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Telecom Sector:Outsourcing Network Operations
The Future
By Runa B Joshi
PGPX 2009, IIM Ahmedabad
Under the Guidance of: Prof. Rekha Jain
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Table of Contents
Topic Page No
Executive Summary 3Introduction 4
Market Overview 4
The Journey so far 9
Market Evolution in the Growth phase 9
Key Drivers 10
Vendor Selection Process 15
Operator’s Financials 16
Operator Concerns 17Vendor Concerns 19
Managed Services- the future 21
Challenges in the future 21
Ingredients of a win-win relationship 23
Conclusions 24
Appendix1: Questionnaires 25
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Executive Summary:
Telecom operators around the world have come under increasing pressure to improve
profit margins, which in turn has sparked an aggressive pursuit of lean business models.
Network sharing has taken hold as a way to substantially decrease CapEx and OpEx.
Sharing has also sparked innovation by enabling operators to increase rollout speed,
provide broader coverage, and introduce new applications.
By the end of 2007, newly forged sharing deals were noticeably larger than previous
deals in terms of network scale and number of subscribers affected. The Bharti/Essar
contract in India and the 3UK/T-Mobile deal in the U.K. are just a couple of notable
examples.
The continued pressure on both mobile and fixed operators to optimize their cost
structures, while simultaneously seeking new services to drive growth, is leading to a re-
evaluation— and a potential revamping—of the entire business model. Network
outsourcing and sharing, in particular, reflect aggressive new business designs that
transform the relationship an operator has with the network. While outsourcing and
sharing can provide significant financial benefits, these deals can be complex and
fraught with risk.
This is a broad-based study in order to identify best practices in forging and executing
network-outsourcing arrangements. This study includes primary research in terms of
questionnaires floated to senior executives at some of the equipment vendors and
service operators in the country. The findings on network outsourcing trends, their
implications for telecommunication executives, and steps executives can take to
anticipate and mitigate risks are summarized in this paper.
This paper also looks at some of the key issues that both the parties are facing in the
current business model. The report focuses on the execution challenges inherent in
realizing the promised benefits of network outsourcing—challenges that can, at best,
slow down implementation of a deal or, at worst, cause it to implode.
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Introduction
Managed Services is a fast growing USD 16 billion industry which is attracting telecom
equipment vendors who are showing increasing interest to benefit from their existing
competence and take on new roles in the value chain, covering activities such as
network build, including planning and design, field operations, Network Operation Center
(NOC) operations, application & service development, and billing. In recent years,
operator awareness of Managed Services has increased significantly; Managed
Services is now beginning to be a standard element of telecom operator procurement
processes.
As per an estimate given by some of the leading managed Service Providers for
Network operations like Ericsson, Nokia Alcatel-Lucent, etc, there can be a 20% saving
in the net spending for a service provider. Although other industries have long since
adapted the Managed Service model in their IT operations, the idea is still in the nascent
stage in the Network Operation area for the Cellular Service providers. Operators at one
time considered the management of the Network operations also to be a core area in the
overall business. But they have increasingly begun to realize that although the network
may be core to their business, network operations are not. And hence the increasing
shift towards the managed services model. Ericsson, in their site, claims to have
announced more than 100 contracts for managed services with operators worldwide
since 2002. The equivalent number claimed by Nokia Siemens Networks is a combined
portfolio of more than 160 managed services contracts. Thus we see that the equipment
vendors are seeing the opportunity and trying to push the concept further ahead with
each vying to get a piece of the pie.
Market Overview
Defining Managed Services: A Managed service (as defined by Dr. Gerard Macioce) is
the practice of transferring day-to-day related management responsibility as a strategic
method for improved effective and efficient operations. The person or organization who
owns or has direct oversight of the organization or system being managed is referred to
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as the offerer, client, or customer. The person or organization that accepts and provides
the managed service is regarded as the service provider.
Typically, the offerer remains accountable for the functionality and performance of
managed service and does not relinquish the overall management responsibility of the
organization or system.
