 | Issue: | Latin America II 2003 |
| Article no.: | 13 | |
| Topic: | Partnering and Outsourcing for Network Convergence | |
| Author: | Christoph Gärtner and Andreas Erler | |
| Title: | Not available | |
| Organisation: | EVP Global Synergies, T-Systems | |
| PDF size: | 184KB |
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Article abstract
Outsourcing transfers an existing company activity, including the staff that performs it, to an external service provider. This transforms fixed into variable costs and reduces capital expenditures. By outsourcing operations, telecom companies can rapidly provide customers with more and better, advanced services. Telco operators have long considered the network to be central to their business, but some now outsource it to partners to obtain quick access to technologies such as converged networks without the expense or delays of in-house.
Full Article
What is ‘outsourcing’ and how is it relevant to network convergence? We have heard a lot about outsourcing in recent years in connection with IT. Now, it is increasingly important to telecommunications users. How does outsourcing work? When a company outsources, it transfers an existing internal activity or operation, including the staff that performs it, to an outsourcing service provider. The transaction typically includes a long-term commitment to acquire the outsourced services from the selected provider. Outsourcing exchanges in-house fixed costs, for external, more flexible costs. Outsourcing, normally, reduces costs. The service provider assumes certain specified costs in return for a guaranteed revenue stream. Reduced costs are the key to such transactions; the outsourcing service provider expects that his specialised know-how will allow him to reduce the cost of providing the service sufficiently to earn a profit. What does this mean to network operators in Latin America, Asia-Pacific and Africa? Outsourcing allows them to get work done with less investment and lower cost. Operators in developing countries typically deploy new technology later than in others. By partnering or outsourcing, they can deploy new technologies sooner, with less capital expense and greater efficiency and build competitive advantage in their markets. Network as a core competence? In the past, telecommunications service providers considered their network as a core-competence. Information technology (IT) was not considered a core competence; it was thought of as something that could be outsourced. Today, because of declining revenues and under-utilised networks, carriers define their core competences differently. Market knowledge, customer relations, innovative product and service portfolios have become more important for telecommunication companies than the control and maintenance of an international network. Tomorrow’s telco will increasingly define itself by its products, services, and the way it handles its customer base. Customers, analysts, and investors do not care much about network infrastructure. It has to work well, but is no longer a differentiator. Standard transport level network services are commodities. At the commodity level, driving down unit costs is the key to survival, and scale is the single most important factor determining unit costs. Adding Value and Network Convergence What are the key aspects of network convergence for the operator? VoIP is at the top of the list for many, but there are several other applications that will also drive the convergence of packet and circuit oriented networks: · Application sharing · Voice and video conferencing · IP centrex · Video on demand A converged network allows service providers to offer this entire applications suite “”out-of-the-box”” and give customers solutions that are far more convenient. The converged-network “box” will be easier to manage, faster to deploy and cheaper to maintain. Everyone who has been through a technology introduction knows the pitfalls: – the delays, interruptions, and costs. Long-term benefits should outweigh these short-term costs. These days, though, operators have to be careful, they may have downsized and not have available staff, or backers might want a quicker return-on-investment than possible. Network Convergence Issues & Geography To be competitive, network operators must focus on unit costs. Every player needs to differentiate itself in the market, but it never takes long for a technology follower to catch up with the leader. Convergence technology is one that can be rapidly copied. Therefore, the costs must be predictable and sustainable by the revenues generated. Parts of Asia-Pacific, North America, and Europe tend to lead technology introduction, but other regions such as Latin America tend to make do longer with existing technology. It makes good commercial sense. Still, this does not mean these countries must lag behind. By partnering with operators that have already incurred the costs, and outsourcing the functions, the operator can deliver advanced services to their customers, without the capital expense, and compete more effectively in his market. Possible partners are operators that, themselves, combine systems integration and network operations. In Europe, such players are typically early adopters of network convergence. In Latin America, an operator might contact North American or European players to request a “partnering” or “outsourcing” solution. More than in other industries, the telecommunication sector can be efficiently managed only when business processes provide an easy-to-utilize information flow. Benefits and risks In addition to permitting companies to focus on core competences, outsourcing brings certain benefits: · Reduction and control of operating costs — outside vendors can maintain in-house service levels at a lower overall cost · Economies of scale — companies can expand their knowledge base and investment capabilities by exploiting the facilities and investments of outside sources. · Access world-class capabilities — vendors invest heavily in technology, methodologies, and people and put to use expertise gained serving clients with similar challenges. · Increase liquidity — by transforming fixed costs into variable costs, capital is freed for other demands But, as always, there is also a flip side of the coin: · Confidentiality — critical internal and customer information might become accessible to the