Telecom Vendors Eye Public Network Outsourcing

Transcription

1 Market Analysis Telecom Vendors Eye Public Network Outsourcing Abstract: As the market for public network outsourcing grows, obstacles will emerge for supplyand demand-side organizations. By Eric F. Goodness, Bhawani Shankar and Frank Fabricius Strategic Planning Assumptions Despite increasing numbers of mobile and fixed network outsourcing contracts, public network outsourcing (PNO) will not become a prominent line of business for telecommunications equipment vendors before 2005 (0.7 probability). Tier 1 fixed carriers and former incumbents are highly unlikely to become major clients for PNO services until 2005 (0.7 probability). Tier 2 carriers and incumbents in smaller economies, as well as mobile operators, will be the main addressable market for telecom equipment vendors targeting the PNO market between now and 2005 (0.8 probability). Uncertainty surrounding carriers' next-generation deployment and the climate of financial risk aversion will inhibit the growth of PNO services until at least the end of 2005 (0.7 probability). Publication Date: 10 October 2003

2 2 Telecom Vendors Eye Public Network Outsourcing Equipment Vendors Seek New Markets Fixed and mobile telecommunications carriers in most regions of the world are grappling with the challenges of keeping capital expenditure under control, while seeking significant cuts in costs of running and maintaining their networks. This is bad news for the carriers' network suppliers, chiefly the large equipment vendors that gained immensely from the carriers' spending spree from 1997 through The drive toward rationalizing operational costs, while preparing to migrate networks to flexible packet-based platforms, presents other opportunities. A need is growing for a range of professional services that will enable carriers to achieve their operational targets. A second carrier imperative focuses on the need for developing a wider services portfolio with, preferably, higher-margin managed or value-rich services to complement legacy offerings with eroding margins. Mobile carriers, in particular, are placing significant emphasis on nonvoice services and their potential to generate future revenue for operators (more information on this will be presented in an upcoming publication that explains why mobile network operators outsource). This is prompting many carriers to concentrate more on service creation and facilitation and seeking external service providers (ESPs) to deal with many aspects of network design, build, operation and maintenance. In response to these shifts in the carrier market, traditional telecom equipment vendors are attempting to develop more services-oriented portfolios. Similar to carriers, their equipment portfolios offer lessattractive margins than a couple years ago, and offering services to carriers provides additional growth opportunities and improved net margin, as well. Although telecom equipment vendors have offered integration, testing, maintenance and other services related chiefly to the rollout of their own products, many of those opportunities have evaporated in the face of cuts in carriers' capital expenditure and as a consequence of increasingly standard, digitized switching equipment. The new market has the potential for large-scale outsourcing of carrier networks, including their design, build, and operation. There is also significant competition to contend with, in the shape of a large established base of experienced professional service providers that have primarily focused on the traditional IT environment within carriers and other enterprises Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 October 2003

3 3 What Drives Carriers? In most countries where deregulation in the telecom services has been in effect for some years, most large incumbents or former incumbent carriers that account for the majority of capital expenditure across the world have already carried out significant rounds of cost cutting. This has involved varying degrees of reducing head count and geographic coverage, and refocusing on fewer market sectors. For mobile operators that have typically been subject to competition longer than their fixed counterparts, this has been a period of organizational consolidation and streamlining, particularly in Western Europe, where addressing debt relating to license fees continues to be critical. Further technological and business challenges, such as rationalizing network resources, including the array of sometimes disparate operations support systems (OSSs) and business support systems (BSSs), and simplifying network structures using packet-based platforms to reduce operational costs are the next goals for large carriers. The drivers for these exercises are as follows: Protection of established revenue streams Aggressive reduction of operating expenditure (OPEX) Fiscal control aimed at debt reduction or targeted capital investments in tune with market drivers New service creation and facilitation Carriers seem to be warming to the notion of transferring responsibilities to ESPs to realize some of these objectives and possibly improve their performance by selective outsourcing. The recent months have seen several contracts particularly from mobile operators keen to outsource field operations and maintenance. The good news for equipment vendors is that carriers increasingly find that the drivers listed do not constitute a discrete set of targets, but rather an interdependent mesh of issues. The resulting opportunity is for these carriers to consider outsourcing life cycle management of their networks, which would leave them more time and resource to address business issues related to their services. The PNO opportunity spans the following: Network design, plan and consulting services Network build, test and deploy Network optimization, maintenance and operation The market reality connected to outsourcing has always been "to outsource that which is not a core competency." But the carrier's perception of core competency varies from a strong engineering focus to a staunch market and service emphasis. Although many carriers are beginning to see themselves more as a marketing and branding organization, the transition from self-management and support to outsourcing is slow as carriers take on ESPs in small pilots and hand over larger projects to them over years. IT services outsourcing activity is happening within infrastructure (or 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 October 2003

