of 12
7/28/2019 Outsourcing Trends in the North American Telecommunications Market
1/12
Perspective Barry Jaruzelski
Raul Katz
Frank Ribeiro
Outsourcing Trends inThe North AmericanTelecommunicationsMarket
7/28/2019 Outsourcing Trends in the North American Telecommunications Market
2/12
Booz & Company is a leading global management consultingrm, helping the worlds top businesses, governments,and organizations.
Our founder, Edwin Booz, dened the profession when heestablished the rst management consulting rm in 1914.
Today, with more than 3,300 people in 58 ofces around theworld, we bring foresight and knowledge, deep functionalexpertise, and a practical approach to building capabilitiesand delivering real impact. We work closely with our clientsto create and deliver essential advantage.
For our management magazine strategy+business, visitwww.strategy-business.com.
Visit www.booz.com to learn more about Booz & Company.
CONTACT INFORMATION
Florham ParkBarry [email protected]
New YorkFrank [email protected]
Buenos AiresRaul KatzExecutive [email protected]
Originally published as:
Outsourcing Trends in the North American Telecommunications Market,by Barry Jaruzelski, Raul Katz, Frank Ribeiro, and Rakesh Bordia, Booz Allen Hamilton, 2004.
7/28/2019 Outsourcing Trends in the North American Telecommunications Market
3/12
Booz Allen Hamilton recently conducted a major
study on the evolution of the value chain and the
potential impacts of outsourcing on the North
American telecommunications industry. As a part
of this study, senior executives from major Service
Providers and industry experts across North
America were interviewed to examine the drivers
and trends for outsourcing in telecommunications,
with a specific focus on network-related functions.
Interest in this study has been positive, under-
scoring the relevance of the topic for senior exec-
utives today. This effort complemented a similarstudy conducted by Booz Allen in the European
market late 2002.
The North American-based effort covered more than
80% of the domestic wireline and wireless markets,
and included incumbent local exchange carriers
(ILECs), long-distance carriers, wireless carriers, and
smaller players. A Booz Allen team interviewed senior
business leaders (approximately 80% of executives
were VPs or higher level) across key functional areas of
the organization typically involved in making outsourc-ing decisions in network operations, finance, procure-
ment, and corporate strategy.
The discussions focused on the following key questions:
Given the market environment, is outsourcing viewedas key lever for the business?
What are the critical drivers and obstacles for outsourcing?
Do companies currently outsource core activities?What activities are companies considering outsourc-ing in the future, and why?
Which functions are involved, and at what levels areoutsourcing decisions being made?
What are the key selection criteria for choosing anoutsourcing vendor? What are the preferred types of
vendors and outsourcing models?
Overall, as companies continue to reevaluate business
models in the face of a tough economic environment,
outsourcing will become an increasingly important com-
petitive lever for Service Providers in North America.
As a result, telecommunications outsourcing (includ-
ing network activities) will grow within North American
Service Providers as they further drive performance
improvements to remain competitive. This document
summarizes the findings of the study and incorporates
the experiences and insight Booz Allen has gathered
from working with clients from many industries, includ-
ing telecommunications, on outsourcing issues.
Different Segments, Shared Priorities
The telecommunications market has been in a down-
turn since 2000, and this environment is clearly shap-
ing most Service Provider priorities today. Not surpris-
ingly, they share a clear set of strategic priorities in
response to the increasingly challenging environment.
Though the market environment has affected wireline
and wireless segments differently, most executives
interviewed share the same number one priority
Outsourcing Trends in the North American
Telecommunications Market
7/28/2019 Outsourcing Trends in the North American Telecommunications Market
4/12
2
improving financial performance (see Exhibit 1). Beyond
the financial priorities, wireline players are concerned
most about declining market growth and revenue due
to pressure from wireless and cable substitution.
Wireless players, though concerned about growth, are
increasingly focused on managing the growing complex-
ity of the business along several dimensions, includ-
ing technology, regulation, and customer preferences.
Wireless and wireline executives agree that focusing
on core competencies is a priority. By focusing on core
activities, Service Providers expect to shed unprofit-
able functions and clarify their value proposition, bet-
ter positioning themselves for revenue growth and
improved margins.
