Telcos are under pressure to find new customers and bring new products and services to market. Unable to address these pressures with their own internal IT in a cost-effective and efficient manner, they are increasingly turning to IT services providers.
In 2013, we saw an increase in the number of outsourcing deals awarded by telcos to IT service providers, compared to 2011 and 2012. Current market conditions and the need to transform operating and business models are driving the trend. We expect even more outsourcing activity in 2014.
IT services providers looking to capture the opportunity should realize that cost reduction is not the main proposition that assures contract wins. The attainment of business goals is quickly emerging as the higher priority for telco clients.
Extending revenue opportunities, cost efficiency, and business transformation drive demand for more outsourcing
Our IT Services Contracts Analytics database shows an increased demand for IT services from telcos in 2013. The number of IT services contracts awarded by telcos grew by almost 16% compared to 2012. This compares to a 10% year-on-year decline in 2012 and a 24% decline in 2011. The pick-up has been driven by telcos’ need to drive top-line revenue growth, improve cost efficiency, and transform business models to pursue new revenue opportunities.
Revenue growth remains the number one challenge for telcos. Examining the revenue performance of the top 20 telcos’ first nine months of 2013, revenues declined by almost 0.5%. To improve growth, telcos need to reduce their opex costs and translate these savings to capex that drives new services and improves customer experience. Indeed, improved customer experience and greater
customer intimacy are at the heart of many telcos’ planned capital investments.
We estimate that opex costs account for more than 60% of telcos’ overall revenues. As a result, the telcos are left with limited cash flow for new investments that will support new products and services. The deployment of advanced technologies such as 4G puts telcos in a more competitive market. Competition is not coming from just their telco peers but from other service providers such as over-the-top (OTT) players.
These players (such as Skype and Google) provide voice, video, and/or data services in competition with the telcos’ traditional voice and data services, thereby reducing the telcos’ wallet share in the consumer market. Telcos therefore need to transform their business models to create new services and sustain their multi-billion dollar network investments.
The approach by telcos to solve these challenges is threefold
Telcos are attempting to solve these business challenges by leveraging outsourcing providers in several ways. They are focusing on improved customer experience, as this assures sustained revenues from their existing client base. They are improving end-to-end operational efficiency, and they are leveraging their existing assets to drive new service offerings to new markets. These efforts, however, depend on the maturity of telcos’ current business models and their experience in outsourcing.
For customer experience, telcos are keen to understand how they can mine subscriber data to identify the type of experience customers get from the services they consume. Telcos want to identify services that they can recommend to customers to improve their overall experience. To improve operating efficiency, telcos are focused on enhancing their business agility in terms of time to market and response to market changes. They need to transform their complex legacy systems to get them to operate more efficiently and support new processes. Telcos also want to reduce the number of outsourcing providers they work with, selecting a few strategic partners with the capacity to support the telco’s plans for growth.
Furthermore, telcos are looking to identify how they can create new service offerings for enterprises and hence extend their relevance beyond just providing network connectivity or data center capacity, and becoming service enablers. On that front, telcos are seeking to develop joint go-to-market strategies with service providers active in industries such as automotive, transportation, healthcare, and utilities.
Operational efficiency is now tied to achieving business goals
While cost cutting may be the initial motivator for many telco-IT service provider engagements, it is not the sole criteria. Telcos are becoming more focused on determining how they can achieve tangible business outcomes when they engage the services of IT services and outsourcing players.
The recent announcement by iGATE, an IT and BPO outsourcing company, of a five-year outsourcing deal with Orange Switzerland is an example of this new approach. The outcome-based deal is for the transformation and management of Orange Switzerland’s back-office IT infrastructure, and covers all enterprise IT systems, business intelligence, infrastructure and data network, as well as telephony services.
The business-outcome model ensures that the telco’s operating costs are tied to the attainment of actual business objectives. In addition, it acts as a measure to determine return on investment for emerging technologies such as cloud, machine-to-machine (M2M) and analytics.
Telcos’ business objectives need to be clearly defined and communicated when engaging with outsourcing vendors. While that may seem obvious, not all telcos seem to be able to execute on their business objective strategies, beyond immediately reducing costs. Some understand that they need to improve their time to market for new services or improve the customer experience, while others appear too focused on cost-reduction strategies to the exclusion of planning longer-term business goals.
Regardless, telcos need the support of a vendor that can help them break their current cycle and one that fully understands their needs, in order to provide proper guidance on how they can use IT services to help realize their goals. We see many IT services providers and outsourcers, with these needs in mind, aligning their portfolios around telco clients’ business outcomes.
John Madden is practice leader for IT services and Adaora Okeleke is an analyst for telco operations at Ovum. For more information visit www.ovum.com/