As one browses through the internet, the definitions vary to some extent across the
vendors. Motorola defines the concept in a 2003 white paper (Ref:
http://www.motorola.com/governmentandenterprise/contentdir/en_US/Files/SolutionInfo
rmation/FEDWhitePaperOverview.pdf ) as “A Motorola Managed Services solution is
based upon a collaborative effort where Motorola assists the customer in the optimum
management and maintenance of their wireless communications network. The
customized solution can supplement their current staff and responsibilities or provide
end-to-end operations management.” Ericsson, in their site (www.ericsson.com )
explains the concept and scope of managed Services as “Managed Services
offering…consists of four segments; Operations, Field maintenance, Operational
readiness and Shared solutions. All the service segments are flexible in terms of scope
and set up and can be adapted to fit the customer’s needs. Typically Managed Services
includes activities such as designing, building, planning, operating and managing day-to-
day operations on behalf of a customer.” Nokia defines “Managed Services as the
delivery and management of professional services under a long duration contract that
includes a service level agreement with incentives.” (www.nokiasiemens.com )
Thus typically a managed service is a contract wherein the service provider takes over
the traditional network operations from the Operator. Managed Services functions
typically include:
• Plan and design – planning, optimization and development. These functions can be
applied to areas such as the actual network, end-user applications and services, and
business support systems, for example systems related to billing and CRM.
• Build – technology integration and implementation of networks, services and business
support systems.
• Operate – day-to-day operations such as operation and maintenance of networks,
services and business support systems, field services, customer problem management
including helpdesk, and service and resource fulfillment.
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The term also covers the case where a provider takes responsibility for providing the
required network capacity to an operator when and where needed. Furthermore, the
term Managed Services also covers hosting business model scenarios, where the
provider hosts service applications and enablers such as MMS, push e-mail and music
for the operator. The provider owns the infrastructure and delivers the capacity and
functionality as desired by the operator. The operator has to decide whether they wish to
have a multi vendor environment or a single vendor one. In most cases, as seen in the
Indian telecom industry, operators usually start with a single vendor for some of their
operations and slowly move out to a multi-vendor environment. For example, Bharti
Airtel, the pioneer in the Indian context started off by giving the MS contract to Ericsson
in 1999 but few years down the line gave the rest of the circles to Nokia Siemens
Networks.
Service Level Agreements or SLAs are defined to control and implement the contract
between the two parties. The measurements are defined in the KPIs or the Key
Performance indicators. There are different business models for managed services:
larger operators tend to outsource individual tasks necessary for running the network,
while many smaller market participants do not even bother to set up their own
infrastructure at all, and they entrust the entire operation and maintenance of their
network, from the outset, to an external partner. The scope of Managed Services
contracts depends on the operator’s strategy and on its organizational and businessneeds. A way of modularizing the Managed Services concept, based on the parameters
of scope and reward, is illustrated in Figure 1 below. However, in practice, the
agreements may vary in scope and may not fit into standardized, distinct modules as in
the model below.
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Figure1. Managed Services structured from a scope and reward perspectiveSource: Official site of Ericsson (www.ericsson.com )
The figure above describes Managed Services from a scope-oriented view, indicating
that the more responsibility that is handed to the Managed Services provider, the greater
the savings and reduction of risk profile for the operator. The level with the most limited
scope is Out-tasking. This refers to the Managed Services provider taking on the partial
operation of a function/process typically related to the management of a network or
service. Performance measurement is made using task-based KPIs, where the Managed
Services provider supports its customer in reducing headcount-related operational
expenditure (OPEX) through alternative means of acquiring resources.
As for the next level of scope, Full Technical Operation, the Managed Services provider
takes on the end-to-end KPI responsibility for the full operation of a network or service,
including technical operation, optimization, design and build activities. So far, this has
been the most common Managed Services model used in the telecom industry. The Full
technical operation typically includes staff transfer from the operator to the Managed
Services provider, opening up for more substantial OPEX reductions compared to Out-
tasking.
Increasing the scope further, the Managed Services provider handles not only the full
technical operation but also the Site and transmission cost management on behalf of the
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operator. This may constitute site and common infrastructure sharing solutions for
towers, shelters, power and so on. End-to-end KPI responsibilities are included. Also in
this type of set-up, staff transfer from the operator to the Managed Services provider
might occur. With this set-up, not only is headcount-related OPEX reduced but network
related OPEX is also affected positively. The set-up may also have a positive impact on
capital expenditure (CAPEX).
