Vendors back away from managed services
As a result, leader Ericsson has become, by some measurements, the world‘s second largest operator, in terms of the number of users on the networks it manages directly.
But there is a major shift in the financial balance of a business when it moves from equipment to services contracts, with huge up-front costs (like taking on the cellco‘s staff), staggered payments, shared risk and squeezed margins.
This has robbed managed services of their luster for some players, especially those without the scale of Ericsson or Huawei. Nokia Siemens presented its recent exit from an outsourcing pact with Brazilian cellco Oi as a positive, because it will cut its workforce by 3,500, rather than as a failure. And Alcatel-Lucent, also looking to make stringent cost cuts, is reviewing as many as a quarter of its portfolio of managed services deals, according to its chief financial officer Paul Tufano. It currently has 68 managed services contracts in place but as many as 17 could be unprofitable and 15 are already being re-evaluated.
On the firm's recent earnings call, Tufano said that 25% of Alca-Lu’s deals will either be renegotiated, exited or not renewed when the initial term expires. He added that “many” of those under review are due for renewal between now and the end of next year and those in most doubt are the ones with a heavy focus on network maintenance, a relatively low value business where there is intense price competition between suppliers.
Alcatel-Lucent‘s managed services business delivers annual revenues of about €1 billion and has about 14,000 staff. But Tufano said annual managed services revenues could fall by as much as €300 million, while like NSN, he pointed out that ending some of the deals would reduce headcount – and would be additional to the 5,000 job cuts already scheduled as part of the company‘s stepped-up turnaround plan.
As well as backing away from the lower value end of the sector, Alcatel-Lucent also aims to spread its resources less thinly and concentrate on its top 60 geographies – it currently does business in 130 countries but 96% of its revenues come from those 60 markets. "We can't be in the bottom 40 markets that deliver 1% of the revenues,” chief executive Ben Verwaayen said on the quarterly call.