Telco Equipment Vendors Can Stay Strong in Public Network IT Services

Market Analysis Telco Equipment Vendors Can Stay Strong in Public Network IT Services Abstract: Improved efficiency and more value-added services could help telecommunications equipment vendors maintain their dominance in the public network professional services and product support services market. By Phua Sin-Hun Strategic Market Statement Despite declining market shares, telecommunications equipment vendors have the opportunity to maintain their dominance in the public network IT services market through 2006 by achieving better operational efficiency and growing value-added services. Publication Date:10 June 2003

2 Telco Equipment Vendors Can Stay Strong in Public Network IT Services Public Network IT Services Playing Field What Are Public Network IT Services? Gartner Dataquest defines public network IT services as professional services and product support services utilized by network service providers (NSPs) to plan, design, build, operate, manage and maintain the public network. Who Competes in the Public Network IT Services Market? Based on Gartner Dataquest's vendor research conducted in February and March 2003, the top 20 vendors, in terms of market share, in the Asia/Pacific public network IT services market for 2002 had representation from the following three mainstream participants: Telecommunications and network equipment vendors are represented by Siemens Networks, Ericsson, Lucent Technologies, Huawei, Cisco Systems, Alcatel, Nortel Networks and Nokia. Computer systems vendors with significant IT services capability are represented by Fujitsu, Hyundai Information Technologies, IBM, Samsung, HP and Legend. Systems and network integrators are represented by EDS, Posdata, Datacraft-Asia, Daewoo, LG-CNS and Nongshim. Figure 1 illustrates the collective market shares from each of these three mainstream participants in 2001 and 2002 and shows how the market share shifts among them. Public Network IT Services Market Overview This report analyzes the impact on the telecommunications equipment vendors in the public network IT services market during this uncertain economic period. It also deals with two strategic questions: Where do they go from here? How do they get there? In the past, the Asia/Pacific public network IT services market favored telecommunications equipment vendors to manage the complex public networks. However, their dominance in this market is now highly contested. In 2002, telecommunications equipment vendors saw their total revenue in Asia/Pacific plunge from 10 percent to 30 percent, a decrease of more than 7 percent in the Asia/Pacific public network IT services total market share. Among the services, product support and professional services market shares fell by 7.6 percent and 6.5 percent, respectively. Telecommunications equipment vendors still command a respectable 24 percent market share in the public network IT services market. However, they have seen their services market weakening as a result of the decline in NSPs' capital expenditure (CAPEX). This decline in CAPEX has a negative effect on consulting, maintenance, deployment and integration services 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 June 2003

associated with new or established NSPs' infrastructure deployment. Nevertheless, NSPs will still require the technical expertise and services of telecommunications equipment vendors on established and new product and technology deployments, which the other two mainstream participants can never match. Figure 1 Shift of Market Shares of Top 20 Vendors, 2001 and 2002 3 Percent 35 30 25 2001 2002 20 15 10 5 0 Telecommunications Equipment Vendors Computer Systems Vendors Systems and Network Integrators 115379-00-01 Source: Gartner (May 2003) On the other hand, NSPs are shifting their focus and spending more on applications and service enhancements or operational improvements, such as storage service. Thus, the computer systems vendors with significant IT services capability and the systems/network integrators, which traditionally are powerhouses in the IT services market, are gaining market shares in the public network IT services market. Therefore, it is crucial for telecommunications equipment vendors to focus on the following to increase their revenue: Those who differentiate themselves will get the sales. Although NSPs have decreased their CAPEX, it has never stopped. Telecommunications equipment vendors should ask themselves how they could prove that their products and services will achieve better and more rapid results for the NSPs' bottom line than other items on the NSPs' CAPEX lists. Those who revamp their organizations and motivate their people will achieve more efficient use of resources, putting them in a clear costcompetitive position. Revamping the organization means growing the professional services business independent of its product business. For example, Lucent's strategy of partnering with Cisco and Juniper will position Lucent to provide services to NSPs' multivendor networks. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 June 2003

