A CLEC’s survival strategy

There aren’t a lot of sure bets in the competitive local exchange carrier market, but for almost a year now, Group Telecom has been the closest thing we’ve got.

That’s why it was a little alarming when earlier this week the Toronto-based firm said it was eliminating 350 jobs, or about

28 per cent of its workforce, in an effort to cut cash expenses by about $30 million a year. There was no need to explain why. All you have to do is look around at what has become the CLEC graveyard of the telecom industry, with names like Axxent and Cannect demonstrating how difficult it is to make it in the local service market.

When a company like Group Telecom undergoes a restructuring of this kind, you can be sure of two things. The CLEC meltdown is quickly reaching its nadir, and that the layoffs were the last possible recourse. This is an organization that has gone above and beyond in making investments for the long-term efficiency of its staff. While some companies react to a recession by cutting too deep too quickly, Group Telecom held on in the hopes of riding out the cycle unscathed.

You could almost look at the first wave of CLEC closures as a transition chapter in the story of how voice services gave way to data. The tight margins in voice services certainly contributed to the demise of several players, while data accounts for about 80 per cent of Group Telecom’s revenues. It also owns its own network rather than renting from an incumbent local exchange carrier like Bell, which will probably pay off in the long run.

When the Canadian Radio-television and Telecommunications Commission deregulated local services, the market revelled in the unbounded opportunity for competition. It wasn’t supposed to become such a tight race so quickly, but the collapse of firms like Norigen left a bad taste in many investors’ mouths. Group Telecom, however, differed from other money-draining CLECs by spending money wisely and running a tight ship at the same time. It became an early adopter of a self-service IT approach that many other enterprises are only beginning to explore, equipping its employees with Web-based purchasing, time control and expense tracking. It realized early on that 70 per cent of its employees were mobile and installed state of the art security systems to protect them, rather than waiting for disaster to strike. Before it faced the bottleneck of the last mile — also known as the distance between the enterprise and the carrier’s central office — it started using optical ethernet technology from Metrobility. These are the signs of a well-managed company.

That doesn’t mean Group Telecom has been immune to the volatility that comes in this risky territory. The firm has been losing money for some time, but executives have told our editors that it has funding in place until at least 2004, which is going to be important now that most of the capital has dried up. Like any fledgling player, Group Telecom simply has to evolve from a base of small and medium-sized customers to larger ones. And it will.

The CLEC market is more Darwinian than the dot-com market because while not everyone needs to shop online, most people will have some need for a combination of voice and data services. There won’t be many new entrants, but there are still a few companies like AT&T with pockets deep enough that they may decide to invest whatever it takes to be one of the few left standing when the market recovers. Group Telecom, which has put the “”competitive”” back into competitive local exchange carrier, is destined to be among them.


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Jim Love, Chief Content Officer, IT World Canada

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Shane Schick
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