Outsourcing Trends in the North American Telecommunications Industry

Transcription

1 0 Study Overview Presentation Outsourcing Trends in the North American Telecommunications Industry Summary of Key Findings New York October 2003

2 1 Report Contents Study Objectives & Approach Summary of Key Findings About Booz Allen Hamilton

3 2 Booz Allen study objectives Develop perspective on drivers & trends for outsourcing in North American telecommunications market Evaluate key differences between various Service Provider (SP) segments Wireless Wireline (ILECs / IXCs) Smaller players (e.g., CLECs) Understand types of outsourcing models deployed and types of vendors preferred by North American telecom Service Providers

4 3 Our approach Interviewed senior executives from 10+ North American telecom Service Providers to gain their perspectives on outsourcing: Given the market environment, is outsourcing viewed as key lever for the business? What are the critical drivers and obstacles for outsourcing? Do companies currently outsource core activities? What activities are companies considering outsourcing in the future and why? Which functions are involved and at what levels are outsourcing decisions being made? What are the key selection criteria for choosing an outsourcing vendor? What are the preferred types of vendors and outsourcing models?

5 4 We interviewed 30+ top executives at North American telecom Service Providers for this study INTERVIEWEE MIX By Customer Segment By Interviewee s Position By Interviewee s Function Small Players 17% Wireline 45% Wireless 38% Exec Directors /Directors 20% CxO 14% SVP / EVP / VP 76% Finance / Procurement 21% Corp Strategy 24% Network 55% The companies interviewed represent more than 80% share of the North American telecom market

6 5 Report Contents Study Objectives & Approach Summary of Key Findings About Booz Allen Hamilton

7 6 Service Providers share a clear set of strategic priorities in response to an increasingly challenging market SERVICE PROVIDER STRATEGIC PRIORITIES Improve Financial Performance 100% 100% Stagnating Growth 46% 63% Focus on Core Competencies 38% 38% Increasing Complexity 19% 54% Wireline Wireless Increased Speed to Market & Innovation 0% 15%

8 7 Telecom Service Providers see outsourcing as a key business lever in responding to current market conditions Is Outsourcing a Key Business Lever today? Not an Important Business Lever 24% Important Business Lever 45% Critical For the Business 31% KEY FINDINGS All the companies interviewed leverage outsourcing today About 75% of the interviewees consider outsourcing as a key business lever today Most larger players consider outsourcing as an important though not critical lever Similar indicated importance across wireless & wireline players Most large player consider outsourcing more reactively as compared to smaller players (e.g., during market downturn) Open to outsourcing in sub-scale geographies Outsourcing is a critical component of the business model for smaller players 100% of those consider this as a critical business lever Leverage outsourcing as a proactive measure to retain focus and gain scale

9 8 In our discussions with Service Providers, a set of clear and common rationales for outsourcing have emerged Reasons for Outsourcing Reduce Opex / Optimize Capex 100% 100% DISCUSSION Headcount control, flexibility Access New Technologies Acquire New Capabilities - complement existing know how 8% 31% 46% 38% 63% 77% SPs overwhelmingly consider opex / capex reduction as the key driver for outsourcing Increased benefit via leveraging vendor scale and technical expertise Improved cash-flows via aligning expenses to revenues (move fixed cost to variable) High inclination from smaller companies to gain new technology access via outsourcing Reallocate and Focus Resources 0% 31% Wireline Wireless

10 9 Though Service Providers differ in activities they consider core All players consider Sales & Marketing functions as core ILECs Most consider all network activities as core In many cases, players consider customer care & billing as core Some consider IT activities as core due to regulatory requirements IXCs Consider network activities as core except installation & maintenance which are usually not considered core Customer care / billing activities are usually not considered core and are outsourced frequently Wireless players Consider network activities as core except installation & maintenance which are usually not considered core Customer care / billing activities are usually not considered core and are outsourced frequently Small players Only customer facing functions are considered as core