The most extensive scope of Managed Services includes Asset optimization and supply
chain management. This means that the Managed Services provider optimizes the
coverage and capacity on behalf of the operator, through providing the required network
capacity to an operator when and where needed. Since deployment of the network
closely follows actual demand, and thereby reduces over and under capacity, the
optimization of cash flow and capital employed optimization is a clear benefit for the
operator. The operator only orders and pays for the needed coverage and capacity on a
continuous basis against an agreed SLA with end-to-end KPIs. Asset optimization and
supply chain management puts high demands on trust and cooperation between the
operator and the Managed Services provider. For the operator, it means a high level of
risk and cost reductions (both OPEX & CAPEX). The Managed Services provider
manages technical operation, site and transmission cost management, as well as
capacity and coverage management of an entire network. Staff transfer may also be
included. With this in-depth partnership, operators secure competitive OPEX efficiencyand CAPEX productivity, since the vendor optimizes the total cost of ownership of the
entire network.
Managed capacity (MC). In a managed-capacity contract, the operator avoids initial
capital expense (CapEx) investment in favor of a “pay per use” approach, thereby
sharing the market risk with the vendor. The network assets are owned and operated by
the vendor, who is paid on a variable-usage basis. This form of outsourcing is most often
used in completely new situations—for example, Bharti/Airtel’s agreement with Nokia-Siemens, or Ericsson rolling out the GSM network in India. Managed-capacity contracts
will likely be the exception rather than the norm, as few vendors have demonstrated the
ability to profitably execute such deals.
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The Journey So far:
As indicated earlier there were many reasons why the Managed service model evolved
for the telecom operators and soon became a key Business proposition for both the
operator and the vendor. We will discuss this evolution path and a few of the key drivers
responsible for the success (?) of the model.
Market Evolution in the Growth Phase:
Significant changes are happening in the telecom industry and the competition for the
same set of subscriber base is heating up. As a result, operators are considering how to
manage the new challenges for their own benefit. The traditional criteria of coverage,
capacity and quality are outmoded in the mature mobile market. Operators need to
rethink their business logic and position in the market to maintain and reinvent their
sustainable competitive advantage. Operators now are realizing that in the changed
environment they have to focus more on the core customer-facing aspects of their
business such as service development and management, marketing, branding and
customer relationship management. This is where the OEMs or equipment vendors are
coming into the picture as an alternate solution to “Manage on your own”. To facilitate
this aspect many of the operators are now outsourcing much of their technical
operations activities to managed service providers.
Looking at Figure 2 below we get an idea of this model. Operators are essentially
outsourcing away the more standardized part of their business. As the CEO of one of the
telecom circles said during the initial process of outsourcing,” We know how to sell the
SIM better; they know how to run the network better.”
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Telecom operators have been the traditional customers for Managed Services, with
various contract scopes. Green fielders, incumbents and lower-tier operators have all
entered into Managed Services engagements. Initially, vendors have focused on
contracts in which they establish an organization and then transfer responsibility to the
operator. So far these contracts have been customized and of varying scope. Other
types of customers are now entering telecom Managed Services agreements. As
operators consider which functions to outsource they are assessing their roles and trying
to identify and focus on core competencies. Consequently there has been a shift in
responsibility for functions in the value chain, as illustrated in Figure 2 (above). Some
functions are increasingly being performed by vendors that offer their services as
Managed Services providers that are network build including planning and design, field
operations, NOC operations, application and service development, and billing.
Key Drivers:
There a number of reasons behind the success of this model in its current form. A few
have been indicated in the figure 3 below.
CustomerRelationshipManagement
ServiceManagement
Managed services forNon Differentiating activities
Enhanced management focusImproved EBITDA
PositionIn the future
PositionToday
TechnicalOperations
Operator
Operator
Figure 2: Operations outsourcing – The restructuring of the value chainSource: www.nokiasiemens.com
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Figure 3: Managed Service- Market Drivers
Source: www.ericsson.com
The earliest Managed service contracts were drawn up in the late 1990s but it is only
after the severe telecom industry crisis of the year 2001-2002, facing a financial turmoil,
the concept of Managed services in the telecom space started to gain acceptance and
popularity. Operators, in the mature markets, faced with the double trouble of the
financial crisis and increased competition, started to seriously consider the efficiencies
that the vendor companies could provide in terms of cost benefits and operational
efficiencies. This pressure to reduce costs is ongoing, especially as competition
increases. Scale based synergies increase as the large Service providers start to sign
more and more contracts and economies of scale kicks in. The larger the scope of the
agreement, the greater is the potential for Managed Services providers to maximize
efficiencies and reduce costs. It is very difficult for an individual operator to achieve that
kind of scale economies on its own. This is true more for the smaller operators but can
also include larger operators that have identified business elements that can directly
benefit from scale, for example field services. Without the synergies across operations
available to large Managed Services providers, it is unlikely that individual telecom
operators could achieve the same levels of efficiency and cost savings.