4 4 Telecom Vendors Eye Public Network Outsourcing network-related) services segment, as well as in the OSS and BSS domains, including the following: Engineering, furnish and install (EF&I) Monitoring network assets Multivendor hardware/software warranty services Billing Signaling systems clearinghouse OSS/BSS services including OSS interconnect services Overall, Gartner Dataquest believes infrastructure services, such as network consulting, design, build and maintenance services, will be not only the largest revenue generator (see Figure 1), but also the one with the strongest growth potential (see Figure 2). Which Carriers Will Prefer PNO? Size and competitive pressure are two key issues that will determine the propensity of a carrier to outsource in the following manner: Size matters in more ways than one. The size and positioning of the carrier in terms of revenue and market share, head count, historical and forward-looking capital expenditure trend (size of its capital expenditure budget) will all go toward defining the constraints under which that carrier and an ESP will work. Larger incumbent carriers that have international networks, occupy the top position in their home markets and have historically been big on capital expenditure (typically the Top 20 global operators worldwide) will be unlikely to dive into PNO contracts in the near term. The degree of competitive pressure in any market will be another strong determinant of the tendency of a carrier to espouse PNO. Carriers that face increasing threats to their markets, as well as those under scrutiny for their debt and fiscal management, will think seriously of offloading some of their network responsibilities to meet operational targets. Large incumbents often compete on the basis of access ownership and the highest quality network. If the core network is, therefore, the very basis of competitive differentiation operational excellence then the carrier is unlikely to outsource it. Other operators, typically challengers in large markets or incumbents in smaller markets, base their value proposition on customer intimacy and excellent value-added service delivery; outsourcing the core network operation doesn't impinge on theirfocusformarketpositioning Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 October 2003

5 5 Figure 1 Global Public Network Outsourcing Revenue by Segment, Billions of U.S. Dollars 60,000 50,000 40,000 OSS Services BSS Services Infrastructure Services 30,000 20,000 10, Source: Gartner Dataquest (September 2003) Figure 2 Global Public Network Outsourcing Growth Rates by Segment, AGR (%) Infrastructure Services BSS Services OSS Services Total Source: Gartner Dataquest (September 2003) 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 October 2003

