Network sharing enhances telecom partnerships

Why many network-sharing deals fall apart, and how to avoid the deal-breakers.

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By  Reuben Chaudhury & Jonathan Gove Published  August 17, 2008

Why many network-sharing deals fall apart, and how to avoid the deal-breakers.

For telecom operators under pressure to improve profit margins, network sharing offers one way to substantially decrease CAPEX and OPEX. By the end of 2007, newly forged sharing deals were noticeably large in terms of network scale and number of subscribers affected.

The Bharti/Essar's contract in India is one notable example. But execution challenges inherent in realising network sharing's promised benefits can slow implementation of a deal or even destroy it.

By anticipating the major risks and laying the groundwork early, operators can respond more effectively to the problems that arise at every stage of a sharing deal.

Consider this: In a landmark network-sharing deal in the Asia-Pacific region, two operators couldn't agree on a consistent role for third-party vendors. One operator fully outsourced network operations and maintenance.

The other retained most of these functions in-house; it outsourced only field services, and to a different vendor. This arrangement spawned confusion about who would resolve problems.

Worse, at times, one vendor could have the capacity to respond more quickly to problems than the other but wasn't allowed to do so under the agreement's terms. Result? Problem-resolution times lengthened and customer satisfaction eroded. These inefficiencies proved costly enough to eat into much of the savings promised by the sharing deal.

Operators can get the most value from sharing by addressing three major risks: regulatory and political, operating model, and operational execution. Here we assume that operators considering sharing a network have anticipated and addressed any regulatory and political hurdles, such as antitrust concerns or possible workforce reductions. We'll concentrate on the remaining two risks.

• Complexities (and therefore potential deal-breakers) associated with the selection and deployment of an operating model

• Poor management of operational-execution risks, which undermines the synergies promised by sharing

Operating-model risks

Operators considering network sharing typically choose from among five possible operating models. Each model has advantages and disadvantages, as shown in exhibit 1. Executives who don't carefully weigh the tradeoffs can set themselves up for painful arguments and negotiation standstills later. Common operating-model battlegrounds include:

• Valuation of existing assets and shareholding in the new entities

• Transfer pricing

• Apportionment of benefits and costs

• Rights and responsibilities in day-to-day operations

• Impact on branding and service-level differentiation

• Management of asymmetry of future demand and CapEx investments

• Exit mechanisms

Operational and execution challenges

Even after network-sharing partners have selected an operating model, their deal can still run into unexpected difficulties once it's put into action. These typically include the following:

• Capacity bottlenecks and limitations in new-service introductions. The original network is not designed to carry the traffic of two networks or new services. To remove the bottleneck, the partners must upgrade the network or incorporate additional equipment.

• The discovery that additional investment is needed to become operational. Costs associated with reconfiguring the network (such as integrating IT systems) and relocating assets are higher than the partners anticipated.

• Failure to consolidate sites. Co-locating operator sites (because of stringent termination clauses of sites) eats into the deal's expected savings.

• Failure to consolidate third-party vendors. Confusion over which third-party service vendors will handle which tasks (such as site maintenance, repair, and field services) spawns costly inefficiencies.

• Misalignment on network- and service-evolution directions and timetables. The operators are at different stages of maturity and have different visions of when and how they will migrate to the next generation of technology to deliver newer services.

• Lack of operational readiness. The players have conflicting organisational structures or different approaches to managing core business processes, defining service levels, or determining employee incentives.

Addressing the risks

By anticipating the major risks and laying the groundwork early, operators can respond more effectively to the inevitable problems that will arise at every stage of a sharing deal. The following tactics can help mitigate operating-model risks.

The operators involved in the agreement should construct a compelling business case for all stakeholders ("What's in it for me?"). In any network-sharing deal, there can be multiple stakeholder groups, such as the operators themselves (including their workforces), equipment vendors, investors, and regulators, each with different interests and concerns.

Operators considering a deal should craft a compelling case for sharing, tailored to each constituency. For example, point out that the deal in question gives network vendors new access to operators, setting the stage for future infrastructure sales.

Select the best operating model for the deal ("How do we work together from now on?"). Operators should build a customised operating model suitable to their (or other stakeholders') preferences and unique circumstances.

For example, an operator may be interested in sharing to lower OPEX but unwilling to surrender operational control or the autonomy to devise its own service and network-evolution plans. This operator may choose a limited degree of asset sharing that covers passive network elements only.

We suggest assessing the following criteria when choosing an operating model:

• Objectives of sharing

• Alignment of service and network evolution

• Technology (legacy vs. new) being shared

• Relative phase of rollout

• Partnering and outsourcing strategy

• Regional scope of partnering

• Technical scope of partnering

To mitigate operational-execution risks, operators should engage in:

• Joint due diligence into each savings lever (including third-party contracts, consolidation, leased lines, and utilities costs) to ensure that synergies specified in the business case are achievable

• Joint planning to identify any differences in expectations and to select an operating model that accommodates both parties' future needs

• Definition and implementation of structural and process changes required to make the organisation operationally ready for sharing

Network sharing can radically improve operators' competitive cost position. But sharing deals are difficult to set up and don't always deliver the hoped-for benefits. These realities stem from the complexities involved in selecting an operating model and the execution challenges inherent in sharing arrangements.

By applying the right tactics before inking a deal and putting it into practice, operator executives can respond quickly and effectively to the inevitable challenges that come with network sharing.

Reuben Chaudhury is a New York-based partner and Jonathan Gove is a Hong Kong-based partner of Oliver Wyman, an international management consulting firm. They can be reached at reuben.chaudhury@oliverwyman.com and jonathan.gove@oliverwyman.com.

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