11 Most Service Providers have already begun to outsource select core activities Outsourcing Opportunities along the Value Chain Network IT HR Products & Content Customer Care & Billing Marketing & Sales Plan / Design (Less Open) Network planning and architecture Architecture design // system selection Demand management Product (Systems) management, QM Resource planning Compensation and benefits planning HR policies Product // Service definition (Product Mkt) Service delivery platform development Customer segmentation service level definition Billing requirement specification Pricing (Product Marketing) Branding Distribution channel management Network tuning // optimization Development // programming Resource Management Service delivery platform operations Billing mediation Advertising Network operations Application operations core systems Recruitment Content bundling (in partnerships) Billing operations Points of of Sale Operate (More Open) Network maintenance Supply Chain (vendor mgmt kept in-house) HR processes // procedures Application & Content Development (in p ships) Call Center, inbound (Premium support) Call Center, inbound (technical support) Infrastructure installation IT IT Operations Payroll processing Application operations Call Center, inbound (regular support) Logistics IT IT Infrastructure // Data Center Training Call Center, outbound and overflow Application support systems (fin./admin) Benefits administration (e.g., 401K) Bill printing, distribution Generally outsourced or under consideration already Outsourcing considered in some cases / in mid-term future Kept in-house 10

12 11 Currently, Service Providers do most outsourcing in HR & IT related activities, but increasingly, everything is on the table SPs leverage outsourcing significantly in HR & IT functions Considered support functions by most SPs Demonstrated track record of outsourcing benefits in these areas Abundant presence of functional specialists Network activities are considered core by most large players but are increasingly open to outsourcing Most SPs are already leveraging outsourcing for overflow activities Lack of proof-points has been a key inhibitor no-one wants to be the patient to the new doctor Nevertheless, most SPs are actively considering / performing out-tasking of selected network activities prior to large scale outsourcing SPs keen to retain control of the customer facing functions Sales & marketing activity was considered core by all SPs only sales support activities (e.g., logistics) are open to outsourcing Only support activities (e.g., technical support) and non-critical components (e.g., regular customer support) of customer care are open to outsourcing Overall, they plan to keep planning/ management functions inhouse and are more amenable to outsourcing field activities

13 12 In fact, Service Providers are actively considering relinquishing control of network related activities once considered core INTERVIEW FINDINGS Do You Seriously Consider Outsourcing Network Activity Functions? Which Network Activities Would You Outsource? 63% Installation 69% Maintenance 56% 69% NO Considered Core 28% New Tech Deployment Integration 25% 25% 38% 46% Transition YES Already doing it / Will do it in Near Future 72% Engineering Operations Network Design 0% 25% 19% 20% 23% 20% Wireless > Wireline in most cases Network Planning 0% 7% Wireline Wireless

14 There is significant interest for outsourcing of selected network activities Network IT HR Products & Content Customer Care & Billing Marketing & Sales PLANNING, DESIGN & ENGINEERING INSTALLATION & INTEGRATION OPERATIONS & MAINTENANCE Network Network Architecture Planning Vendor Selection Capacity Planning Traffic Engineering Network & Transport Engineering RF Design Laboratories / Testing Manage New Element Installation Manage Add/ Moves/ Changes OSS Deployment & Integration Network Monitoring/ Surveillance Fault Detection Network Capacity Management Performance Management Trunk/ Port/ Path provisioning Network Troubleshooting Service Resource Dispatch Transport Routine & Preventative Transport Diagnosis & Repair Remote Tech Support OSS Administration Security & Config. Mgmt. Back-up/ Disaster Recovery Work Force Management Network Inventory Management Spares Inventory Management Asset Inventory Management Field (MSC/ Access Network) MSC Engineering Cell Site Engineering RF Optimization Site Selection & Acquisition MSC/ Site Construction HW Installation Switch/ Backhaul Provisioning Tower Management On-site Routine & Preventative On-site Diagnosis & repair Battery Maintenance Database backups Site Documentation Maint. Site inspections Generally outsourced or under consideration already Outsourcing considered in some cases / in mid-term future Kept in-house MSC/BS Integration Site Maintenance 13

15 14 or complete outsourcing of significant components of their network under specific market conditions Propensity to Outsource by Customer Segment Examples of Potential Function Network Outsourcing Opportunities Wireline Wireless Force augmentation for large-scale network deployments (e.g. 3G, DSL) High High Small Players High Network implementation, maintenance & operations for legacy networks (e.g. TDMA network in GSM overlay migration, C2P) Low Low High Field Operations & Maintenance for subscale markets Medium High High Network deployment, maintenance & operations for emerging technology platforms (e.g. 3G, VoIP) NOC support (24/7 or after-hours only) High Low Medium Low High High