6 6 Telecom Vendors Eye Public Network Outsourcing Competition in this context has to be multidimensional; threats to carrier market positions occur not just from competitive service providers, but also from partners and other companies (not necessarily from the same industry sector) that compete for capital. Pressure to change can also build from within. Staff or management can define targets that drive a carrier toward, or away from, outsourcing. In Italy, Telecom Italia has come under increased competitive pressure from smaller players such as Fastweb and has looked to its vendor suppliers for progressive, if not radical, packet-based network technologies. Internal, domestic pressures against head count reduction will keep many carriers from diving deep into outsourcing contracts. In the case of Telecom Italia, the result is insourcing of provisioning and assurance activities. Many international and regional mobile operators will also look to PNO opportunities to increase operational efficiency. The greater degree of competition is compelling several large mobile operators to selectively outsource some parts of network operations the most common among these are base station and field network deployment and maintenance. Equipment vendors that are targeting PNO services should target operators that would be placed in the "early adopters" quadrant (see Figure 3) the fixed and mobile arms of carriers with a dominant position in smaller markets. Telecom New Zealand, which has been a heralded example that outsources mainly to Alcatel, Lucent and Ericsson, istypicalofcarriersinthisquadrant. Larger, international carriers are exploring their options for PNO services, but they will not be the prime markets for ESPs before Carriers such as BT, Deutsche Telekom and AT&T are unlikely to outsource any more than small slices of PNO projects, which will gradually build momentum over time. Carriers, such as Telecom Italia that are Tier 1 and are reacting to competitive pressure, are more likely to consider PNO services seriously, although they will be "cautious followers" in their approach. From an ESP's perspective, it is important to target carriers that have a dominant position in their major markets. Dominance translates into a greater degree of market longevity, as well as a relative stability of network strategy. In contrast, competitive carriers that battle incumbents and other major players, particularly in Western Europe, have still some distance to go before they can claim to have attained market stability. In fact, this sector of the market still needs to consolidate considerably, and the prospect of a client's acquisition merger with others has to be factored into an outsourcer's plans. These carriers will be "risky bets," even though many of these players could be beneficiaries of a sound PNO strategy Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 October 2003

7 7 Figure 3 Carriers' Propensity to Outsource High Risky Bets Cautious Followers Tier 2 Small Big Size Tier 1 Early Adopters Small Incumbent Low Competitive Pressure in Home Market The Conservatives Notes: Tier 1 Top 25 Global fixed and mobile carriers account for the bulk of capital expenditure worldwide. Tier 2 Competitive carriers in national and regional markets Small incumbents: Dominant carriers typically in smaller economies or developing countries such as those in the East (including New Zealand), those in smaller Western countries (such as Denmark), and those in Latin America Source: Gartner Dataquest (July 2003) PNO: What Should Contractual Positioning Be? The nature of PNO services differs significantly from outsourcing services that IT services companies have typically provided to enterprises and carriers. Although some of the service contracts that are being executed in the field go beyond warranties and standard IT services contracts, they are by no means "outsourcing," which is commonly accepted by the enterprise market. Typically, enterprise outsourcing is an arrangement in which the vendor provides IT procurement and deployment services (for example, EF&I) for a company that has historically provided the same services with an inhouse (CIO) organization. Outsourcing also includes the transfer of employment of those internal support personnel to the ESP as well as the transfer of title, either at contract execution or phased through technology refreshment agreements, to the ESP. Because of the considerable size and value of a carrier's asset-based business, asset assumption as a function of an IT services agreement is not realistic in the near or long term. Theinfrastructureservicesthatvendorsaretargetingincludenetwork consulting/design, network deployment and network run. Contracts are subsets of these segments or are specific deals focused on network operations and maintenance or relating to OSS and BSS outsourcing Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 October 2003

8 8 Telecom Vendors Eye Public Network Outsourcing Telecom equipment vendors have been slow to create a market approach or a portfolio of services that present operators with a value chain or life cycle of support and professional service focused on carrier and business requirements and challenges. Multivendor capabilities are a core component for legitimacy in this space. Vendors, while viewed as technology experts relevant to their own platforms, are not seen as effective across the entire network, including front- and back-office systems. Brand confusion between the equipment sales and services offerings indicate that vendors must demonstrate autonomy and organizational independence for their service organizations. Telecom equipment vendors are not doing this, although Lucent the vendor with the most-aggressive plans for the PNO market maintains a separate profit and loss. Its emphasis on "Bell Labs Innovation" offers little distinction between a technocentric message and a service brand that engenders a feeling of "relationship." Too often, vendor portfolios are heavy in upfront design and implementation services for their own products. To ensure future success, vendors must create a portfolio and capabilities, either organically or through partnerships, to address IT and business services for the service providers. The following presents a continuum, or chain, of value that needs to be considered when creating PNO portfolios for extended IT services contracts with carriers (see Figure 4). Reactive services These services are represented by standard service or warranty contracts with the service providers. Typical offerings include Web (self-help) and telephone support, logistics and break-fix repair (on-site, return-to-factory or depot). Proactive services These services are increasingly used to increase the quality of service delivery and contracted service levels. Remote monitoring and remote administration, or management, services are key to this offering. Component services within this service level would be event correlation, root cause analysis and some form of automated remediation (for example scripted, rules-based automation as well as fully resourced network operations centers for problem solving and dispatch). Technology consulting The differentiator in this segment is the ability to work within any portion of the service provider environment. From the core network, to the front and back office, the vendor must be able to provide counsel either directly or through partners to influence or effect change in the IT environment. Business consulting Telecom vendors must focus on key advisory services to help executive management within the service provider company improve the effectiveness of corporate strategy, process or operations by assessing the business needs and reviewing the business functions, plans and directions Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 October 2003

