there is a backlog in legal, the business unit can add a lawyer or paralegal immediately.  The business unit doesn’t have to argue with the General Counsel about the Legal Department’s budget constraints. 

Moreover, by narrowing the focus, each business unit can target projects that grow revenue and optimize spend.  Each business unit can focus on their customer’s needs.  Working with Zayo isn’t confusing, and you would be surprised at how many customer relationships have improved in the few short months since Zayo de-integrated.

The question that we always get asked …  

Doesn’t having 3 salesforces, 3 NOCs, 3 Operations departments, 3 IT departments, etc. cost a lot more than having 1 centralized department for each function?  (I have to admit that this thought crossed my mind).

The answer based on financial results is that we gain more in efficiency than we lose in cost. 

I think back to when I worked for an organization that shared a service delivery department across all business units/product groups.  The centralized service delivery department was probably the best in the industry.  They had 95%+  on time delivery. One month, the colocation product group didn’t have a single install.  But, they still had to pay for service delivery.  Their P&L was charged their pro-rata share (based on revenue) of the service delivery department’s actuals.  Because the colocation group had no control over the service delivery cost, they didn’t focus on optimizing that cost.  In fact, because there was no control, the product managers didn’t waste any time trying to understand the cost.  The service delivery team was never brought into the loop to discuss how their costs impacted the colocation business.  Was the colocation product charged appropriately?  With focus, could the cost structure have been improved?  How hard would it be to understand and implement change in this environment?