Competitor or Partner?

Equipment vendors are getting more and more involved into the telecom operators’ business via Managed Services

Tags: Detecon International GmbH (www.detecon.com/en/)
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Competitor or Partner? (Source: Detecon)
By  Manfred Schmitz , Patrick Hung Fai Ma Published  May 14, 2011

Vendors are expanding their service offering and taking the chances to move upwards in the value chain. Operators need to find ways to reduce costs while maintaining their market share, and to act quickly. A partnering model with a vendor can be an attractive solution - but with increased business risk.

According to the New York Times, Ericsson and Nokia Siemens Networks are technically now the world‘s largest wireless operators thanks to the increasing number of carriers relying on the vendors for network management. The two equipment vendors operate networks covering a combined 355 million customers worldwide. Ericsson earned about $1.7 billion from its Managed Services business in 2009, up 17 percent from a year earlier. Based on an Ericsson definition "a Managed Service is provided by a service provider that takes on management responsibility for a function that has traditionally been carried out internally by a telecom operator."

The Managed Service providers are now aiming to further evolve the business from a transactional performance of tasks towards full business transformation via Managed end-to-end service operations. This implies the development from Network operations towards Customer experience driven activities with a stronger partnership based on risk-and-reward mechanisms. Will this be for the benefit of the operators or will this ultimately shrink their share of the value chain?

In mature markets operators are faced with two challenges simultaneously. On the one hand, their revenues are decreasing due to market saturation. Therefore they need to drastically reduce operational costs to offset increasing expenditure on marketing and sales. On the other hand, they need to migrate their legacy networks into next generation technology to stay competitive. In developing markets, operators have to invest heavily into network capacity to keep pace with the huge subscriber growth. At the same time they need to carefully manage costs to stay profitable despite the low ARPU of sometimes down to $3 in their markets.

These challenges lead to the need to adapt the old vertical business model to take care of the new realities. The operators need to ask themselves what are the activities they are best in and what activities other players can perform better. Managed Services are a central piece in the adaptation of the business model.

An overview of recent developments and trends

Traditional equipment vendors achieved major successes in enhancing their portfolio with managed services; they have diversified their portfolio and achieved good margins within their professional service business. As a result, they are operating the biggest networks based on number of subscribers. At the same time, the envisaged cost reductions have not always been achieved by the operators. Therefore some managed service providers are trying to manage expectations about what can be realistically achieved with managed services, emphasising managed services as substantial part of a long-term strategy change.

Another aspect we currently see is that the first generation managed services contracts start to expire. Many operators are evaluating the benefits and issues of the managed services set-up. They question themselves whether and how to continue the managed service contracts. There are trends visible into multiple directions. Some operators have started to reduce the scope of managed services compared to the original scope.

Opposite to this, Telecom New Zealand aims to expand the scope of the second wave managed service contract towards business transformation. They aim to focus on outcomes, not people and tasks, and to give partners freedom to provide more value, e.g. SaaS rather than infrastructure supply. This requires the operator to fully integrate the vendor as a partner into transformation programme governance, and to explore a new risk-sharing business model.

Vendor shared-risk business approach

The concept of shared risk is a new approach to the relationship between network operators and vendors. Shared-risk approach involves the closer integration of the revenue streams of the managed service provider and operators with the explicit aim of making both parties more reliant upon each other.

Risk sharing and reward might create problems with respect to possible legal issues as managed service relationships are different from purely contractual ones. The main legal issue in managed service agreements can be found in the definitions, for example, what is meant exactly by improving CAPEX or OPEX and how these improvements will be measured.

Benefits and risks of this development for operators

The broader managed service offering by the equipment vendors with deeper involvement in the operator's business is driving the traditional contractor relationship toward partnership. For the operators, this development may provide them with good opportunities to focus more on business activities that would lead to higher profits, to react faster to the challenging market dynamics, and to deliver more value-added services to the end customers.

These potential benefits in a partnership also come with risks. Operators usually deploy a multi-vendor network. Getting into partnership with one vendor may affect the relationship with the others, especially when the vendor gets more involved in the operator's operational processes and business transformation. The higher the dependency on one vendor, the higher the risk of being locked in. Maintaining multiple partnerships is not easy, especially in the area of managed operations where end-to-end responsibility is best taken up by a single vendor.

When a vendor gets closer to the end customers in a managed service partnership, the operator has to be careful with a shared business identity. For a green-field operator, the association with a credible managed service partner may help its market entry.

However, an established operator who has already built up its own identity may get its customers confused, especially when its partner fails in a similar venture with another operator. Mature operators who plan to let vendors take a central role in their business transformation have to carefully consider such risks.

Evaluation

To what extent managed services should be employed depends on many factors, such as business strategy, company core values and capability to effectively manage various activities. In a simplified model, we can look at the maturity and business size of an operator and generalize the important strategic focus. Accordingly, the extent of managed services can be proposed for the focus areas.

The above diagram describes some general situations:

- New market entrants would aim at a rapid market entry. Lacking staff resources and experience, they would rely more on managed services.

- When operators are on the growth curve, they have gained experience in managing their own networks and their dependence on managed services may decrease. On the other, they may want to push the managed services providers to further increase the quality and service levels;

- Mature operators would focus more on optimization and efficiency, for which they can turn to managed services. In tough market situations, they would consider business transformation by reviewing their role in the value chain.

The strategic actions described above are only examples and in no way general guidelines. The best option for an operator depends on the chosen business direction and the given market situations. However, more business risks may also come along. How relevant and likely these risks are depends on the operator’s business focus and strategy as well as the market environment. Even if partnership is the right way to go, an operator still has to ensure that such a partnership will be built upon mutual understanding of needs, trust and commitment towards achieving common goals, and all these have to be safeguarded with careful operational planning and contractual design.

The authors:

Manfred Schmitz is Head of the Mobile Architecture & Services within the Competence Practice Communication Technology at Detecon International. He authored numerous publications on telecommunications strategy and planning, network operations management and managed services.

Patrick Hung Fai Ma is Senior Consultant in the group Program Management and Engineering within the Competence Practice Communication Technology. His current focus in Detecon is project management, managed services and network sharing. He is a certified Project Management Professional (PMP).

2318 days ago
Alex

Sure managing their networks is the core business of operators. One of the reasons outsourcing has been so popular in places like Europe is that it gives them the chance to reduce their workforce. As most telcos are government-owned in this region, I cannot see this happening. Plus what if your network is multi-vendor, as most are here?

2322 days ago
Amit Kundra

The Managed Services has halped the Operators to focus on Marketing & other Business Developement activities instead of being occuiped with day to day worries of network operations . Also as Ericsson & NSN take up the MS Contracts of mutilple operators the operators also get a chance of getting best parctices as being done for other operators by these Vendors .All in all the MS era has allowed Operators to focus on Market & Technlogical evolution decisions

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