The combination of growing business complexity and
changing customer preferences, coupled with strong
pressure from the capital markets, is forcing the com-
panies to act. They are reassessing their strategic
direction and operating models, which in turn effects
activities along the value chain to be kept in-house and
those to be outsourced to a third party. As a result,outsourcing has emerged as a key business lever for
players today.
Outsourcing as a Business Lever
More than 75% of the executives consider outsourcing
as a key business lever that allows their business to
better respond to market challenges. Smaller players
tend to emphasize outsourcing more than larger players
and leverage outsourcing as a means to retain focus
and gain scale. Larger players use outsourcing more
opportunistically, for example, during market downturns,
or in subscale geographies to manage costs.
The reasons Service Providers give for outsourc-
ing are closely aligned with their strategic priorities.
Overwhelmingly, the number one reason Service Providers
give for outsourcing is Opex reduction and Capex opti-
mization (see Exhibit 2). The primary mechanisms men-
tioned to achieve this goal through outsourcing are:
Improve scale
Transfer fixed cost to variable
Leverage vendor expertisee.g., improved processes,proprietary tools, lower cost structure, etc.
Core Competencies of Telecommunications Players
Given the market conditions and external market
pressure, its not surprising that 100% of the Service
Providers interviewed currently engage outsourcing ven-
dors for some aspect of their operations. While core
activities appear to be off-limits for now, the definition
ofcore varies by segment, as follows:
ILECs: Most network activities; customer care and
billing in many cases; IT activities sometimes due to
regulatory requirements
Exhibit 1Service Provider Strategic Imperatives
Source: Booz Allen Hamilton
Exhibit 2Reasons for Outsourcing
Source: Booz Allen Hamilton
7/28/2019 Outsourcing Trends in the North American Telecommunications Market
5/12
3
Long-distance players: Most network activities except
installation and maintenance; customer care/billing
activities in few cases
Wireless players:Most network activities except instal-
lation and maintenance; Customer care/billing activi-
ties in few cases
Small players:Onlycustomer-facing functions
How the definition of core versus noncore evolves over
time is critical to understanding the true potential of
outsourcing. Critical questions to be answered include:What are the key obstacles, and is the current reluc-
tance deeply fixed or likely to change? And who would
be considered for outsourcing, and what outsourcing
models will be deployed? As part of the study, Booz
Allen explored these critical questions to assess the cur-
rent and future extent of outsourcing along the telecom-
munications value chain in the North American market.
Evolving Boundaries of Core Competencies
Looking at all activities across the telecommunica-
tions value chain, it is clear that Service Providers
are most interested in keeping planning and manage-
ment functions in-house and are more open to out-
sourcing field activities. Human Resources (HR) and
Information Technology (IT) are the two functions that
Service Providers most often outsource today. There
is a demonstrated track record of outsourcing benefits
in these areas and many functional specialists deliver
these services today. On the other hand, the telecom-
munications industry has been slow to embrace out-
sourcing for core technical functions or customer-facing
activities such as network planning and architecture,
platform development, and sales and marketing. The
customer-facing functions where outsourcing is most
leveraged are customer care and billing, predomi-
nantly for overflow call centers and bill processing.
Exhibit 3 (above) provides a view of activities currently
outsourced and planned for outsourcing in the future.
Exhibit 3Outsourcing Opportunities Along the Value Chain
Source: Booz Allen Hamilton
7/28/2019 Outsourcing Trends in the North American Telecommunications Market
6/12
4
Evolving Boundaries of Network Activities
Given that outsourcing is not highly leveraged in net-
work activities today, the interviews focused on how
this area might evolve over time. In general, Service
Providers have been hesitant to outsource network
activities because they consider their networks to
be key competitive differentiators. However, given
the financial pressures they are facing, most Service
Providers are increasingly open to the idea of outsourc-
ing in this area. While Service Providers are hesitant
to use outsourcing for network-related functions in gen-eral, they are very open to outsourcing under specific
situations. Examples include force augmentation for
large-scale network deployments, technology migrations
requiring new technology expertise or capability to man-
age legacy networks, or lack of scale in certain geo-
graphical markets. (See Exhibit 4). In fact, over 70% of
executives interviewed either already outsource some
network activities, or would do so in the near future.
