`We're Making A 180 Degree Turn'

It's well after regular working hours in the Bonn offices of Deutsche Bundespost Telekom, Germany's telephone monopoly. But Hans Huber, executive director of telephone services for business customers, is still poring over analyses of his future competitors. Huber, a Digital Equipment Corp. veteran, has scored big successes selling such new Telekom services as toll-free numbers. But he knows that with complete deregulation approaching, his gains could evaporate. "The market is changing so quickly, if we don't move fast we will be killed," Huber says.

That lesson is slowly sinking in at the giant state-owned utility. Telekom is already being challenged in liberalized areas: British Telecommunications PLC is peddling international service to Germans, and Mannesmann and Thyssen want to dominate the cellular-phone market.

More changes are coming. This month, the government will name the investment banks to oversee Telekom's privatization--Europe's most ambitious--which begins in 1996 with a share offering worth up to $12 billion. The European Union will also soon decide when other companies can install phone cable of their own in Germany. And in 1998, Telekom's monopoly on local voice services will end.

Telekom's top executives swear they'll be ready for the free market. "We're well into making a 180-degree turn," says management board member Carl-Friedrich Meissner, who was hired away from IBM by Telekom Chief Executive Helmut Ricke. The company's strategy is to go all-out to improve the core telephone business, where a friendlier Telekom could really capitalize on its market dominance. It is also moving into such new businesses as multimedia.

CIVIL SERVANTS. Yet investors who expect a completely transformed Telekom to emerge by 1996 may be in for a surprise. Even a privatized Telekom will continue to suffer from the legacies of public administration. According to German law, some 50% of its 230,000 employees are civil servants who cannot be fired, and seniority guarantees jobs for an additional 20%. Telekom is negotiating with unions over early-retirement packages but is firing no one. That contrasts with now-privatized British Telecom, which has laid off 30% of its workforce, and Finnish Telekom, which plans a 40% reduction. Gerd Wittkemper, a telecom consultant with Booz, Allen & Hamilton Inc., figures that Telekom, whose sales will top $41 billion this year, should cut its staff by up to 40%.

There are other burdens. The cost of modernizing eastern Germany's phone system has helped boost Telekom's debt to $75 billion. That's perilously high for a capital-intensive business.

While a complete makeover hardly seems imminent, there are some encouraging developments. A new data processing system will replace the paper records for all 40.7 million customers and allow itemized billing for the first time. As new products such as toll-free numbers proliferate and workers serve local customers better, business is picking up. From 1991 to 1995, sales per employee will have surged 50%, and CEO Ricke predicts that number will double by 2000. "We won't fire people, so we'll grow," says Hans-Willi Hefekauser, director of regulation and competition.

Telekom is also responding to new rivals. Last winter, Gerhard Rist, telecommunications director at chemical giant BASF Group, switched his international calls to British Telecom, saving over $660,000 a year. Others started defecting. So Telekom fought back in February with its own "Ausland Spezial Plus," or Foreign Special, which offered volume discounts of up to 42%. It was a delayed reaction, but Rist gives Telekom points for trying and says he will consider the carrier when his BT contract is up. "I sense a culture of competition coming to Telekom," he says.

REBATES. The digital cellular market is another area where Telekom is fighting back despite a slow start. After the cellular market was opened in 1989, a rival consortium lead by Mannesmann kept Telekom's market share in the digital segment down to a third. So Telekom set up DeTeMobil--a separate unit symbolically located across the Rhine from Bonn headquarters and staffed with new, younger hires and Telekom volunteers. Market share is now up to 50%, users have quadrupled in two years, to 800,000, and the unit expects a profit by 1995. To share his leaner management style, Lothar Hunsel, the ex-Bertelsmann executive who heads cellular, may soon lend his most aggressive executives to the parent company.

Telekom also set up a unit in January to provide complete telecom solutions to its top 200 German clients. This corporate network business is potentially quite lucrative, and rivals are already at work, especially a new alliance between Deutsche Bank, Mannesmann, and RWE. Telekom's unit, DeTeSystem, is paying market-rate salaries, not a bureaucrat's scale, to get the most service-minded staff.

Customers are starting to see results from these efforts. Last year, when United Parcel Service Inc. wanted its own communications network with its 4,500 trucks in Germany, it chose Telekom. After dealing with several Telekom departments and more than 100 locations, UPS requested--and got--one Telekom manager to coordinate the account. "We demand a lot," says Ralf Schreckling, a director at UPS in Germany. "But they are responding."

While Telekom still has some catching up to do in customer service, at least it has made a start. Repair technicians now make appointments instead of showing up at random, and Telekom gives a rebate if they arrive late. Other services, such as voice mail and call-waiting, are just starting. Things will improve even faster once the rank and file finally incorporates all the new lessons on service. Until 1990, "we didn't even use the word customer," notes Jochen Schlegel, head of customer service, who holds training sessions with role-playing and videos. Even now, Schlegel faces resistance to his plan for a dispatch system that would more efficiently assign repair workers.

Creating top customer service may take most of a decade. That certainly has been true for British Telecom, which has been building a new culture since 1984. Yet the prospect of U.S.-level phone service is what excites investors and investment bankers about Telekom's privatization. The profits from new efficiencies and upgrading service could be huge. Already, pretax earnings should be up 62% this year, to $3.4 billion.

ALLIANCES. Strategic partnerships will be critical to Telekom's growth potential. It's hooking up with Intel Corp. and Microsoft Corp. to boost its multimedia capability on personal computers. And through tie-ups with France Telecom and Sprint Corp. earlier this year to offer corporate networks to multinationals, the German carrier is well-positioned in this fast-growing new market. But Telekom hit a roadblock Nov. 9 when European Union regulators rejected a pay-TV joint venture with Bertelsmann and Kirch Group as anticompetitive.

The key question is whether Telekom can take the heat once its protections are removed--and new shareholders start clamoring for results. Free-market advocates think Germany should end Telekom's national monopoly over phone cable even sooner than 1998, as proposed, and so hasten the company's makeover. The U.S. also wants deregulation accelerated before approving Telekom's Sprint investment. Failing to set earlier deadlines "impedes Telekom's ability to compete outside Germany," says Carl Christian von Weizsacker, head of Germany's Anti-Monopoly Commission. Whatever the timetable, Telekom has started a painful journey that will take years to complete.

     Deutsche Telekom
             At A Glance
            1994 ESTIMATES
      SALES             $41.3 billion
      PRETAX PROFIT     $3.4 billion
      DEBT              $75 billion
      EMPLOYEES         230,000
      PHONE CUSTOMERS*  40.7 million
      *Includes mobile phones
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