9 Figure 4 Value Chain for Sourcing Public Networks Relationship management Although it is not a structured IT services offering, relationship management represents the core skills and capabilities to identify customer needs, to create value-added long-term contractual relationships with service providers, and provide account management personnel and resources. These capabilities will enable vendors to secure adherence to contracted service levels and ensure high levels of service provider satisfaction. 9 Relationship Management Business Consulting Technology Consulting Proactive Services Reactive Services Account management Flexible master contracts Risk-reward goals Service creation/customer acquisition Churn management Revenue assurance Marketing and campaign management Network architecture and integration Enterprise infrastructure and support OSS deployment and integration Enterprise infrastructure Remote diagnostics Proactive fault detection Remote and automated administration Systems quality assurance audits Logistics Break/fix repair, depot repair Telephone/Web support Installation and testing Source: Gartner Dataquest (September 2003) Telecom Vendor Strategy: A Range of Approaches The leading telecom equipment vendors are at various stages of addressing the worldwide PNO market. Lucent, which has undergone by far the most radical rationalization since the boom, is also the company that seems to be staking the highest bets on the carrier services market. Others, such as Alcatel, still prefer to be a diversified equipment vendor with services as one of the potential growth areas but not yet a major focus Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 October 2003

10 10 Telecom Vendors Eye Public Network Outsourcing This brinkmanship could well prove to be decisive for vendors aiming for the PNO market. On one hand, it will be necessary for the services divisions to be independent of the parent organization and also offer a degree of transparency of the services business, including arming the divisions to be responsible for their own profit/loss. Carriers for whom multivendor solutions are imperative will demand this. Indeed, the success of equipment vendors will hinge on how independent they are perceived as when it comes to services. On the other hand, several equipment vendors are waiting for momentum in carrier services (that is, for Tier 1 contracts) before long-term commitment to the market. Table 1 provides a brief overview of the respective manufacturers' approaches to the PNO market. Table 1 Telecom Vendors' Approaches to Network Outsourcing Equipment Vendor Strategy Alcatel Alcatel aggressively markets its success with Telecom New Zealand to be viewed as an example of its skills as a service aggregator for carriers and utilities. Although most maintenance services still seem to be combined with equipment supply, a dedicated group handles professional services. The primary model for sales appears to be direct-sell-direct-deliver. Alcatel quotes many reference clients, including mobile operators and fixed operators, in developing economies. Alcatel is risk-averse and despite its initial success and marketing messages, will wait for the market to develop before putting corporate muscle behind its efforts in PNO. For instance, it has yet to launch itsservicesunitasaseparatelineofbusiness.alcatel'sstrategyneedstobefortifiedwithstrongpartnerships and alliances. Cisco Systems Beneath the channel-focused demeanor is a competitive IT services provider. Through its Customer Advocacy (CA) and Internet Business Solutions Group organization, Cisco works to enable its ecosystem of IT services partners. Cisco Systems' direct support of the service provider market has grown considerably over the past 18 months. Its CA group has expanded into professional and consulting services through its Advanced Services portfolio. Ericsson Since its radical restructuring and head count reduction from 2001 through 2003, Ericsson's focus has moved away from the fixed carrier market and toward mobile operators. The old Ericsson-Hewlett-Packard Services organization, which had some degree of success in customer care, billing and support services outsourcing, has been absorbed into the new Compaq organization. Ericsson is now building anew, based on its mobile infrastructure expertise. It already has a nearly $4 billion services business developed. Though most of that is based on traditional maintenance services, the company is aggressively pushing for mobile network operations outsourcing and multivendor network build opportunities. Lucent Lucent has a strong legacy of providing IT services to its service provider customers. The company is primarily a direct-sell-direct-deliver organization; however, it has subcontractor relationships for EF&I and logistics support. Recently, Lucent has begun to refine its marketing messages by emphasizing its Bell Labs research house as a key strength that has helped much of the industry. This positions Lucent as a technology champion a proposition that Gartner Dataquest believes may not be as effective as Lucent would like. Recent appointments of several former EDS executives to lead its services organization points to the hopes that Lucent is pinning on this sector. Nortel Nortel views its role in the services world as an enabler of external service partners; especially its larger global service providers. Nortel may enter into multivendor support contracts with some of its larger, more strategic customers; however, it is not expected to be a competitive force as more carriers look to outsourcing. Siemens Siemens has emerged as a strong outsourcing services contender in the past year. Toward the end of 2002, it launched Carrier Services division within the Siemens ICN organization. While retaining its diversified presence, Siemens is also making attempts to target mobile operators for base station maintenance as well as fixed operators for support services, consulting and integration services. Its recent wins include Brazil's Telemar as well as Orange Denmark, and it continues to target operators in developing economies. Much like most other vendors, dealing with emphasis on services business from an organizational perspective will remain a challenge for Siemens. Source: Gartner Dataquest (September 2003) 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 October 2003