Not surprisingly, within the network area it is the low-
differentiated field functions that are the likely candi-
dates to be outsourced. Key reasons include:
Require limited differentiated technical expertise
Are big drivers of operating cost
Are in line with Service Providers propensity to keep
Exhibit 4Specic Likelihood for Leveraging Outsourcing, by Area
Source: Booz Allen Hamilton
Function Wireline WirelessSmall
Players
Force augmentation for large-scale
network deployments (e.g., 3G,DSL)
High High High
Network implementation, mainte-
nance and operations for legacy
networks (e.g., TDMA network in
GSM overlay migration, C2P)
Low Low High
Field operations and maintenance
for subscale marketsMedium High High
Network deployment, maintenance
and operations for emerging tech-
nology platforms (e.g., 3G, VolP)
High Medium High
NOC support (24/7 or after-hours
only)Low Low High
Exhibit 5Outsourcing Opportunities Along the Value Chain
Source: Booz Allen Hamilton
7/28/2019 Outsourcing Trends in the North American Telecommunications Market
7/12
5
planning/management functions in-house and con-sider outsourcing for field activities
Exhibit 5 (see page 4) provides a detailed view of
specific network functions where outsourcing will be
deployed today and in the future.
At a high level, Service Providers are most open toward
outsourcing installation and maintenance-related activi-
ties (see Exhibit 6). This is followed by new technology
deployment and network integration. There is limited
openness toward outsourcing engineering, network
operations, network design, and network planning.
Segment Differences
The analysis also provides a unique perspective into
how the various customer segments differ in their
propensity to outsource. In general (and also evident
from Exhibit 4, page 4), smaller players are most
open to outsourcing, and wireless players are more
open than wireline players.
ILECs
The ILECs show the least propensity of all segments to
outsource network-related activities. Their represented
workforce is a critical inhibitor, and there are other
cultural and philosophical obstacles. ILECs regard
their network as the core to their business, and are
unwilling to relinquish control over network activities.
Further, ILECs possess scale in most geographies and
are much less drawn to the scale benefits which often
form the basis of an outsourcing business case.
Inter-exchange Carriers (IXCs)/Long-Distance Players
The long-distance carriers have a more pragmatic
approach toward outsourcing. Represented workforce is
still a critical inhibitor, but they generally are more open
to outsourcing. The executives interviewed indicatedthat their primary objective is financial improvement and
that they are actively exploring approaches to work with
a represented workforce on outsourcing opportunities.
Wireless Players
Wireless players also have a pragmatic approach
toward outsourcing and are open to it. They do not
have represented-workforce issues or cultural and phil-
osophical obstacles. Yet they are wary of introducing
a represented workforce into their current organization
and are likely to a take toe-in-the-water approach,experimenting with focused out-tasking before engaging
in large-scale outsourcing.
Small Players
Small players are most open to outsourcing network-
related activities. Many smaller players lack the cul-
tural obstacles that contribute to the hesitancy on the
part of the larger established wireless and wireline
Providers. Smaller players do not possess the scale
and technical expertise to maximize the benefits of a
smaller network and believe that outsourcing theseactivities to large vendors allows them to create a level
playing field, capturing economies of scale with the
larger players.
Overall, the key concerns raised around outsourcing are
focused on quality of service, potential loss of flexibility,
and labor issues. Several large companies mentioned
past outsourcing experiences that resulted in loss of
flexibility and internal skill base as other obstacles.
Key Aspects of Outsourcing Arrangements
Once the decision to outsource is made, Service
Providers deploy specific contractual arrangements to
maximize benefits and minimize risks (see Exhibit 7,
page 6). For many participants, the most important
elements of an outsourcing deal are the financial ben-
efit and the duration of the contract. Wireline and wire-
less providers alike want to see a value proposition
that implies a clear and proven path to achieve 10% to
20% savings.
