The rush toward services

'Specialization - that's what it's all about,' sang Marilyn Monroe and Frankie Vaughan many years ago. Marilyn is not normally known for her business strategic expertise, but she couldn't have better described 21st century business.

In telecoms we see service providers are more and more becoming just that - providers of services - while vendors have discovered there's a better business in selling expertise than equipment.

Ericsson captured headlines and a boost to its stock price last month from its $3 billion, seven-year deal with 3 UK - probably the biggest ever network outsourcing.

It's a little-known sector but surprisingly mature, although Ovum points out that mobile operators by and large are not yet confident of it. But Ericsson alone has 55 managed services contracts worldwide, with more than 50 million end-user customers.

The outsourcing of network ops is all about cost and focus. Operators can put it on to a technology specialist to keep down the cost of equipment while retaining access to both the latest technologies and skills. The technology risk is reduced, enabling carriers to attend to their core business of selling telecom services.

For network vendors outsourcing is a bit more strategic. Their interest in services began during the tech drought, inspired by IBM, and led the way into IT services outsourcing.

Multi-vendor capability

For the big suppliers professional services is a high-margin business based on their deep and scarce level of technical and business expertise.  It's also a way of staying a step ahead of the cost-competitive Chinese, who don't yet have the ability to cope with the complexity of outsourcing.

It is a different business, however. For one, says Vince Pizzica, Alcatel's Asia-Pacific CTO, it means getting to know your rivals' equipment; multi-vendor capability is a must.

On the other hand, that means the chance to get in the door with operators that are not already customers - as Ericsson has done with 3 UK.

Depending on the nature of the actual arrangement, it also means a different relationship between carrier and supplier. The Ericsson-3 deal is conventional, where the vendor operates the networks and the IT while the carrier sets the strategic direction.

At a more intense level is Alcatel's relationship with Telecom New Zealand, where the supplier plays a role in the strategic planning and design. It works for a smaller carrier like TCNZ, which says it simply didn't have the resources to continually test and evaluate fresh technologies. 

The hardest part is setting the right incentives for the right kind of performance.  The basic idea is to align the performance of the outsourced service with that of the end-users, says Pizzica. 'We are trying to get to the point where we share the KPIs [key performance indicators],' he says.

Financially speaking, outsourcing deals tend to be longer contracts for vendors and help to iron out the lumpiness of the conventional tendering process. 'It gives us more certainty than a contract-based relationship,' said Pizzica.

The services market is certainly huge. IT services accounted for 48% of IBM's $96 billion revenue in 2004, growing at 11% for the year.

 

Growth tailed off a little last year, with just a 3% rise year-on-year in Q3.

Alcatel doesn't break out figures on its services business, but for Ericsson the business accounted for 17% of total revenue in the third quarter 2005, growing at 25% and with a 45% margin - nice work if you can get it.

The margins may not last for long. The vendor business is highly competitive, not to mention over-supplied. It won't be too long before ZTE and Huawei figure a way of playing in the segment. On the other side is competition from the IT players.

In any case, vendors standing on the sidelines have no choice, says Ovum. They need to offer professional services 'if they want to remain in the game seven or ten years from now, when the next telecom infrastructure replacement cycle commences.'

Robert Clark, a former group editor of Telecom Asia, is a Hong Kong-based technology journalist and analyst  ([email protected])

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