11 11 PNO Providers: Equipment Vendors or Service Companies? In coming months and years, equipment vendors will face the strongest competition in PNO services from entrenched IT services companies such as IBM, EDS and Accenture. These are companies that have executed outsourcing contracts albeit enterprise outsourcing for many years and have the discipline, management skills and the ability to partner effectively to deliver client needs without the baggage of equipment bias. For this reason, Gartner Dataquest believes services companies are wellpositioned to take on prime contractor responsibilities for PNO deals of the future. Tables 2 and 3 examine the main challenges facing service companies and equipment vendors. Table 2 Service Companies' Approaches to Outsourcing Company Approach EDS IBM BearingPoint Science Applications International Corp. (SAIC) SchlumbergerSema General Dynamics Accenture Cap Gemini Ernst & Young Source: Gartner Dataquest (September 2003) EDS' strongest legacy is in the enterprise network environment. New leadership from president Joe Warnemuter in the Communications Service line promises to increase the company's ability to provide services to carriers and through carriers to enterprises. IBM Global Services remains focused on outsourcing BSSs while relegating network infrastructure initiatives to partners. Gartner Dataquest identified IBM as having the second highest vendor revenue for BSS in "Worldwide BSS Vendor Market Share, ," TCPN-WW-MS BearingPoint focuses more on its planning and design phase of the IT services life cycle and will act as an aggregator for integration and ongoing management. BearingPoint's core network competencies are virtual private network infrastructures, security services, business planning services, provisioning services, billing consolidation and managed services. SAIC maintains the broadest portfolio of point and outsourcing services for the telecommunications industry. Its acquisition of Telcordia strengthened its presence in the frontand back-office management and outsourcing market for carriers. Schlumberger maintains skilled resources that provide life cycle IT services to asset-dependent verticals such as utilities/energy and telecommunications. With the acquisition of Sema, Schlumberger has addressed core network as well as OSSs development and integration. General Dynamics provides build-operate-transfer and build-operate-maintain public network IT services around the globe. Accenture is not well-known for its networking expertise, although it has 1,500 employees in its Network Service Line dedicated to public network operators. Better communication of those resources, and expansion into more wireless accounts, would help Accenture continue to lead its competitorsinthismarket. Cap Gemini Ernst & Young's Telecom Media Networks maintains more than 200 sales representatives and 1,200 network infrastructures and is a strong competitor in the PNO market, particularly Western Europe. In July 2002, Gartner Dataquest identified that 22 percent of bookings within the Telecom Media Networks practice are outsourcing arrangements, up from 15 percent the previous year. The developing market will impose on both services companies and equipment vendors to come together and capitalize on complementary strengths, but until such time their approaches will remain parallel Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 October 2003