4 Telco Equipment Vendors Can Stay Strong in Public Network IT Services From the employee angle, massive layoffs have had a large effect on staff morale and will indirectly affect the quality of service. Thosewhoareabletoidentifyandprovidevalue-addedservices,such as network service creation strategies and business consulting that improve NSPs time to market for new technologies and service offerings, will have a competitive edge. They should look to provide more than the current standard set of professional services and product support services portfolio associated with their products and technology. What Contributes to Their Decline? Although the primary goal of telecommunications equipment vendors is to grow their product business, they are gradually putting a greater emphasis on services. For example, providing professional services, such as maintaining and managing multivendor networks, is the second prong in Lucent's three-pronged strategy to stay viable for the long term. Another example is Siemens, which has developed a carrier service portfolio (including security consulting and network optimization) to supplement its product business. This makes sense during the current regional economic uncertainty, especially in the case of annuity-stream business such as maintenance and outsourcing. Factors contributing to the decline in market share of telecommunications equipment vendors include the following: NSPs decreasing their CAPEX greatly reduce the profitability of their service organizations, because the primary goal of telecommunications equipment vendors is to sell equipment. Like any buyers, NSPs heighten competition among telecommunications equipment vendors when buying technology and equipment. This competition causes price erosion, making it difficult for foreign equipment vendors to compete with local vendors. This is especially true in China, where competition among foreign telecommunications equipment vendors is probably the highest in the region. NSPs have become more conservative in many network services decisions. Most IT projects are smaller, shorter and more focused on quicker return on investments. As such, NSPs are requesting service contract renegotiations. Some telecommunications equipment vendors have renegotiated service contracts with their strategic customer base within the last 12 months. Massive layoffs by many telecommunications equipment vendors have put a large number of talented technical resources in the market for hire as direct competition. While these layoffs can provide a relatively inexpensive way to add NSP internal resources, they also raise concern over service quality delivered by them to the NSPs because of the reduced resources available in telecommunications equipment vendors. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 June 2003

Telecommunications equipment vendors in Asia/Pacific are slow to find strategic alliances in the market, which would enable them to push more product and services to market without adding additional head count. Public Network IT Services Market Size and Drivers Table 1 shows the Asia/Pacific public network IT services market size and forecast. The Asia/Pacific public network IT services market is forecast to grow at more than 10 percent compound annual growth rate (CAGR) to more than $3 billion by 2006 from $1.9 billion in 2002. Product support services and professional services are expected to grow at 5.7 percent and 12.4 percent, respectively, over five years. Management services represent the best growth opportunity through 2006, with a CAGR of 18.2 percent and a total market size of more than $750 million. However, development and integration services remain the largest service segments in term of revenue through 2006, with a CAGR of 10.2 percent and a market size of more than US$1.2 billion. Table 1 Asia/Pacific Public Network IT Services Market Forecast by Major Segments, 2002 to 2006 (Millions of Dollars) 2002 2003 2004 2005 2006 CAGR (%) 2002-2006 Product Support 673 724 787 862 948 5.7 Hardware Maintenance and Support 480 513 555 606 665 5.3 Software Maintenance and Support 193 211 232 256 282 6.6 Professional Services 1,233 1,360 1,557 1,847 2,212 12.4 Consulting 157 169 187 210 237 8.6 Development and Integration 736 789 883 1,35 1,223 10.2 Management Services 340 402 486 603 753 18.2 IT Services 1,906 2,084 2,344 2,709 3,159 10.1 Source: Gartner (May 2003) 5 For telecommunications equipment vendors to regain their lost ground, it is essential to know the issues faced by NSPs in Asia/Pacific, one of which is to reduce both CAPEX and operating expenditure (OPEX) by making their operational infrastructure more efficient. However, we should not generalize that reducing CAPEX and OPEX is the primary issue for every NSP in its domestic market. For example, the primary issue for NSPs in Australia is that of introducing new network services, such as managed storage with higher margins; and in China or India, the challenge is expanding their public network infrastructure. From our research discussions with NSPs and external service providers (ESPs), these issues illustrate the fundamental drivers and challenges, such as reducing CAPEX and OPEX, economic uncertainty and exchange rate fluctuation, of the public network IT services market in 2003. Details on the market drivers underlying this report can be found in "2003 Public Network Services: Opportunities in IT Management," ITNI-WW-MT-0111. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 June 2003

