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When you hear of a company that provides service to 185 million cellular customers, your thoughts turn to large international carriers like Vodafone and Telefonica, or maybe a major market giant operating in China or India. In fact, 185 million is the number of subscribers supported by Swedish vendor Ericsson through its portfolio of managed services contracts, according to the firm's own figures.
March 27, 2008
When you hear of a company that provides service to 185 million cellular customers, your thoughts turn to large international carriers like Vodafone and Telefonica, or maybe a major market giant operating in China or India. In fact, 185 million is the number of subscribers supported by Swedish vendor Ericsson through its portfolio of managed services contracts, according to the firm’s own figures.
Managed services encompasses everything from application hosting, or outsourced spare part management, to an end to end solution that sees a vendor run the carrier’s entire network operation, as Ericsson does with 3UK.
And it’s big business. The strong growth in managed services that we’ve seen in recent years is set to continue, with Informa Telecoms&Media forecasting a CAGR of 18 per cent for the next four years. Informa estimates that between 2008 and 2012, the value of the market for managed network services, one of the fastest growing areas in telecoms services, will all but double, from $9.4bn this year to $18.46bn in four years’ time. The telecom services market as a whole, Informa says, was worth some $60bn in 2006.
The leading three players in managed services provision – Ericsson, Nokia Siemens Networks (NSN) and Alcatel Lucent – have between 65 and 170 contracts apiece. And last year they collectively accounted for only half the market. Growth remains, but managed services in the mobile space is already a significant industry.
You don’t have to travel too far back to reach a time when managed services – which has long been a popular model in verticals like financial services and utilities – was anathema to the cellular carrier community. IT outsourcing and off-shore call centres aside, every element of the operator’s business was managed in-house on the assumption that there was no better expertise to be found outside.
And, while early moves towards outsourcing were seen as an option more likely to be favoured by lower tier carriers that lacked the muscle mass of their larger, international competitors, it is today a strategic tool favoured by even the biggest players.
“If we were having a discussion with an operator a few years ago,” says Josephine Edwall-Bjorklund, vice president and head of Communications for Ericsson Global Services, “and we brought up managed services, the big players were showing us the door. They were saying: ‘Absolutely not, we’re not interested’.”
“But then when you look at last year,” says her colleague Mats Agervi, vice president for Strategy, Market and Portfolio Management at the Global Services unit, “we had France Telecom coming in, and T-Mobile. This year we had TDC in Denmark. These guys are all incumbents.”
A number of factors have combined to bring about this level of acceptance. In part, says Andreas Herzog, vice president of network operations at Alcatel Lucent, the recent growth reflects the fact that the managed services industry in the mobile sector has moved into a second phase. “Seven years ago the biggest challenge for an outsourcing project was convincing the customer that outsourcing was the right solution for them. In some cases that took years,” he says. There is now far greater awareness of the available benefits, he adds.
But principally the growth spurt in managed services is down to the shifting operational models of both the operators and the vendors. Large infrastructure contracts have been tailing off in number for some time, leaving the vendor community with a hole to fill. Concurrently, operators have been deliberately evolving to a world of services and content while looking to cut cost out of their business as average revenues decline.
“The network is much more of a known quantity than it once was,” says Ashish Chowdhary, global head of managed services at Nokia Siemens Networks (NSN). “Everybody is used to it being there. ‘Commoditised’ is not the right word but the network part is smaller now. The thinking has moved from how to run a network and get KPIs from it, to wondering what other things can be pushed through the channel.”
If the vendor community has struggled in the past to convince its customers that they should offload a portion of their operational responsibility onto their suppliers, it is congratulating itself that it didn’t give up. The drop in infrastructure sales has been steady and there is no doubt that the services market has been driven partly by vendors in search of alternative revenue streams.
The Global Services unit at Ericsson now accounts for one third of the vendor’s total revenues, says Mats Agveri. NSN and Alcatel Lucent are less forthcoming with revenue splits, but Andreas Herzog does reveal that his firm has absorbed 5,500 employees through managed services contracts, which often involve the transfer of staff from carrier to vendor.
Agveri argues that services have always been in Ericsson’s DNA. When founder Lars Magnus Ericsson founded the business in 1876, says Agveri, it was a repair shop. But it wasn’t until the year 2000 that the Global Services unit was created. And not until 2002 did the first major contract – with Dutch operator Telfort – get signed.