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For technical operations of an operator, managed service including outsourcing is
understandably a major change. The operator needs to consider carefully the
advantages and disadvantages of this option. The major considerations are as follows:
• Is the managed service contract in line with the business strategies and
objectives of the company
• What is the scope of the operations to be outsourced? Which network domains
and technologies are included in the outsourcing deal? How will future network
upgrades be handled?
• What are the specific targets and objectives for the outsourcing and managed
services deal?
• What are the criteria for a successful managed services provider?
• How should the operator manage the outsourcing process?
Every operator will have its own set of reasons and motives for getting into a contract
and hence should consider its unique proposition when deciding upon the vendor and
the type and scope of the contract. Some of the key drivers towards this consideration
are as follows:
• The need to reinvent the business as the business environment changes
As the competitive pressures increase, the operator needs to rethink his
business strategy and position in the value chain. One solution – contributing
both to differentiation and cost leader strategies – is to simplify the value chain
and move closer to customers through mobile services.
• The need to be able to focus on the most differentiating activities Most
operators would want to differentiate with new mobile services, content and
portals. All of these require extensive efforts to develop, launch and market with
increasing time-to-market pressures. Being able to focus on these most
differentiating activities is a significant benefit – while the technological
environment is becoming more complex.
• The need to improve operations efficiency – to improve EBITDA Irrespective
of the operator's competitive strategy, there is a need to increase the cost
efficiency of basic technical operations. And after usual process optimization and
competence development, the main source for cost efficiency is economies of
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scale. For very large operators and international operator groups it is possible to
gain significant economies of scale in-house. Small and medium sized operators
should consider also whether a managed service provider could deliver benefits
for their business by creating higher economies of scale on their behalf.
• The need to improve quality of services and operations In mature markets, if
the operator manages the operations and network properly with necessary
capacity increases and modernization, the quality of service will be meeting the
customer's expectations. However, the quality is unlikely to be a differentiating
factor as all the operators can deliver the same. But the new mobile services and
applications provide excellent possibilities for quality differentiation and grabbing
market share – in a certain time window. The operator should make the most out
of this with the chosen help of the experienced managed service provider.
• The need to manage technology and operational challenges In traditional
operator-vendor relationships, the operator has responsibility for deploying
mobile services – network technologies, billing and customer care readiness.
This integration responsibility has a fair share of risk involved in it. Managed
services contract can be set up in a way to reduce this technology and
operational risk, linking service provider’s incentives to operator’s business
objectives.
• The need to improve CAPEX utilization Improving CAPEX utilization is one of
the key opportunities for improving operator’s cash flow. Operators can reduce or
completely forgo significant investments in facilities for network operations/call
centers, warehousing, distribution and maintenance by leveraging these
resources of the Managed Services provider. The right Managed Services
provider’s scope of capabilities offers the operator flexibility to manage to their
optimal mix of CAPEX and OPEX. Network optimization on the part of the
Managed Services provider can also move out capital investments for network
expansion or better prioritize where and when those investments are made.
• Reduction in OPEX Operational expenditure: (OPEX) reduction is clearly a
common goal that comes to mind when looking to Managed Services. The
operator can realize reduced headcount related expenditures by leveraging the
Managed Services provider’s resource economies of scale and access to
efficient processes and expertise. The savings will vary depending on the
Managed Services model employed. Out-tasking small portions of an operator’s
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network processes would be expected to yield less of a savings versus a fully
outsourced network that sees operator staff being transferred to the Managed
Services provider. For Greenfield operators, OPEX savings can primarily come
from:
• being able to forgo the recruitment and training of staff to run portions or
the entire network and
• leveraging the operational and cost management experiences of
vendors that have already successfully deployed and run networks.
OPEX savings are not limited to headcount but also across the entire network and
operations scope. The Managed Services provider may also be tasked to drive more
efficiency into site acquisition and preparation costs, optimize performance of the
network, provide creative transmission/backhaul solutions and automate end-user
provisioning, to name but a few examples.