12 12 Telecom Vendors Eye Public Network Outsourcing Table 3 Equipment Vendors vs. IT Services Companies Company Type Strengths Weaknesses Equipment Technology championship Existing carrier relationships and installed base; Global presence IT Services Equipment independence Multivendor Project management skills Company devoted to services Greater success with partnerships across IT and telecom industries Better marketing and value propositioning skills Source: Gartner Dataquest (September 2003) Service is not a focus (yet) for most Business units need greater clarity Lack for partnership history Lack back-office and front-office bench strength Lack business consulting skills and acumen Less experience of carrier-scale contracts Lack of logistics and support infrastructure for ongoing maintenance and management of physical network Gartner Dataquest Perspective The prospects for the equipment vendors in the PNO market will remain tentative unless they can demonstrate genuine technology and equipment independence. They also need to provide their services units with, if not a rebranding distinct from the parent brand, a unique organizational identity or at least line-of-business status. Even Lucent, which once maintained one of the industry's strongest IT services sub-brand "NetCare," has forsaken the approach by conditioning the market with Bell Labs Innovation. With this approach, Bell Labs seems to shout "smart guys developing products," not "smart guys designing and managing your nextgeneration network." Vendors that are serious about their future in this sector should strive to meet the following objectives: Develop a strategy to address service providers' needs Supporting reseller and distribution partners to deliver outsourcing services through structured channel programs is a valid and focused strategy for selling and delivering of IT services. The important concept is execution on plan and service provider satisfaction. Recruit industry professionals that understand how to develop and sell outsourcing arrangements. Invest in partnership and alliance resources. Partner for skill, expertise and acumen. Manufactures cannot "do it all." No one manufacturer has the knowledge to develop BSSs or support, install and configure all telecom equipment. Build robust contingency planning into your outsourcing contracts. Create outsourcing agreements that spend as much effort convincing the carrier that it is as easy to break the deal as to make the deal Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 October 2003

13 Carriers must take note of the varying market positions of telecom equipment vendors and weigh these against their own drivers and inhibitors for network life cycle outsourcing. Specifically, carriers should address the following issues: No single equipment vendor or services company is in a position to outsource significant areas of network life cycle management. This is partly because of the scale of these carriers' networks and also because of human resources takeover issues that neither party may be prepared to undertake yet. Carrier COOs should begin testing, for instance, overseas branches of their networks and slowly extending them during the next two to four years. Smaller incumbents that consider themselves to have overcome debt and cash issues where they existed and seek to use operational efficiency as a key differentiator in their transition to a next-generation network are strongly advised to explore network outsourcing options with equipment vendors and services companies. Carriers must exercise extreme caution in defining contractual obligations for services contracts, taking care to ensure that vendorsuppliers assume as much as possible of the risk associated with design, deployment and maintenance of new network technologies. Carriers must avoid short-term consulting or project-only engagements and instead focus on outsourcing involving transfer of resource and longer-term commitments. Mobile operators must consider outsourcing maintenance of field operations, including base station maintenance. Key Issues What are the opportunities, trends and forecasts for the public network professional services market? What are the user requirements and buying behaviors for network IT services? Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 October 2003

14 14 Telecom Vendors Eye Public Network Outsourcing This document has been published to the following Marketplace codes: ITSV-WW-DP-0544 TELC-WW-DP-0608 For More Information... In North America and Latin America: In Europe, the Middle East and Africa: In Asia/Pacific: In Japan: Worldwide via gartner.com: Entire contents 2003 Gartner, Inc. and/or its Affiliates. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice