Last week we saw that Level 3 Communications' revenue per employee is approaching $200K for the first time in the company's history, and we saw that this is a whole lot higher than Verizon and AT&T, both of whom have about $100k in revenue per employee. However, comparing Level 3 to AT&T and Verizon on this metric isn't really all that useful, as Dutch Brinkert pointed out in a comment on Friday's post. As Dutch put it:
"Interesting analysis although I'm not sure these numbers (revenue per employeee) really surprise nor are meaningful when you take into account the differences in the business models between LVLT which has a relatively small number of customers who each generate relatively large amounts of traffic/revenue compared to T and VZ who both derive signifcant revenue streams from many, many customers who individually generate comparatively little traffic/revenues and require lots of hand-holding (think of all the folks working down at your local Verizon Wireless or AT&T store working to support your $100 a month wireless bill and your kids $5.99 a month unlimited text package).
Because LVLT has the vast majority of it's business in wholesale markets (Voice, transport, CDN, IP) one would expect their revenue per employee to be higher than T and VZ and suggesting that a measure like this represents a valid measure of managerial effectiveness is superficial."
Dutch makes a great point: it's hard to compare revenue per employee across wholesale and retail business models in any meaningful way, and that the metric is maybe not such a great measure of managerial effectiveness. And I don't suggest that is is a good measure of managerial effectiveness. However, revenue per employee does give us a peek into the employee productivity that should be expected from different telecom strategies.
Level 3 took a largely wholesale approach early in its history, selling bandwidth, internet, colocation, and voice services to large carriers, service providers, and media/content companies. The company only added a business markets group to their portfolio when they saw that Verizon and AT&T were consolidating many of their would-be customers, and that T and VZ planned to continue their vertical integration strategy, making it highly unlikely that they would outsource much of their network business to Level 3. So, Level 3 pragmatically decided to buy more metro assets and business customers and created their own business markets focus.
Over time, if Level 3 is successful in growing their Business Markets Group, it might serve to dilute the apparent efficiencies Level 3 is enjoying in the form of low SG&A costs as a percentage of revenue, as compared to some of their peers. However, I am guessing that even if Level 3 is successful in business markets, the dilution in revenue per employee will not be so severe that SG&A efficiency ceases to be an advantage for Level 3.
SG&A efficiencies, as measured by metrics like revenue per employee, derive from several sources. Yes, wholesale strategies, in scale, should be more efficient than retail strategies, but more broadly, the source of SG&A efficiency is focus. A focused strategy, in which the product suite is carefully guarded against bloat, and in which the sales force carefully targets their customers, can really help to contain expenses.
To illustrate, let's look at how a few other Level 3 competitors stack up on the revenue per employee metric:
|
Employees |
Quarterly Communications Revenue (millions) |
Quarterly Revenue Per Employee |
| Equinix |
911 |
$ 172 |
$188,804 |
| Level 3 |
5,965 |
$ 1,072 |
$179,715 |
| Global Crossing, Limited |
4,936 |
$ 630 |
$127,634 |
| Cogent |
431 |
$ 52 |
$120,650 |
| Time Warner Telecom |
2,859 |
$ 318 |
$111,228 |
| Paetec |
3,900 |
$ 404 |
$103,590 |
| Verizon |
235,000 |
$ 24,124 |
$102,655 |
| ATT |
310,000 |
$ 30,866 |
$ 99,568 |
| XO |
4,416 |
$ 361 |
$ 81,748 |
Note: For companies on this list other than Level 3, AT&T, Verizon, Paetec and Equinix, revenue is from the first quarter because the companies had not yet announced actual second quarter earnings yet. I did use Paetec's estimated 2nd quarter revenue range from their announcement last week to estimate revenue per employee for Paetec.
Equinix tops the list with $189K in revenue per employee. The company bill itself as "the leading global provider of network-neutral data centers and Internet exchange services for enterprise, content companies, and network service providers." So, like Level 3, they are not entirely wholesale, but largely so, and they are certainly focused in their strategy.
Level 3 does well, though, in the revenue per employee metric, when compared against a broader group of companies. I think this due to their largely wholesale focus and their tighter product and sales focus.
The further down the list you go, the lower the revenue per employee. Also, as Dutch pointed out, you get more retail focus lower on the list. I'd also point out that as you go further down the list, you generally get a broader product portfolio and/or sales focus.
I believe Dutch correctly diagnosed the primary cause of the disparity between Level 3 and AT&T in revenue per employee: wholesale versus retail strategy. I think that you can generalize that even further, though, and say that companies with a tighter focus should rise in the revenue per employee rankings.
Dutch asked a number of other excellent questions in his comment on Friday's post, so I encourage you to check it out. I'll try to offer some opinions on them later this week.