The operator has to be very clear in the following aspects when deciding upon which
vendor to select:
• Establish realistic expectations about benefits and scope. Having a clear set of
objectives and a business case that can be benchmarked are prerequisites for
convincing senior management to make the commitment to network outsourcing.
• Define a detailed picture of the desired end-state early on. Operators that
successfully execute outsourcing deals define a detailed picture of the desired
end-state early in the process—and further validate this with the respective
vendors.
• Having a clear understanding of one’s expectations and requirements is central
to maintaining control throughout the vendor selection and negotiation process,
and then arriving at a satisfactory outsourcing contract.
Examples of Outsourced Network Operations include:
3 UK: MSP Ericsson, $3B over 7 year contract, >1000 people, network deployment and
operations. Done to enable H3G to achieve profitability and focus on breaking the 5
million customer barrier.
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The process is characterized by the early development of the desired end-state by the
operator. A select group of vendors should be involved extensively to validate and test
the end-state, prior to the issuance of an RFP. These discussions should involve key
personnel who will be the leaders of the organization post-outsourcing. While the
investment in terms of resources and time might seem initially excessive, a clear and
jointly held understanding of the details and alternatives for a future outsourcing deal is
critical to future success.
Establish clear vendor selection criteria: However detailed the scope and contract
negotiations, it is impossible to foresee every eventuality in an outsourced relationship.
Selecting a vendor that one can partner with goes beyond evaluating its past
experience. The selection criteria should include an assessment of the characteristics of
the vendor such as experience, local presence, convincing business model and
compelling operations model, as well as an assessment of the vendor’s partnering
capabilities.
Align and communicate. Senior management support for the outsourcing initiative and
internal communication of the implications for employees are vital to ensuring success.
Insufficient attention to these elements has often resulted in attrition of more than 20% of
operator staff during the process, not to mention needlessly drawn-out negotiations with
potential vendors. How to align and communicate? On the first point, we’ve alreadynoted the importance of a sound business case and end-state model. With respect to the
second point, operators must supply their staff with early and honest explanations of
how the outsourcing deal will be implemented, what these changes will mean for how
people do their work, and how job performance will be evaluated and rewarded.
Operator's Financials:
As one delves into the financials of some of the major telecom operators, it is clear that
there exists an 80:20 split between the operational (80%) and Capital Expenditure
(20%). Capital expenditures cover the amortized investment in the licenses and building
the network infrastructure. The bulk of a mobile operator's costs are operational
expenditures, hence the importance of EBITDA (Earnings before Interest, Tax,
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Depreciation and Amortization) as a metric of an operator's financial performance;
generally in the 25-35% range.
The operational expenditures breakdown into roughly:
• 40% Marketing and sales, building the brand, paying for all TV advertisements,
sponsorship, subsidies on phones, etc;
• 25% Interconnect, cost of calls terminated on other operators, generally a
regulated cost structure;
• 20% Technical operations; and
• 15% Other costs covering customer care, offices, etc.
The 20% Technical operations can be further broken down into the following three main
categories.
• 7% Transport, most mobile operators have to rent E1s or T1s from incumbent
carriers. As mobile broadband grows, operators need to find ways to have this
cost grow in line with revenue and not data volume;
• 7% People, This is a touchy issue and the focus of outsourced network
operations, a roughly $10B business, which is about breaking down
organizational silos to enable better teamwork, removal of redundancy and
leveraging economies of scale; and
• 6% Other (maintenance and site leasing), here we see suppliers being squeezed
on maintenance contracts and options such as site sharing.
Operator Concerns:
All operators, cutting across size, geographical boundaries and type pf market, are lured
by the Managed Services model due to the Cost advantages. Operators are seeing the
benefits of network outsourcing go directly to their bottom line, with 15% to 30%
reduction in OpEx (2% to 5% EBITDA improvement) and 50% to 60% improvement in
time to market. Such gains stem primarily from the better network management and
acceleration of new technology introductions that outsourcing affords.
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As per an Oliver Wyman study carried out on 100 outsourced operators, the primary
objectives behind the acceptance of a contract differ across the globe. As a typical Asian
operator noted, “...to concentrate on sales and marketing core competencies and to
relieve network topics from the management agenda.” The operator gains about +5-10%
increase in customer satisfaction and >50% reduction in “fixed” costs. The European
operator gets into the contract for purely financial reasons only. As per one such
operator, “OpEx reduction is the overriding driver… achieve a reduction of around 20%.”