16 15 Still, there are significant differences around activities on the table between telecom Service Provider segments Wireline -- ILEC Wireline -- IXC Wireless Small Players Service Provider Perspective Limited propensity to outsource network related activities Network operations related activities considered core Strong focus on retaining quality of network operations Significant labor and cultural obstacles further magnified by regulatory requirements Union issues are a critical inhibitor key driver for low outsourcing propensity Have historically performed most activities in-house outsourcing requires significant mindset change Pragmatic approach to outsourcing network related activities Several players consider outsourcing as a key business lever need strong business case and, technically & financially sound vendor Focus on opex reduction & capex optimization In spite of cultural and labor obstacles, actively evaluating approaches to leverage outsourcing Significant union obstacles looking for approaches / workarounds (e.g., overflow activities are usually allowed to be outsourced) Considering out-tasking prior to large scale outsourcing Pragmatic approach to outsourcing network related activities Several players consider outsourcing as a key business lever looking for strong business case and, technically & financially sound vendor Focus on opex reduction & capex optimization, speed to market Limited cultural obstacles, but wary of represented workforce Reluctance to engage outsourcer with represented workforce Considering out-tasking prior to large scale outsourcing Most open to outsourcing network related activities Most players consider outsourcing as a key business lever Focus on opex reduction & capex optimization Customer facing activities considered core network is considered a critical support activity Limited cultural obstacles, large potential benefit through leveraging vendor scale & technical expertise Outsourcing Propensity LOW HIGH

17 16 and within each of the segments Wireline players vary significantly in their propensity to outsource from everything is on the table to nothing in near future Companies address labor issues differently considering it as a non-starter to not a problem can be worked out Regional companies are less open to outsourcing as compared to national players Wireless Service Providers are overall more open to outsourcing than the wireline players but still vary in their propensity Many players prefer out-tasking network activities against complete large scale outsourcing Players are cautious about being the first movers want demonstrated benefits elsewhere before outsourcing themselves Wireless players with ILEC parent company are less open to outsourcing Smaller players consistently indicated strong inclination to outsource

18 17 There are limited differences between comparable NAR and European players Wireline (ILECs vs. PTTs) NAR Focus on quality of network operations Low likelihood of outsourcing Significant union and cultural obstacles Network operations less likely to be considered Europe Focus on quality of network operations Low likelihood of outsourcing Significant union and cultural obstacles Wireless Focus on capex and opex reduction, speed to market Pragmatic approach to outsourcing Actively considering outsourcing of selected activities prior to large scale outsourcing Focus on quality of network operations, speed to market Low likelihood of outsourcing Significant union and cultural obstacles Current focus on addressing balance sheet / debt issues Small Players / New Entrants Focus on opex reduction and capex optimization Open to outsourcing leverage vendor scale & technical expertise Customer facing activities considered core

19 18 Even with this increasing propensity, each customer segment faces several challenges against outsourcing Quality of Service / Network Considered Core Lack of Flexibility / Loss of Skillbase Labor Issues / Reluctance to Engage with Rep Workforce Philosophical / Cultural / Political Reasons Existing Economies of Scale Key Obstacles for Outsourcing 0% 8% 27% 25% 31% 50% Wireless 75% 65% 63% 77% Wireline DISCUSSION Wireline players (primarily ILECs) consider network services as their core competency Most SPs are very concerned about lack of flexibility / loss of skill base Several companies mentioned past bad experiences Smaller companies were less concerned about this than larger ones Most companies are concerned with the represented workforce issues Key inhibitor for wireline companies Reluctance from wireless companies to outsource to represented workforce Cultural issues are a much bigger obstacle for wireline players as compared to wireline

20 Most players deploy specific outsourcing arrangements to minimize their operational risk and loss of control Key Aspects of Outsourcing Models Deployed Outsourcing Model Parameters Assured returns (above planned efficiencies) Short duration deals (up to 3 years) Vendor business case Exit clause / Shared Risk with Outsourcer Comments Opex reduction / Capex optimization are the most important driver for outsourcing measured against already planned internal improvements 10-20% savings is a necessary condition for a vendor to be considered for outsourcing many SPs look for higher savings (typically 20% and upto 50%) Long-term contracts results in loss of control / flexibility and vendors tendency to up-scope given customer s dependence Ensure vendor accountability if the vendor is good, the contract will extend to 10 years anyway Duration of the contract also dependent on vendor s financial condition Though SP's want to maximize their returns, they realize that a successful deal needs to be profitable for both parties Scrutinize business case carefully to ensure win-win deal (more than 60% of deals fail because they are either one-sided or have over-promised savings) Many large SPs don t believe vendors can improve scale, therefore lowering costs may need to be achieved through other means (e.g. elimination of redundancies, process improvements, lower labor rates, etc.) Increasingly require exit clause to protect themselves against lack of flexibility Significantly concerned around vendor propensity to up-scope (primarily based on experience in IT outsourcing) Include clear & measurable definition of success with performance guarantees Importance Most important Least important Other Benefits SPs keen to share technology / productivity improvements from the vendor as part of the deal 19

