Competitor or Partner?

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1 Manfred Schmitz, Patrick Hung Fai Ma Competitor or Partner? Equipment vendors are getting more and more involved into the telecom operators business via Managed Services Vendors are expanding their service offering and taking the chances to move upwards in the value chain. Operators need to find ways to reduce costs while maintaining their market share, and to act quickly. A partnering model with a vendor can be an attractive solution but with increased business risk. 68 Detecon Management Report 3 / 2010

2 Competitor or Partner? Photo: Painting, Nicholas Kashian A ccording to The New York Times, Ericsson and Nokia Siemens Networks are technically now the world s largest wireless operators thanks to the increasing number of carriers relying on the vendors for network management. The two equipment vendors operate networks covering a combined 355 million customers worldwide. Ericsson earned about $1.7 billion from its Managed Services business last year, up 17 percent from a year earlier. That figure is 7 percent of the Ericsson s total revenue highlighting the growing importance of the services business for the equipment vendors. The Managed Service providers are now aiming to further evolve this business from a transactional performance of tasks towards full business transformation via Managed end-to-end service operations. This implies the development from Network operations towards Customer experience driven activities with a stronger partnership based on risk-and-reward mechanisms. Will this be for the benefit of the operators or will this ultimately shrink their share of the value chain? A short look to history of Managed Services In mature markets operators are faced with two challenges simultaneously. On the one hand, their revenues are decreasing due to market saturation. Therefore they need to drastically reduce operational costs to offset increasing expenditure on marketing and sales. On the other hand, they need to migrate their legacy networks into next generation technology to stay competitive. In developing markets, operators have to invest heavily into network capacity to keep pace with the huge subscriber growth. At the same time they need to carefully manage costs to stay profitable despite the low ARPU of sometimes down to 3 US$ in their markets. 69 Detecon Management Report 3 / 2010

3 These challenges lead to the need to adapt the old vertical business model to take care of the new realities. The operators need to ask themselves what are the activities they are best in and what activities other players can perform better. Managed Services are a central piece in the adaptation of the business model. Although outsourcing is a well established business practice in many other vertical industries like financial services, utilities and transport, the telecoms industry has been slow to adopt it in activities outside conventional IT outsourcing and call centre off-shoring. Network outsourcing is a solution offered by service providers (vendors, integrators, etc) in taking up activities previously or traditionally performed by the network operators. Managed Service and Outsourcing are often used interchangeably. Different definitions of Outsourcing / Managed Service exist. According to Analysis Outsourcing contracts are long term arrangements, often involving the transfer of staff or assets out of a company. They are major initiatives and typically involve the complete replacement of internal departments or business units by external suppliers, along with the hosting of services by third parties. Based on an Ericsson definition a Managed Service is provided by a service provider that takes on management responsibility for a function that has traditionally been carried out internally by a telecom operator. Some typical Managed Services offers exist: Out-tasking involves the outsourcing of specific tasks only. No employee or asset transfer occurs as part of an out-tasking arrangement and often internal departments will simply use the resources they have freed up to undertake work of higher value to the business. Typical areas of out-tasking are Call Center, Billing and collection, and Field Service. Managed Operations involve the complete or selective tasks or end-to-end business processes without asset transfer from operators. They often include a transfer of employees from the operator to the managed service provider as part of the arrangement. Typical examples of managed operations are Build, Operate, Transfer, and Operations and Maintenance. Managed Capacity focuses on capacity arrangement, to allow operators to reduce up-front investment. Here the managed service provider is fully responsible for the plan, build and operation of the network. The network expansion is payable on a variable usage or capacity basis. These kinds of agreements are very popular in growing markets such as India in particular. Drivers of Managed Services Introduction of Managed services is based on multiple drivers. Driven by the saturation in developed markets resulting in decreasing revenues, the operators need to manage their cost base, especially OPEX. To ensure long-term profitability and the ability to further maintain their business, OPEX and CAPEX will have to be tightly controlled. Hence cost reduction was and still is the operators most important driver for the introduction of managed services. At the same time, operators with a large footprint in multiple markets are also seeking internally to achieve economies of scale, but this seems also to be very difficult to achieve. Driven by the uptake of data services and technology development, operators are getting more and more challenged by overthe-top (OTT) players. To respond to this challenge, they need to reduce the time to market for new technology and launch new services more quickly. Mobile operators need to transform themselves and the role they take within the value chain to avoid becoming dumb pipes. This can be achieved by stronger leveraging the network assets. The operators need to concentrate more on managing the customer relationship and improved service enablement and value creation. But as it is impossible for an operator to do everything at once, they look more and more to outsource anything that is not treated as a core competency. An overview of recent developments and trends Traditional equipment vendors achieved major successes in enhancing their portfolio with managed services; they have diversified their portfolio and achieved good margins within their professional service business. As a result, they are operating the biggest networks based on number of subscribers. At 70 Detecon Management Report 3 / 2010