Contract values today can range from $100m to more than $3bn (the size of Ericsson’s end-to-end deal with 3UK) over the life of the relationship, which typically will be between five and seven years. With the volatility that has characterised the infrastructure supply market in recent years, reliable, predictable revenue streams like this are welcome additions to vendors’ books.
None of the vendors want to talk about the kind of margins that are achievable in managed services, which perhaps suggests that they are not as strong as on the product side. But, as Andreas Herzog says: “Managed services is a business that is delivering constant margin. Some of these deals even have initial terms of ten years, but they don’t necessarily get terminated at the end of that time. Customers of managed services relationships have a very high incentive to extend these contracts, so we are really talking long term. In times like today, this is a crucial benefit.”
Each of the three vendors says that services contracts are not linked to kit sales, dismissing the suggestion that managed services relationships offer suppliers a more effective channel through which to move their products. All have services clients that own none of their service partner’s infrastructure – indeed it is not uncommon for operators to deliberately select a managed services supplier that is not a kit supplier in order to ensure complete impartiality.
If the notion of a calculable revenue stream helps vendor CFOs sleep soundly at night, their carrier counterparts are equally comforted by the predictability that managed services can give them over their operational spend. Don Price is director of technology at leading Indian carrier Bharti Airtel, and a client of NSN’s managed services division.
“We’re all in the business of making money,” Price says. “One way to do that is to drive the top line growth and another is to drive the expense out of the middle. As a network person I can do very little do drive the top line but I can certainly do a hell of a lot to drive cost out of the middle.”
For carriers, it is generally agreed, cost management is the principle driver for adopting a managed services strategy. But exactly how and why cost benefit is derived differs depending on the maturity of the carrier, the state of its market and its geographical location.
As an Indian carrier, Bharti Airtel is involved in a network deployment of significant scale. In February alone, says Price, the firm’s network grew by 3,166 cell sites. This rate of growth has been enabled by the operator’s relationship with NSN, through which it buys capacity rather than kit. NSN agreed to this pay-as-you-grow strategy, says Price, only on the condition that it took on the network management as well.
NSN gets paid on consumption. So Airtel decides where it wants to improve capacity, NSN builds out the network and receives an income as that network expansion attracts more customers. There is a safeguard that sees NSN paid within a 90- or 120-day time limit for the capacity rather than on consumption. In this scenario, Airtel has “no skin in the game” says Price; the operator itself is not motivated to deploy and maintain the network as efficiently as it could. He explains:
“Prior to this arrangement, if I was to plan a new network in Mumbai, my engineers would tell me I needed 750 sites. Then I’d go to Nokia Siemens Networks and they would say that I needed 1,000 sites. Their game now is to provide the capacity in the most efficient means possible because the more boxes that go in, the more it costs them. With the new model they come back to me and say: ‘You know what? I can do it with 500 sites’.”
Now, says Price, he doesn’t have any operation and maintenance staff. He has a group of some 200 employees managing the provision of service to more than 60 million customers on a network of roughly 70,000 base stations.
For a carrier in a mature market, where effective coverage has more or less been achieved, deployment management is not the motivator. “These operators are reaching the point where they can no longer address cost savings in the network,” says Andreas Herzog. “In the network area, cost savings originally meant efficiency gains, but mature operators are reaching a limit. Further operational savings would represent a risk to network performance, which would then create a risk of customer churn.”
The vendor community, with hundreds of managed services contracts in place, can offer an operational scale that, arguably, even the largest carriers cannot match. And it is this scale that enables them to run a network at a lower cost than the carriers themselves.
“If you were to go into every operator as an outsourcing partner and just become a mirror image of that operator, then you’d have too may different instances around the world; different KPIs, different SLAs, for example,” says Ashish Chowdhary. “But we have created a network operations model, we’ve defined how it should look. So we try and transform an operator’s network into a standard way of running, a best practice,” he says.
The scale that the vendor community can offer extends to geographical reach as well. Because they have customers all over the world, they have employees all over the world and, if an operator is looking to expand into a new region where it has no existing headcount, the managed services partner can execute the network strategy on their behalf. Likewise if an operator already owns and manages its 2G network and is poised to deploy a 3G operation but has no direct experience, there will be vendor staff on the ground who will be able to deploy and operate it for them.