Other than operationalizing Capex, an operator reduces about 15-30% Opex and 5-7%
Capex. For a mid-size operator, irrespective of the geography, the rationale behind
outsourcing model is People and Technology. “Outsourcing allows us to quickly build up
intellectual property and capability, in particular on new technologies.” There is a 50%
improvement in time-to-market and risk for a new technology is shared between the
partners.
But not all is well with the model. Despite the above mentioned and heavily documented
advantages, there are many pitfalls and tradeoffs that the operator needs to be aware of
before getting into a contract. This is more so for the small to medium sized operators
with little or no experience. There is a vast difference between buying equipment from a
vendor and getting into a relationship with them.
Operators are locked to vendors and switching to another vendor in case of the
arrangement failing is very difficult. A badly written contract may result in mutualdissatisfaction and this may prevent the operator from acting swiftly to respond to
changing market conditions and customer priorities. A few other potential risks include:
• Loss of strategic control
• Dependency created with large suppliers
• Reduced capability to monitor supplier performance and manage network migrations
• Implementation costs and workload
• Network performance and quality of service issues
Overestimating savings, inadequately defining the scope of the outsourcing project, and
mixing outsourcing initiatives with other infrastructure projects (such as next-generation
networking migration) are a few common pitfalls that operators may fall into. Sometimes
the larger operators are too lucrative a deal for an upcoming vendor and they might
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over-promise. But in an attempt to gain business, they may not look at the tight contract
SLAs and may not be able to deliver after a point in time. By then, even if the operator
wishes to, it is quite difficult to come out of the contract.
Governance may be another point of contention and there needs to be clear agreement
on the rewards and penalty system in the contract. If there are other third party contracts
that overlap in scope with this contract, it may become a major relationship issue with
some operators, especially if the parties concerned vary in market strength. The
operator may get involved in unnecessary tussle and in turn lose out on the competitive
advantage that it set to get in the first place. The operator has to ensure that the
outsourcing vendor effectively manages third-party equipment and services and
manages those relationships well.
An important concern for the operator during the initial phase of the transition is HR
transition. It is easy to transition out equipment but as with all human relationships, the
transition of personnel from one company to the other is the most difficult and
sometimes the cause of failure of the contract. The operator and the vendor may have
very different sets of HR policies. It is extremely difficult for the operator to explain to its
employees that they are no longer employed in the operator company but are now
external outsourced employees. These employees now have to still do the same job but
are paid by the vendor. Employee morale takes a severe beating. Attrition ratesskyrocket during these times and smooth transition may take a setback, if this happens.
The operator has limited control over the employees once the transition is over and there
have been cases of sabotage out of sheer frustration and the employee had to be
tackled without denting the morale of the rest. Operators must supply their staff with
early and honest explanations of how the outsourcing deal will be implemented, what
these changes will mean for how people do their work, and how job performance will be
evaluated and rewarded.
Vendor Concerns:
As more and more equipment providers are trying to get in to the arena, it is becoming a
tough fight for the pie across the world. In some cases, they are promising a whole lot
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more than what they can possibly deliver. The contracts are getting tighter and the
margins are shrinking by the day. Traditionally the vendors have supplied the “boxes” to
them and the operators paid for it and managed the operations themselves. The
operators owned the network and the jobs responsibilities were built on this basic
premise. But as the operators outsource the operations to the vendors, this very premise
does not hold good any more. The vendors traditionally work on the premise of SLAs
and delivery of KPIs. The logic of ownership does not hold true for them. What they see
is a 5% of their business portfolio which delivers 70-80% of their revenues.
The model rests on the fact that the technology aspects are best understood by the
technology companies. But selling technology and managing operations based on those
technology platforms are two different ballgames altogether. Vendors are still operating
in their old mindset of selling boxes and making money. Most of the large players work in
silos. The vendor business can be divided into 3 main categories: Selling the standard
boxes, Customized high end service and finally the Managed Services. As one of the
respondents this author interviewed stated “When the contract is signed for a Managed
Service, one has to look beyond the money. The relationships are important, more so for
a country like India. One has to understand that India is not Europe. Here the people
aspect is very strong. So what works in the European countries will not work here.” It is a
common feeling in at least some of the contracts that while the operator is making
money out of the model, the vendor is not. The operator may think that the vendorcompany is more competent but fails to understand that if the business does not make
sense, the competency cannot increase. This has a direct impact on the quality of
service provided. The manpower is no longer the best. The competencies are not
developed; the tools provided are of inferior quality and sometimes are altogether
missing. Cost cutting goes to the extent beyond compare. Retention of quality manpower
becomes a challenge.