4 Competitor or Partner? the same time, the envisaged cost reductions have not always been achieved by the operators. Therefore some managed service providers are trying to manage expectations about what can be realistically achieved with managed services, emphasising managed services as substantial part of a long-term strategy change. At the early days of managed services, operators measured the success of managed service agreement mainly based on OPEX or CAPEX savings sometimes accompanied by measures of network quality. Now there is a strong trend to enhance these to include an improved end-user perception of the operator s services and service delivery provisioning, all factors that lead to greater success for the operator s business. As a strong driver of this trend Alcatel-Lucent promotes a business transformation that influences the operators business in all areas. Based on this understanding, business transformation is a comprehensive model of the traditional managed service approach. They aim to go beyond the traditional metrics like cost savings, operational efficiencies and improved network performance. They offer the operators to drive operational transformation, to improve time-to-market and business agility. This evolution also requires a substantial development on their side from a quality vendor towards a strategic vendor. The status of a strategic vendor requires them to get a strong customer intimacy and to achieve a trusted advisor status. The relationship needs to develop from a client-supplier relationship towards business partnership. This can result in a new corporate business model with eventually a shared business identity. For the concrete realisation in the managed services contracts, this requires an increasing level of risk-sharing and business partnership. With this approach, Alcatel-Lucent plan to develop from simple out-tasking and operating the mobile operators networks. The objective is to take over and transform the operators networks and business processes in order to tackle the unique challenges of next-generation networks. This approach includes the attempt to position the vendor at a central point in the operators business and to move up in the value chain. Another aspect we currently see is that the first generation managed services contracts start to expire. Many operators are evaluating the benefits and issues of the managed services set-up. They question themselves whether and how to continue the managed service contracts. There are trends visible into multiple directions. Some operators have started to reduce the scope of managed services compared to the original scope. Sweden s 3GIS serves as an example of this tread. In 2009 they decided to take back the network performance management function which had been previously provided by its managed service supplier. 3GIS stated that they wanted to get back full control over the end-user service and customer perception. They argued that outsourcing the whole operation to a third-party network service provider was not the optimal approach. Opposite to this, Telecom New Zealand aims to expand the scope of the second wave managed service contract towards business transformation. They aim to focus on outcomes, not people and tasks, and to give partners freedom to provide more value, e.g. SaaS rather than infrastructure supply. This requires the operator to fully integrate the vendor as a partner into transformation programme governance, and to explore a new risksharing business model. Vendor shared-risk business approach The concept of shared risk is a new approach to the relationship between network operators and vendors. It has previously been used mainly in the development and provision of new services. Shared-risk approach involves the closer integration of the revenue streams of the managed service provider and operators with the explicit aim of making both parties more reliant upon each other. Risk sharing and reward might create problems with respect to possible legal issues as managed service relationships are different from purely contractual ones. The main legal issue in managed service agreements can be found in the definitions, for example, what is meant exactly by improving CAPEX or OPEX. The past also shows that it is very difficult to agree on a quantifiable measure how a vendor s service has contributed towards the overall revenue. 71 Detecon Management Report 3 / 2010