vendor. · Loss of knowledge sharing — knowledge management, training and skills development may be hindered, breeding managers that have little familiarity with basic procedures. · Cultural differences — outsourcing partners, who do not share the internal culture or goals, can create tension within the organization and derail its primary objectives. · Financial and operational risk—critical internal processes become dependent on the financial and operational performance of the outsourcing partner. So it is necessary to choose a strong partner. · Fear and trust – no one knows the future; since the outsourcer has a long-term reliance on the service provider, they must be able to trust that the handling of unforeseen circumstances will be equitable. Who can benefit from outsourcing and why? Any company that needs certain assets or skills – be they network, equipment, software or engineering resources, might benefit. Incumbent carriers, alternative carriers, and mobile operators can all benefit from outsourcing international backbones, traffic, or new technology introduction. Smaller players, benefit from outsourcing their under-utilized networks and by working with vendors that provide their customers with global solutions and products. Players in developing countries can benefit greatly by: Avoiding early adopter mistakes, · Having access to technology, convergent services, or geographical reach · Buying the technology at “incremental” cost to the service provider · Few network operators “volunteer” to outsource parts of their operations. It is not in their blood. Operators should take a strategic approach and ask the following questions: · Does my traffic volume, and realistic business growth, make me one of the three largest network operators in my area? · If there was a war of attrition, i.e. continuous merciless price pressure in our main market, will I be one of the top three survivors? If the answers are no, then the operator should take a closer look at his business model and at radical ways of reducing its operating costs. Mergers and acquisitions are possibilities, but they bring the risk of losing control of the business. Network partnering and outsourcing keep strategic control in the hands of management. Common misperceptions about operator outsourcing It is important to consider outsourcing for the right reasons. In the network operator community, many players interested in outsourcing can be found. For the most part, they wish to solve one or all of the following problems: · The operator built-up staff during the expansion years. Now, facing the costs and trauma of large-scale redundancies, and wish to transfer the problem to someone else. However, it is not the vendor’s business to be a placement agency. · Over-dimensioned networks created a massive overcapacity problem, they cannot offload the capacity, and there is no market recovery in sight. The carrier hopes that the vendor will buy the inventory to sell or to satisfy internal demand. Again, why would the vendor suddenly be able to find a market for this overcapacity? · The operator made long term operation and maintenance commitments for capacity and co-location space leases during the boom years – often at inflated prices for many years to come- and would like to transfer these liabilities to someone else. Any of these factors are likely to play a part in a network outsourcing deal – but they should not be the primary drivers of it. Vendors cannot ‘undo’ past mistakes. They can only achieve, all other things being equal, a sustainable improvement providing advantage relative to rival operators. How can outsourcing improve an organization’s performance? Primarily, outsourcing can be a way to generate synergies between a carrier and the vendor. Note that although the term outsourcing is used, it is in fact a type of partnering where one party takes the leading role and bears the risk. A favourable outsourcing solution addresses customer demands on the one hand, while focusing on cost or reach improvements on the other. A synergy partnership has three principal goals: · Cost-savings: This is due to the shortening of customer access tails and migration to leased circuits on a less-expensive backhaul infrastructure. In the medium term, staff efficiency gains further reduce operational costs. · Network reach extension: International network coverage, especially to countries that are hard to reach, can be obtained without intensive capital expenditures · Local market access: Special, in-country market and sales knowledge will be gained through the knowledge transfer that co-operation with a carrier brings. By bundling traffic of both parties (outsourcer and insourcer) significant economies of scale can be achieved and smaller players can benefit from a larger purchasing power. Outsourcing can lead to significant reductions of capital and operational expenditure. The outsourcer gets guaranteed cost projection and improved profitability. It also might get, depending upon the contract, access to international wholesale and retail products, which might include exclusive access to a homogenous, wholesale, suite of international products without product development costs or delays. Conclusion: ‘Outsourcing’ a new model for the telecommunications sector Difficult markets and financial constraints call for the revision of business models. Solutions like outsourcing, which take advantage of global synergies, can help companies regain margins in a consolidating telecommunications market. In recent years, the telecom industry over-invested in infrastructure and is now suffering from a hangover. The resulting supply-demand imbalance is likely to continue for some time. This cripples the operators’ cash-generation and limits their ability to fund innovations such as network convergence. As revenues fail to keep pace with costs, many operators face financial distress. The financial community has criticized telecom players for their inability to use their capital and operational resources more sensibly. Perhaps players in developing but advanced countries, as in Latin America, will be the first to overcome their reluctance to relinquish full ownership and control of network assets. Network partnering, or outsourcing, sends a signal that the players have finally understood what their financiers are demanding and telcos might finally regain investor confidence.