The problem begins with the development of the business case itself. It all depends onthe aspects covered in the original agreement. There has to be clear understanding of
what the operator expects and what the vendor can deliver. There cannot be any major
deviation from the business case; at best a deviation of .5-1% is allowed and that results
in the later stages of failure. It also depends on the way the transition is carried out. As
the respondent compared the style of operation for two Indian companies, he mentioned
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in one case the team was handed over to the vendor without the leader. This resulted in
a lot of confusion and misunderstandings. The attrition rates increased tremendously.
The operations suffered and a stage has now come where the operator has again
started to build up its own team and there are strong rumours that at the end of the 3
years, the contract may not be renewed. “There is no trust and the operator team
behaves more like policemen to watch over the vendor.” As opposed to this transactional
behaviour of one operator, the vendor’s experience with another operator has been of
complete trust. In this case the model was based on Managed capacity rather than on
Managed Services. Revenue sharing model has worked for this operator and its
relationship with the personnel even after they have been transitioned to the vendor
company, has been exemplary.” If the relation is skewed in terms of business
opportunities and profit, it cannot sustain for too long. As of now, in India, some of the
operators are earning to the tune of 30-40% whereas the margins for the vendors is
languishing way below at 2-3% in some of the contracts.
This puts unnecessary pressure on the senior management also and they are forced to
resort to less skilled manpower. They do not see the logic of enhancing the skill sets of
their teams because the business model does not allow them to do so. The short term
losses and pressures to meet the margins loom large and the long term aspect of
business and the very basis on which the MS model is based, that is the advanced
competency levels of the vendor management, is lost.
Managed Service- The Future
Challenges in the future:
As is clear from the number of Managed services contract being signed every quarter,
this concept is here to stay. But the nature of the contracts and the model may very as
time passes by. Some of the future trends evident from the way the new contracts are
being signed are as follows.
Network Sharing: So far, each operator gets into a contract with one or multiple
equipment vendor for its network operations. Thus an operator may have contracts with
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different technology leaders. Going forward, multiple operators may come together to
share not only the passive infrastructure but also the active equipment like BSS, Switch,
TRXs cabinets, antennas, power generators, and shelters, as well as network operations
and maintenance staff. Operators can save up to 40% of total network costs through
such partnerships. However, aligning network technologies, roadmaps, and vendors can
prove difficult.
Asset Transfer models: Wider use of asset transfers beyond the current software and
test-bed transfers will start. Currently the network is owned by the operator and the
service and operation is under the aegis of the vendor company under the MS contract.
Analysts feel that the current model may give way to that wherein the network will also
be owned by the equipment provider and they may lease out the services to various
operators. This will also result in reduction in costs for both the parties. The vendor will
be able to consolidate its maintenance, manpower, expertise expenses for different
operators and give a competitive package to its clients. The mission critical areas like
NOC or Network Operational Control will be set up at the centralized place. This has
already started to some extent. But the service providers have to get used to the idea
that their operations may be controlled by the same set of people from under the same
roof as their competition. In the present world of network security, this may not be a very
difficult issue for them. Nokia Siemens and Ericsson already have in place their Global
NOCs that manage their Managed Service networks for both Vodafone India and BhartiAirtel from the same facility.
As is evident from the figure below, as the concept of Managed services mature,
operator s and the vendors, both will look for ways to make the contracts more failure
proof. Since any such deal is very difficult to exit with major implications on the credibility
of either, the future contracts will call for greater partnerships. As one of the persons
interviewed by this author said, “It has to be a win-win game for both. The vendors have
taken on the service industry but have yet to align their organization towards a servicemindset. They still do not work on an ownership model and are just concerned about
meeting the SLAs.”
