Pursuing non-linear cost reductions to improve competitiveness

Sponsored by Alcatel-Lucent

Service providers have always worked closely with their business partners to find ways to increase revenues, but today they're also looking for ways to improve profitability and free up cash to support future business needs and remain competitive. The challenge is not an easy one. The costs to operate increasingly complicated networks keep escalating, networks require continual, expensive upgrades to meet customers' demands for better services and applications, and the economy is still uncertain. 

Addressing the underlying costs of doing business is one way to tackle these economic challenges.  Typically at the end of the year, as service providers establish their forthcoming budgets, they will establish targets to reduce operating expenses as part of the key performance indicators they want to achieve in the new calendar year. Generally, a service provider will set a cost-reduction target of about 5 percent to 9 percent, which can usually be achieved by improving the performance of the business's existing assets, processes and programs.

Because of the intense competition to acquire customers in today's market, however, that cost-cutting formula is not always enough. At least one service provider has claimed that for every dollar of revenues generated by a new subscriber, another dollar is added to his company's costs of doing business. There is no margin in that scenario.

Some service providers have started employing a new model that takes a forward-looking and holistic approach to cost-reduction. This new framework considers each individual cost- or revenue-component in a business as interrelated to the others, not as a variable that exists in a business silo in isolation from the others. Financial performance is improved by adopting cost-saving solutions in conjunction with specific operational and management strategies designed to transform the cost structure of the business overall. Carefully done, the coordinated efforts can reduce operating costs by more than 5 percent to 9 percent. Because the cost-reduction process is tied to network management, the process can not only decrease costs, it can increase revenues and widen profit margins.

Alcatel-Lucent refers to this as non-linear cost reduction because it breaks the fixed, linear trend to cost reduction. Depending on circumstances of the business case in which it is used, the approach can yield a company double-digit and potentially geometric cost reductions that can be sustained over time.

Tim Broschuk, director of regional sales promotion and support in Alcatel-Lucent's business consulting services division, describes three key approaches that can be used to systematically change a service provider's cost structure to generate non-linear cost reductions. 

One approach is for the operator to restructure its multi-vendor maintenance agreements to a single contract. This gives a single vendor the responsibility of managing the maintenance and service level agreements for all OEM products used in the network, including all repair and inventory, technical support and field maintenance activities. Alcatel-Lucent has found that the efficiencies gained by this streamlined approach can reduce maintenance costs by 15 percent.

A second approach is for a service provider to outsource the management of their legacy network to a managed services vendor, who can assume responsibility for routine network operations and initiate best practices where needed. The approach can produce an average 15 percent to 20 percent reduction in operating expenditures for the legacy network while freeing up the operator's personnel to focus on developing their next-generation networks and services. 

A third approach is to strategically manage the migration from the legacy system to next-generation networks. Network modernization, conducted in conjunction with business changes needed to go to market with new services, can shorten the transition periods between networks. It can reduce the operating costs for the process by 15 percent to 20 percent, and allows the service provider to realize a faster return on investment. While migration challenges are particularly difficult, a well-managed network migration can decrease expenditures across the board of a service provider's operation, contributing substantially to the effort to achieve non-linear cost reductions and improving a company's overall cost structure while transforming a service provider's business.

These approaches are used in conjunction with business processes designed to reduce network complexity, which will also reduce costs; increase average revenue per user while maintaining margins; and identify opportunities to gain operational efficiencies through network assessment and consultation with the service provider.

Broschuk said Alcatel-Lucent has been implementing these processes with service provider first-adopters for about a year. In a typical engagement, Alcatel-Lucent consultants work closely with the service provider to understand their business needs, priorities and future plans before developing the framework for implementation.

"Alcatel-Lucent has made the investment in the process of methodology as well as the hard assets and automation by working with the first companies that have tried these things," he said. "I think it is appreciated because it is comprehensive."

An attribute Alcatel-Lucent brings to its partnerships for these services, Broschuk said, is that it can demonstrate how it mitigates risk.  "Any time you make a large change in a business there are risks. This is a key concern for service providers," he said. "The methods we use will accommodate and manage those risks as well."