Operators look to outsourcing as a way to reduce costs, transform the network

Historically, outsourcing has involved mobile operators, primarily in Europe and Asia, offloading their network operations in order to bring their balance sheets quickly up to snuff and drive the bottom line. But this new world of data consumption and cut-throat competition, along with the maturity of the outsourcing market, is ushering in a longer-term view of outsourcing--a business transformation view that not only addresses costs but business value.

"A vendor can nearly always be found to undercut internal operational costs--and how attractive if they can also rebadge employees, or pay a success fee upfront to win the business," said Camille Mendler, vice president with the Yankee Group. "While this might improve the bottom line, it won't drive top-line growth. That's the real issue that operators must address."

It's a new world for the mobile operator community, one characterized by aggressive operator consolidation, slower revenue growth, commoditization of voice services and the explosive demand for mobile broadband services. The situation has operators scrambling to add more capacity while remaining creative on the marketing side.

For many operators, the cost of delivering services is increasing faster than revenue, said Andreas Herzog, president of Alcatel-Lucent's managed services division.

"Operators are finding that single-digit percentage reductions in expenses are simply not enough when it comes to meeting customer expectations for personalized multimedia services," Herzog said. "Cost reduction is still an important part of managed services, but the larger picture is helping operators meet their overall business objectives and growing their revenue."

Indeed, the main driver for network outsourcing remains operational expenditure savings, but other managed services capabilities such as new service creation and capex savings are also important drivers, said Informa Telecoms & Media principal analyst Kris Szaniawski. He projects managed services will see an annual compound growth rate in the high teens, moving from a $13 billion market in 2009 to a $28 billion market in 2014. Network-led solutions will continue to dominate.

"We're not expecting managed services to lose their appeal," Szaniawski said. A recent Informa survey indicates about 60 percent of telecom companies are planning to outsource within the next 12 months to 18 months in three areas: the network, services--such as application enablement--and a newer category involving consulting and advisory services. Of course, these three areas often overlap.

Outsourcing has become a financial bright spot for network vendors such as Alcatel-Lucent, Ericsson and Nokia Siemens Networks. For NSN, managed services represent about 45 percent of the vendor's revenues. However, the norm is about 25 percent, Mendler said.

"The focus on managed services going forward is really about evolution," said Peter Jarich, vice president with Current Analysis. "At the base line, the standard services are there, such as managed care, quality assurance, managed supply and operations and multi-vendor management. Beyond that, vendors really want to go higher into things such as applications and monetization of services--all of those sticky topics that nobody has their head around."

Herzog said the entire concept of managed services has changed. "No longer can managed services be limited by operationally focused and network-centric," he said. "The network-centric approach was sufficient in an environment where point solutions, cost savings and the bottom line were primary considerations. But the next generation of managed services out of necessity shifts emphasis significantly to focus on the end customer's services."

There is some indication of this movement. Indian operator Reliance created a joint venture with Alcatel-Lucent that made the equipment vendor a strategic partner that not only took over operations and maintenance but also helped the operator identify new business opportunities.

"I think our biggest focus was to make our opex predictable," said Sandip Biswas, head of Reliance's managed network division. "We wanted to be increasing our operational efficiency as well by bringing in world-class processes."

Karin Yates, head of marketing with Alcatel-Lucent's services group, said one specific process change Alcatel-Lucent brought to Reliance was Quality of Service (QoS) tools the vendor already had experience with in other markets. "They never had any SLAs on measuring performance of the network," she said. "Reliance is now evaluating and measuring QoS on an ongoing basis to achieve a higher level of customer satisfaction."

Outsourcing the network is a nascent trend in the U.S. Sprint Nextel put the first stake in the ground with a massive $5 billion, seven-year deal with Ericsson in July. Bob Azzi, senior vice president with Sprint's network business, said the immediate bottom line was not the driver for Sprint's move into managed services.

"We already knew how to take short-term costs out of the business," Azzi said. "We had made the decision in January to make a force reduction ... What we were really after was the investment Ericsson brought to the table that would ensure long-term unit cost improvement."

The release of day-to-day network operations means Sprint is free to focus on launching competitive services, getting closer to the customer and enhancing the user experience. "We're just starting to scratch the surface to make this a reality," Azzi said. "2010 will be an exciting year as we start to see the acceleration of the business process and improvement start to take hold."

Sprint's foray into network outsourcing was no simple task. Azzi admits the operator knew little about the world of managed services initially, but spent more than a year educating itself by talking to experienced operators in Europe--even taking a trip through Europe--and starting an RFP process that went several rounds.

"You really have to be willing to challenge your operating model," Azzi said. "This is a dramatic shift for any operator. What I firmly believe is I'll deliver a more guaranteed experience for customers at a lower cost. Customers will see this difference over time."

Meanwhile, Verizon Wireless wants no part of network outsourcing. "I am not a believer in outsourcing," said Tony Melone, Verizon Wireless' senior vice president and chief technology officer, during Ericsson's Capital Markets Day earlier this year.

Melone said Verizon Wireless has long worked to promote the quality and reliability of its network--he trumpeted that the carrier has spent $50 billion on its wireless network since 2000. Thus, Melone said, outsourcing its network operations wouldn't fit with the reliable-network image the carrier has spent billions pushing onto consumers.

Still, analysts aren't convinced Verizon or other major U.S. players will totally shun managed services. The transition may begin with specific services such as network maintenance.

"Automating some processes creates a proposition that even Verizon or AT&T can't match from a financial perspective," Mendler said. "There will be further deals, but maybe not quite as large (as Sprint's)--and probably more discreet."