5 Benefits and risks of this development for operators The broader managed service offering by the equipment vendors with deeper involvement in the operator s business is driving the traditional contractor relationship toward partnership. For the operators, this development may provide them with good opportunities to focus more on business activities that would lead to higher profits, to react faster to the challenging market dynamics, and to deliver more value-added services to the end customers. In a partnership model, cost saving and financial benefits for the operators should be no less than in the traditional relationship, as the vendors are willing to share the operator s business risks. Ideally, this partnership will lead to a win-win situation in which both parties are better off with the achievement of higher profits and market share as a result of cost saving, faster time to market and more focus on fulfilling end customer s wants. These potential benefits in a partnership also come with risks. Operators usually deploy a multi-vendor network. Getting into partnership with one vendor may affect the relationship with the others, especially when the vendor gets more involved in the operator s operational processes and business transformation. The higher the dependency on one vendor, the higher the risk of being locked in. Maintaining multiple partnership is not easy, especially in the area of managed operations where end-to-end responsibility is best taken up by a single vendor. When a vendor gets closer to the end customers in a managed service partnership, the operator has to be careful with a shared business identity. For a green-field operator, the association with a credible managed service partner may help its market entry. However, an established operator who has already built up its own identity may get its customers confused, especially when its partner fails in a similar venture with another operator. A managed service provider does not serve only one operator; it is likely that it also serves other operators in the same market. Trust in a partnership is important but may not be sufficient. In arrangements such as network sharing, equipment vendors often offer to manage infrastructure and operations for competing operators in the same market. Conflicts of interests may arise in case the same vendor takes central role in the business strategy of competing operators. The handling of commercial sensitive information and confidentiality issues need to be put into the right contractual and legal perspective. Mature operators who plan to let vendors take a central role in their business transformation have to carefully consider such risks. Differentiation is another concern. Competing operators can get the same offers from the same vendor. When an operator has a higher reliance on a vendor and allows the latter to go further up the value chain, differentiation from competitors and unique value proposition to customers will become more difficult. Evaluation To what extent managed services should be employed depends on many factors, such as business strategy, company core values and capability to effectively manage various activities. In a simplified model, we can look at the maturity and business size of an operator and generalize the important strategic focus. Accordingly, the extent of managed services can be proposed for the focus areas. The following diagram describes some general situations: New market entrants would aim at a rapid market entry. Lacking staff resources and experience, they would rely more on managed services. For example Zain, in its commercial launch in Saudi Arabia in 2008, partnered with Nokia Siemens Networks to quickly enter the market where getting local human resources is a big challenge. When operators are on the growth curve, they have gained experience in managing their own networks and their dependence on managed services may decrease. On the other, they 72 Detecon Management Report 3 / 2010

6 Competitor or Partner? may want to push the managed services providers to further increase the quality and service levels; Mature operators would focus more on optimization and efficiency, for which they can turn to managed services. In tough market situations, they would consider business transformation by reviewing their role in the value chain, In 2009, for example, Sprint signed a US$5 billion deal with Ericsson in which 6000 staff were transferred together with network management, rollout and provisioning responsibilities. However, Sprint retains full ownership and control of network assets, network strategy, customer service, technology and vendor selection. Since mature operators have established enough expertise and sometimes more than sufficient resources, they may want to get things done in-house for better control. As described above, Sweden s 3GIS decided to take back network performance management from the managed services provider. But the case of Telecom New Zealand shows a mature operator relying even more on managed service providers in its business transformation. The strategic actions described above are only examples and in no way general guidelines. The best option for an operator depends on the chosen business direction and the given market situations. However, more business risks may also come along. How relevant and likely these risks are depends on the operator s business focus and strategy as well as the market environment. Even if Figure: Focus areas where operators can rely on managed services Large investment Focus Further rollout Service diversification Dependence on MS Quality ++ Focus Optimization/ centralization Service diversification Dependence on MS ++ Quality ++ Business? transformation + Small investment Focus Dependence on MS Rapid rollout +++ New entrants Mature operators Source: Detecon 73 Detecon Management Report 3 / 2010

7 Photo: Painting, Nicholas Kashian partnership is the right way to go, an operator still has to ensure that such a partnership will be built upon mutual understanding of needs, trust and commitment towards achieving common goals, and all these have to be safeguarded with careful operational planning and contractual design. Manfred Schmitz is Head of the Mobile Architecture & Services within the Competence Practice Communication Technology. During more than 15 years in the mobile and fixed network telecommunications business he has held several positions at both suppliers and for different mobile operators. Before joining Detecon he was Senior Manager Global Technology Planning at Vodafone Group Services. In that role he was responsible for creation and implementation of strategic global technology plans. Prior to this he was Head of the Service Management department at MobilCom Multimedia, Germany. He had multiple international assignments in the area of global technology strategy and planning. He authored numerous publications on telecommunications strategy and planning, network operations management and managed services. Manfred.Schmitzr@detecon.com Patrick Ma is Senior Consultant in the group Program Management and Engineering within the Competence Practice Communication Technology. Before joining Detecon, he worked for the incumbent operator in Hong Kong, in various areas such as system design, equipment testing and acceptance, interconnection service offering, commercial negotiation and regulatory issues. His current focus in Detecon is project management, managed services and network sharing. He is a certified Project Management Professional (PMP ). Hung-Fai.Ma@detecon.com 74 Detecon Management Report 3 / 2010