21 20 Most of the outsourcing decisions are taken at the very senior level usually CxOs are actively involved Key outsourcing decisions are taken by the senior management at the corporate level (CEO / CFO / COO / CTO) Most decisions are top down driven primarily by the strong business case rationale Most decisions are made by the C-levels, Presidents, or SVPs but not below that Line functions are considered interested parties opinions are taken but does not usually impact the decision and implementation is passed top-down to the functional units Sometimes, low impact deals (within established operating guidelines) can be finalized by the regional / functional unit heads (at least VP-level) e.g., local field maintenance The procurement organization usually supports finalization & execution of outsourcing decisions

22 21 While SPs are looking at a large range of players, they prefer vendors with strong functional expertise and financial strength VENDOR SELECTION CRITERIA Key Buying Criteria Functional Expertise Financial Strength & Stability Outsourcing Track Record 41% 69% 86% Technical expertise and financial stability considered as the most important criteria Technical expertise was considered the most important criteria by most SPs Almost 75% of the interviewees ranked technical expertise as #1 criteria Further, SPs most often prefer vendors with experience on its installed base Expertise with Telco's Network / Technology Business Case Relationship / Track Record with Customer Other Considerations 3% 21% 31% 28% Financial stability was the 2 nd nd most important criteria though, usually associated with vendor size rather than profitability Few other criteria around overall vendor fit were also mentioned Vendor track record -- do not want vendor to learn with us Cultural/ philosophical issues Ease of doing business / strength of existing relationship Labor issues (e.g., wireless players reluctant to outsource to represented workforce)

23 22 There was an overwhelming preference for functional experts over generalist outsourcers Functional Experts General Outsourcers Niche specialists VENDOR PREFERENCE 100% 43% 100% would consider functional experts less than half will consider traditional outsourcers 17% Comments Overwhelming preference for functional experts Prefer traditional outsourcers for process engineering related efforts (e.g., Accenture) IT outsourcing to traditional IT outsourcers (e.g., IBM, EDS) Telecom equipment vendors / services companies for network activities At the same time, SP reluctance towards functional experts with limited outsourcing experience

24 23 What does this mean for you? Initiate a strategy discussion around today s and future core and non-core competencies for your company in the changing market environment Benchmark performance against best practices for core competencies, and develop focused strategy to address gaps Challenge your in-house performance for all current or future non-core activities Benchmark against industry best practices to identify cost savings potential (10 20% plus) Evaluate 3 rd parties to capture cost benefits from outsourcing Assess potential other benefits from outsourcing non-core activities (e.g., resource focus, variable cost vs. fixed) Review ongoing outsourcing deals for compliance with lessons learned and success factors Regularly revisit today s and future core and non-core competencies to ensure success

25 24 Report Contents Study Objectives & Approach Summary of Key Findings About Booz Allen Hamilton

26 25 Booz Allen Hamilton overview Who We Are... One of the oldest, largest and most experienced strategy and technology consulting firms Founded in 1914 in Chicago 13,000+ professionals Our business model is driven by global industry practices emphasizing industry expertise to better serve clients We bring a global perspective serving clients from over 50 offices in over 40 countries We are not aligned with any other integration firms or software vendors we bring an objective and independent viewpoint to all of our clients What We Do... Booz Allen Hamilton delivers end-to-end strategybased transformation solutions through multidisciplinary skills and through our industry expertise which spans virtually every major industry sector We bring industry-specific talent for the most complex consulting engagements We leverage our global expertise from our offices around the world We work closely with senior management in guiding the strategic transformation of their businesses Mission: Booz Allen Hamilton combines strategy with technology, and insight with action, working with clients to deliver results today that endure tomorrow

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28 27 Booz Allen contacts: Barry Jaruzelski Vice President Raul Katz Vice President Frank Ribeiro Principal Booz Allen Hamilton New York, USA Booz Allen Hamilton New York, USA Booz Allen Hamilton New York, USA Tel. +1 (212) Fax +1 (212) Tel. +1 (212) Fax +1 (212) Tel. +1 (212) Fax +1 (212)