6 Telco Equipment Vendors Can Stay Strong in Public Network IT Services Capitalizing on Public Network IT Services Opportunities 2003 largely will be a repeat of 2002 for the public network IT services market. However, professional services and product support services for this market still have plenty of future growth in many parts of the region. Services opportunities still exist for telecommunications equipment vendors in a more competitive public network IT services market. Product Support and Integration Services In developing countries, such as China and India, the largest contribution to growth from 2002 through 2006 will come from hardware maintenance and development and integration services segments. Together, these segments are forecast to contribute about 27 percent of the total Asia/Pacific's public network IT services market size in 2006. This reflects the rate at which new technology and public network infrastructure are being adopted and the complexity of implementing them. For example, a shift in the distribution of voice and data from the public networks onto IP-based data networks will allow for more cost-effective and bandwidthefficient transport. However, one of the challenges faced by NSPs is that the governments of China and India plan to provide telecommunications in the remote rural areas. NSPs trying to reach and address this rural market could not generate enough revenue to justify the large investment required. Managed Services and Outsourcing In developed markets, such as Australia, South Korea and Singapore, the growth in demand for all types of network management service is the key driver shaping the public network IT services market. A number of NSPs have sought efficiency improvements and cost reductions through sourcing agreements with telecommunications equipment vendors and IT services companies providing outsourcing and managed services. Alcatel, for example, has announced outsource network operations services with Telecom New Zealand and Cisco with Telstra Australia. Discussions with NSPs and ESPs have confirmed that NSPs are considering the benefits of outsourcing certain aspects of their operations. The processes most likely to be outsourced or managed by an ESP, systems or network integrator are the most tactical and inward-facing. This includes site preparation and construction, network maintenance, and systems integration. Next in line for consideration are processes that lie inbetween the network infrastructure and the client, including tactical network design and build services, and capacity management. Overall project management and strategic network planning and design are among the least likely to be outsourced. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 June 2003

7 Gartner Dataquest Perspective So, is the telecommunications equipment vendors' dominance in the Asia/Pacific public network IT services market threatened? The answer is yes, as NSPs reduce their CAPEX and focus more on enhancing applications and operational improvements. This shift in focus provided opportunities for computer systems vendors with significant IT capabilities and network integrators that are traditionally stronger in provisioning applications and services. However, telecommunications equipment vendors have the opportunity to maintain their dominant presence in the public network IT services market through 2006 by achieving better operational efficiency and growing value-added services. In Asia/Pacific, telecommunications equipment vendors are slowly adopting the trend toward more emphasis on services, because services are becoming an increasingly important component of public NSPs' operations. Services revenue is growing as a share of total IT expenditure. The traditional business culture that undervalues services as opposed to products is gradually changing. Telecommunications equipment vendors are being asked to provide more value-added services to help NSPs improve their time to market for new technologies and service offerings. The result is a rapidly growing marketplace hungry for technical capabilities and market knowledge. Gartner Dataquest Recommendations Gartner Dataquest makes the following recommendations for telecommunications equipment vendors in the public network professional services market: Employee motivation Create programs under which staff, on a voluntary basis, can be offered the opportunity to set up their own companies, with guaranteed contracts to provide services as independent subcontractors. The business functions involved in the program should include such areas as outdoor plant maintenance and other technical maintenance areas. The program can maintain vendor's commitment to make its operations more service-efficient and customerfocused, at the same time minimizing the impact on its loyal and highly trained staff in the current tough economic environment. Branding Articulate the changes that are occurring, such as emphasis on services, within the organization. The service branding must be perceived as purposeful and dynamic. Strategic partnering Partner or build their IT and business consulting capabilities in the public network space. NSPs are looking to provide added value to their customer engagements and will need expertise to determine optimal architectures and craft next-generation operations. 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved. 10 June 2003

8 Telco Equipment Vendors Can Stay Strong in Public Network IT Services Service contracts Review and renegotiate, if necessary, internal agreements with product management and engineering organizations regarding warranty funding and dead-on-arrival/return materials authorization charges as part of service contracts. These charges may unduly burden vendor service organizations and reduce the internal perception of service profitability while hiding operations costs and product problems. Service organizations that support their own profitand-loss measurements must have a clear view to their true cost structures. Relationship management Telecommunications equipment vendors that invest in relationship management will gain competitive advantage, becausenspsinasia/pacifichavebecomemoreconservativeinthe current economic climate, favoring known vendors and engaging in smaller-value contracts. Sales management Plan on longer selling cycles because of reduced CAPEX, delayed product deployments and tightened budgeting processes. Also, anticipate reduced project sizes as operators seek more frequent milestone examinations. Key Issue What are the opportunities, trends and forecasts for the public network professional services market? This document has been published to the following Marketplace codes: ITSV-WW-DP-0507 For More Information... In North America and Latin America: +1-203-316-1111 In Europe, the Middle East and Africa: +44-1784-268819 In Asia/Pacific: +61-7-3405-2582 In Japan: +81-3-3481-3670 Worldwide via gartner.com: www.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. 115379