IP rules. After years of squeezing margins, IP has become the biggest driver of new demand for telco enterprise services. Carriers which have been swapping out lucrative ATM and frame deployments in favor of low-cost IP-VPNs, are finding they're getting orders from those same customers to help them manage their expanding IP networks and applications.
'You are starting to see convergence become a reality,' said Andrew Dobbins, Verizon regional VP for sales and services. 'It used to be that a greenfield site deployment would be designed and maintained in-house. Now there seems to be more of a willingness to out-task that network infrastructure to the likes of ourselves.'
Paul Gregory, director of marketing and solutions at Cable & Wireless, observes a similar trend. 'What we really see is a customer going from Layer 1 into a VPN environment. They convert to on-net voice and now they're trying to make efficiency gains with collaboration across the enterprise.'
The other factor - no surprise here - is cost. 'Our surveys show that squeezing out more cost savings continues to be an obsession of many enterprises this year,' said Adrian Dominic Ho, research manager for IDC's managed services and enterprise networks in Asia Pacific.
A managed services arrangement 'not only leads to cost savings but also gives them access to technology' that can drive productivity and increase competitiveness, a recent study by Ho found. The study showed that enterprise outsourcing and managed services of IT and communications in Asia Pacific (excluding Japan) were valued at $23.3 billion in 2006 and is expected to reach $36.2 billion in 2012, with a CAGR of 9.2%.
It's an impressive number, but the bulk of it is in IT. Indeed, for the tier 1 global carriers, enterprise services are a tiny part of their overall revenues. But it's a prestigious business, yes, and MNCs pay very well.
However, competition, the supply glut and the rise of IP have reduced the capacity business to low-margin commodity status. Telcos now talk about climbing the services value chain and offering some IT services as well. The question is, which ones‾
Gartner analyst Foong King-Yew urges caution. IT and telecom services are still quite distinct, despite some overlaps, he says, and calls on telcos to plot their strategies with care.
More leverage
Foong also noted that managed services business involves a good deal of supplier push. 'Among the top global carriers, there's less and less differentiation in terms of network coverage and so on. To really develop new revenue streams, many are pushing for so-called managed services as a form of incremental revenue.'
He agrees that one advantage of building a managed services portfolio is it gives a telco more leverage and contact points into a customer. But this is where new skills are called for. 'By and large it requires new ways of selling to the enterprises. Some regional carriers may not have the necessary expertise to really push products out into the market.'
Partnering is the obvious option, he says, pointing to SingTel's partnership with IBM to deliver security services in Singapore. (see related article on page 36) Cable & Wireless' vendor partnerships around the region are quite typical: it works with Cisco for IP telephony and IP contact centers and Datacraft for systems integration.
'Partnerships sit between the full-fledged IT services as sort of a halfway house. It's looked at as natural extension for telco. But the trouble with partnering is the margins are very low, and carriers really have to have a plan in place where they start acquiring their own expertise,' Foong says.
'We don't actually see telcos going into full-blooded IT services as something that is natural in the way that it is for IBM, EDS and Accenture. It's a very challenging strategy. It looks fine on paper, but when you execute, you find there are difference between IT services and telecoms.'
IT also differs from telecoms in a number of other ways, Foong points out. IT tends to require customization, whereas telecoms is more a repeatable services model. 'For telcos, you have an IP-PBX you can sell to many people. In IT services every enterprise tends to have different requirements.'
Difficult business
The payback is different as well, Foong notes. The ROI on IT services projects tend to be longer and lower than carrier service margins.
An instructive current example of the market is Dutch IT services firm Getronics, now the target of a takeover offer by local incumbent KPN. Last year, in buoyant economic conditions, Getronics' service revenue posted organic growth of just 2.3%.
'It's a very difficult business,' said Foong. 'Even though it sounds nice, we caution that for carriers that want to embark on such a strategy to go in with eyes wide open. A lot of things can go wrong.'