Exhibit 6Which Network Activities Would You Outsource?
Source: Booz Allen Hamilton
7/28/2019 Outsourcing Trends in the North American Telecommunications Market
8/12
6
In fact, this level of savings is a necessary condition for
an activity to be considered for an outsourcing arrange-
ment. There is also a clear preference for shorter-dura-
tion deals (up to three years) for multiple reasons:
Uncertainty around vendor capabilitiesPast bad experiences with five-year or longer con-
tracts (e.g., lack of flexibility)
Shorter contracts drive greater vendor accountabilityOutsourcing Decision Making
Key outsourcing decisions for large-scale deals are typi-
cally strategic decisions made by CXOs, with planning
and implementation then passed down to the function-al units. Often, smaller deals within established operat-
ing guidelines can be finalized by the regional or func-
tional unit heads, usually at the VP levele.g., local
field maintenance. Another key player in this process
is the procurement organization that usually supports
finalization and execution of outsourcing decisions.
Key Criteria for Outsourcers
One area where there is consensus involves the crite-
ria used for choosing outsourcers. The technical exper-
tise and financial stability of the vendor are at the top
of the list. Given that the quality of the network and
issues around the skill base are the key concerns for
Service Providers, it is no surprise that need for techni-
cal expertise emerges as the most important criteria.
In fact, almost 75% of the interviewees rank technical
expertise as their number one criterion. As one execu-
tive said, nobody wants to pay an outsourcer to learn
from us.
The second area of focus is the financial stability of
the outsourcer. Financial stability is usually associatedwith vendor size rather than profitability in spite of the
fact that profitability is the key enabler for ensuring
that a vendor meets its obligations in an outsourcing
arrangement.
While Service Providers are looking at a large range of
players, there appears to be an overwhelming prefer-
Exhibit 7Key Aspects of Outsourcing Arrangements Deployed
Source: Booz Allen Hamilton
7/28/2019 Outsourcing Trends in the North American Telecommunications Market
9/12
7
ence for functional experts (such as equipment ven-
dors) over generalist outsourcers.
Conclusion
Service Providers share a clear set of strategic priori-ties in response to an increasingly challenging market
and see outsourcing as a key business lever. While
Service Providers do most outsourcing in HR- and IT-
related activities, they are already involved in, or con-
sidering, the outsourcing of network-related activities
considered the key core competency of a Service
Provider. Increasingly, everything is on the table.
These trends have clear implications for Service Providers
wanting to maximize their outsourcing opportunity:
Identify current and future core and noncore compe-tencies
Develop a focused strategy to build best-in-classcapabilities in core areas
Challenge in-house performance for noncore activitiesand leverage outsourcing
As companies continue to reevaluate business models
in the face of a tough economic environment, outsourc-
ing will become an increasingly important competitive
lever for Service Providers in North America.
7/28/2019 Outsourcing Trends in the North American Telecommunications Market
10/12
7/28/2019 Outsourcing Trends in the North American Telecommunications Market
11/12
7/28/2019 Outsourcing Trends in the North American Telecommunications Market
12/12
Asia
BeijingHong KongMumbai
SeoulShanghaiTaipei
Tokyo
Australia,New Zealand,andSoutheast Asia
AdelaideAucklandBangkokBrisbane
CanberraJakarta
Kuala LumpurMelbourne
Sydney
BOOZ & COMPANY WORLDWIDE OFFICES
20040025/03/04 Printed in USA
2004 Booz & Company Inc.
The most recent list of our ofce addresses and telephone numbers
can be found on our Web site, www.booz.com.
Europe
AmsterdamBerlinCopenhagen
DublinDsseldorfFrankfurt
HelsinkiLondon
MadridMilan
MoscowMunichOslo
ParisRome
StockholmStuttgart
ViennaWarsaw
Zurich
South America
Buenos AiresRio de JaneiroSantiago
So Paulo
Middle East
Abu DhabiBeirutCairo
DubaiRiyadh
North America
AtlantaChicago
ClevelandDallas
DetroitFlorham Park
HoustonLos AngelesMcLean
Mexico CityNew York City
ParsippanySan Francisco