Thus the key elements for the next generation of outsourced networks will be the
following:
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• Shared active infrastructure elements and operations
• Asset transfers
• Adoption of fragmented out-tasking of O&M functions
Multi Operator
SHARING
Transfer
Single Operator ASSET OWNERSHIP
Infrastructure O&M
No Transfer
MANAGED CAPACITY
Scope of managed services
Figure 5
Source: Adapted from Oliver Wyman analysis (http://www.oliverwyman.com )
Ingredients of a win-win relationship:
Working as a team• Ensure joint goals and high level relationships
• Set up efficient governance to implement joint processes for
planning, transition, measurement, escalation, change management etc.
• Display trust – success is delivered together
TraditionalModel
Network
Sharing
NetworkOperations
Outsourcing
Next
Generation
Outsourced
networks
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For the operator
• Clear understanding of business scope
• Allow managed service partner to build economies of scale
For the outsourcing partner
• Fully integrate outsourced activities and people into company processes
• Build in flexibility to the scope
Conclusions:
Network outsourcing by telecom operators is bound to spread, as it can generate 15% to
30% reductions in costs while presenting relatively manageable challenges. It offers cost
predictability, the ability to best use existing networks, and long-term commitment to
business success from both sides – the operators and the vendors. Yet there are risks.
That’s why operators should weigh the tradeoffs relative to alternative means of saving
money and achieving economies of scale— such as network sharing, internal
improvement efforts, and non-traditional outsourcing partnerships.
Implementing a network-outsourcing deal is far more complex than selecting an
equipment vendor. Thus, it requires close attention and model definition, due diligence,
contract governance, and work force communication by the operator’s management
team. Anticipating the unique pitfalls that network outsourcing presents will allow
telecom operators to make good on the promise: making a major impact on the bottom
line.
The maturity of the model and the way it is structured provide an operator a long-term
commitment of qualified service, along with predictability of costs, giving this model vast
potential for further development.
Managed services is about gaining operational and management efficiencies. It is about
handing wide responsibility to the experts while allowing the operator to manage the
core of the business, which has the potential of bringing focus to the operator's business
in difficult times.
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Appendix 1 : Questionnaires used for primary research
Questionnaire ( Service Provider):
1. Name of the company you are working with
2. How long have you been associated with the telecom industry?
3. What is the nature of your responsibilities?
4. Have you been with the company before the managed services contract started?
5. What in your opinion was the logic behind the MS model?
6. Do you think it makes economic sense to outsource the operations?
7. What are the advantages you find after the MS implementation
8. And the disadvantages?
9. What are the challenges in maintaining multiple vendor relationships? You now
have to deal with your own employees and the NSN, Ericsson employees as
well?
10. Are there any challenges in the timely resolution if the Network Quality issues?
Do you think it would have been easier if it was an internal Network team?
11. How transparent do you think is the reporting system and other operational
issues?
12. Do you think the fact that the same vendor has the MS project with your
competitor may be a potential threat to the internal information security aspects?
13. Have you faced any employee related issues in this model? What in your opinion
may be the driving force for the MS employees towards your network? Do you
feel the levels of commitment may have been different between pre MS days and
now?
14. Why do you think the model has not been embraced by all the major Service
providers?
15. What do you think will be the future of the Managed services model?
16. Are there any changes that you would like to make in the model that can lead to
better performance- both for the vendor and the service provider?
17. Are there any regulatory issues being faced? Any future problems envisaged?
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Questionnaire ( Vendor):
1. Name of the company you are working with
2. How long have you been associated with the telecom industry?
3. What is the nature of your responsibilities?
4. Have you been with the company before the managed services contract started?
5. What in your opinion was the logic behind the MS model?
6. Do you think it makes economic sense to outsource the operations?
7. What are the advantages you think the service provider company gets in this
relationship?
8. And the disadvantages?
9. What are the challenges that you face in this model?
10. Do you think it is possible to have complete transparency with the service
provider with regard to the operations, reporting and other such issues?
11. Do you think the operator has any information security concerns? The same
vendor manages the network for two competing providers.
12. Have you faced any employee related issues in this model? What in your opinion
may be the driving force for the MS employees? Do you feel the levels of
commitment may have been different between pre MS days and now?13. Why do you think the model has not been embraced by all the major Service
providers?
14. What do you think will be the future of the Managed services model?
15. Are there any changes that you would like to make in the model that can lead to
better performance- both for the vendor and the service provider?
16.Are there any regulatory issues being faced? Any future problems envisaged?