Verizon believes it has avoided these pitfalls by going down the acquisition path for expertise in the sought-after area of security. The US service provider has just completed the purchase of one of the word's best-known security firms, Cybertrust, which does a third of its business in Asia Pacific and runs a global center of excellence here.
Its domain expertise has the clout to take Verizon into new verticals, in particular banking and finance, Dobbins says.
'There's no way any individual organization can pull together all that expertise and that level of connection into the broader security community,' Dobbins told Telecom Asia. 'There's an understanding by banks that the threat levels are increasing and that they should not have to do it all themselves. Banks are starting to understand that they don't have to own and manage everything.'
Cybertrust's specialized knowledge of network security assists Verizon to build out its professional services practice. It's that kind of skills leverage that Foong sees as the logical way forward for telcos.
'Carriers have to go beyond selling bandwidth and competing on price and to go into selling value.' That means selling solutions and 'understanding the real needs of an enterprise and what the solutions that they are offering really mean to the enterprise. That's where carriers today are starting to acquire industry expertise.'
Underlying these emerging opportunities is the expanding IP network platforms and applications. While the underlying IP networks are simple, it is that simplicity that gives them the ability to support a range of different applications.
Says Dobbins: 'With the convergence of voice, video and data, and of telecoms and IT, you are getting decisions made by a smaller number of people within an organization and you are getting a level of complexity that's getting difficult to manage on what is essentially IT.'
There's also an organizational factor in the demand equation. Whereas an enterprise used to have a different manager for PBX, WAN and IT, today all of its ICT infrastructure comes under a single person.
'They're very cost-conscious. They're moving into new areas, and they're seeing a continued benefit in not having to own all that infrastructure,' he noted.
The carriers say the areas in demand are security, video-conferencing and unified communications (see related article on page 20).
One that's gaining a lot of attention is applications performance - being able to ensure that certain applications perform at enhanced levels at certain times.
'Customers are becoming more knowledgeable about application performance. We are finding they need to enhance performance of some applications across their networks,' says Cable & Wireless' Gregory.
Conferencing of all kinds is now heavily in demand, both Gregory and Dobbins agree. It's partly driven by the integration of IT apps into conferencing platforms, partly by the need to cut travel budgets, in some cases - such as Verizon's client EDS - as part of a carbon neutral program.
Perhaps the biggest change is not what the service providers do, but the way they do it. Telcos have long talked the talk about being customer-focused, yet traditionally they have been more focus on their networks, their own product sets and their rivals' products than customer needs.
Cora Chu, VP of marketing & communication at PCCW Global, says the Hong Kong telco is prepping for the Olympic Games next year, where it has the exacting task of running services for broadcasters and media.
They need a service provider that is aware of what is happening in their network and can communicate that to them, she says. PCCW's NOC will look into network every 15 minutes and run a traffic light warning system -'when the yellow light is on, we escalate,' she says.
'We are providing predictive management capability with frequent reports,' she said. The aim of that is not just to report on the state of the network, but to keep the customer informed. 'We have to manage the expectation of our customers,' she said. 'It's all about how you manage the customer.'
Gregory talks about building an 'emotional connection with customers.'
'We are a communications service provider, and the key is service. If you look at the airline industry, the reason people choose between Singapore Airlines and Cathay is typically something to do with service. I think a lot of service with the carriers deliver is similar, and differentiation is the key. It's more about service excellence, and the value that we add.'
Still, one of the issues service providers do have is in billing models. Telcos have usually billed for the size of the pipe, or class of service, plus an SLA. Professional services means hours billed. The billing, like the business, is 'still in its infancy,' says Dobbins.
He says the options are total outsourcing, or TCO model, or fee-for-service model. In one experiment Verizon has contributed research staff to the R&D effort at an Asian enterprise. Verizon sees it as an investment, says Dobbins.
For all that, he thinks the cards are falling right for telcos in the enterprise segment today. 'For managed services, we are really at the tip of the iceberg.'