Vendors are now selling convenience as well as kit and all types of carriers are finding benefit in freeing themselves from the headache of network management, service launch and application deployment. Principally what they are freeing themselves from, of course, is risk. If, as a CTO, you’re network goes down, there’s nobody responsible but you. If you have an outsourcing partner – and this is a major non-financial attraction for carriers – it is their fault when the network goes down. It’s their problem to fix it, and it’s them that will pay the penalty for failing to meet the SLA.
Airtel’s Don Price admits that he was set against the managed services strategy that his board decided on.
“We debated it for 18 months. No decision in the history of the company had ever taken so long to make. And when I walked out of the board meeting, having been told to execute on this strategy, I was still arguing against it.”
So what changed? In the very early days, before the strategy had been in place long enough for any impact on KPIs to have been properly assessed, Price was having dinner with one of his managed services partners. “Prior to this arrangement, I would get 30 messages an hour relative to network performance,” says Price. “Sites going down, trouble tickets being raised, my phone was ringing off the hook. Then over dinner with my strategic partner, he was on the phone constantly, my phone was quiet and I was thinking: ‘This model is great!’.” Subsequently, he says, real improvements in the KPIs began to appear.
Price’s admission that he railed against the outsourcing of what were then core functions like network management reflects the reticence that vendors report from several years ago, and which is still to be found today. Perhaps rarely for technical elements of an operator’s business, managed services is a very emotional area. In many organisations, says Price, the CTO will be the biggest opponent to this type of initiative. “People start to worry about job security, there’s a whole set of emotions that need to be handled,” he says.
“Outsourcing is a very personal decision for an operator,” says NSN’s Chowdhary. “It’s an identity issue and you have to hold the operators’ hands, give them the right justifications and prove that it really works.”
One element of managed services adoption that is not often publicly discussed falls squarely into the emotional category. Most deals of this type that are struck involve the transfer of staff from operator to vendor – 1,000 or more at a time – so it’s not just the CTOs that find themselves exercised by issues of job security.
“The first deal we did,” says Ericsson’s Josephine Edwall-Bjorklund, “we just didn’t have the experience. You need to plan, you need to talk to the unions. There are simple logistical issues like everyone needing a seat. They need to be educated in the tools, processes and methods that we have. There is a big human resource and communications aspect that we also now include in our value proposition.” One more headache, perhaps, that the carriers can offload.
But it’s not just the carriers that offload their headaches, as Don Price found out. Vendors also look to cut cost out of their operations and it wasn’t far into the relationship with NSN that Price found himself in meetings not with his team, or with the NSN team, but with staff of a subcontractor to which NSN had outsourced some of its own workload. Price didn’t like this but, in the end, he says, as long as the KPIs are better, the site deployments are better and the customer satisfaction is better, he can have no cause for complaint.
Managed services is a linear process. It’s probably nigh on impossible, operationally, for a carrier to reverse a large outsourcing contract and so it follows that those contracts already in place will continue to evolve. The network, for some carriers, may no longer be a core competency. But is it still a core asset – do the carriers still need to own their networks? This is a topic that generates some debate.
Alcatel Lucent’s Andreas Herzog is clear on where he thinks the sector will go: “Operators will sell their networks to consortiums of vendors and investors that want to be network owners. I’m not sure about the timing but we already have several operators that have sold off certain parts of the network, say the backhaul. We believe that’s going to increase.”
Herzog’s competitors are less willing to back such a fundamental shift. “I think today that this is not the way to go forward,” says Mats Agvieri, of Ericsson. “Logically you might say that if we can share everything, if the vendor owned the network, it could be cheaper. But the reality is that this is not as easy as it sounds.”
NSN’s Chowdhary is no more convinced. “It’s difficult to see how vendors will take the assets onto their books and then convert it to some kind of lease or opex model,” he says.
Don Price believes that ultimately a collaboration on network is the only way forward, and that separate deployments simply duplicate effort and expenditure. It’s conceivable that this scenario could be unappealing to the vendors as it would reduce the amount of assets that needed managing, and therefore the size of the sector overall. Nonetheless, this is how Price sees the market shaping out.
“As we go forward in the industry, as a network community, let’s build one highway; one common infrastructure. Then we can let the sales and marketing guys compete on the cars.”
There are still carriers who won’t consider outsourcing and, while this is the case, Price’s vision of the future is likely to remain just a vision. There is no doubt, however, that the growth of managed services has set the carrier community on a path that will see greater evolution going forward. Today we’re getting just the first indication of how tomorrow’s operator may look.
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