How to build a virtual telco

Telecom service providers today are chasing new opportunities to bring network-delivered managed services and solutions to a variety of markets and industries — a golden opportunity to move further up the value chain and be a more strategic partner to their customers.

Just as importantly, that same outsourcing dynamic is affecting how they run their own businesses, as service providers increasingly turn to vendors to run key portions of their enterprise — even including the “crown jewels” of network operations, field operations and engineering — on their behalf.

Deals that find traditional and new upstart service providers outsourcing key parts of their operations certainly aren't new. In a recent analysis, Yankee Group uncovered more than 800 outsourcing deals inked by more than 300 service providers from 2002 to 2008. The pace is only quickening, Yankee found, as it forecast spending on outsourced and managed services by telcos to grow from $16 billion per year today to $32 billion annually by 2013.

The decisions of what to outsource and who to partner with might be the most important ones service providers are making today, said Camille Mendler, analyst with Yankee Group, noting that such deals “challenge ingrained perceptions of what is core and non-core to telecom operators' business activity.”

Those operational decisions help to change the cost structure of today's network operators, but they also lay the groundwork for new business models and service delivery paradigms that are critical for not just growth but survival.

“Most operators are beginning to focus more on service differentiation and serving their customers than how they will be running their network,” said Ashish Chowdhary, global head of managed services for Nokia Siemens Networks. Managed services deals “free up time for more strategic issues and how they can really distinguish themselves in the marketplace,” he said.

Outsourcing and managed services deals typically fall into four broad buckets: network operations; business processes, such as call centers or human resources; business/operations support systems; and IT and data center management. In each case, deals typically involve some level of replacement staffing, on-site hardware, and software installation and maintenance. But increasingly, as vendors set up dedicated and centralized operations centers of their own that can handle multiple operator deals, such outsourcing arrangements are becoming more and more “virtual,” with vendors literally being able to offer operations-as-a-service, further cutting costs by improving the scale of such offerings.

In recent months, momentum seems to have gathered even further around providers turning over more crucial elements of their operations to partners, particularly in the U.S, where operators have lagged behind their global counterparts.

In July, Sprint signed a seven-year deal topping out at $5 billion to turn its network operations — including more than 6000 Sprint workers — over to Ericsson, the largest deal of its kind for a U.S. operator. The mobile operator, which has lagged behind competitors, made the bold move to plow savings — estimated at between 10% and 20% over running the network itself — to expand its network coverage and improve customer service.

“We're going to focus our attention on improving the customer experience, expanding coverage, improving the quality of the network and bringing new open devices, applications and services and integrating them on that network,” said Steve Elfman, president of network operations and wholesale for Sprint, in announcing the deal.

Before the Sprint megadeal, the most notable U.S. pact was Embarq, which last year outsourced its network operations to Nokia Siemens Networks. NSN will complete the takeover of Embarq's networks operations this year, according to Alan Petry, the vendor's North America head of managed services, who noted that the level of outsourcing activity among U.S. vendors is ramping up. “The tipping point [in the U.S.] is upon us,” he said. “I don't know if we're right before it or right after it, but the level of activity is really high in the proposal and due diligence phases.”

Embarq has merged with CenturyTel since first inking the network operations deal, but CenturyTel is still maintaining the original Embarq agreement with NSN.

Overall, outsourcing has been much more accepted outside the U.S., with recent large deals including Vodafone UK turning over mobile network operations to Ericsson; Orange Spain giving the reins of its network to NSN; and BT outsourcing its entire international voice termination business to Tata Communications.

But just because network operations outsourcing deals are proving popular doesn't mean they'll be successful, experts say. Some of the industry's large back-office “transformation” projects, many of which have the same feel as today's network managed services deals — billions of dollars on the line, a primary vendor partner on the hook and loads of hype when the deals are signed — ended up falling short of their goals. So how can service providers ensure success on the network side?

One approach by vendors is to learn from each subsequent deal by setting up standard operations “playbooks” and operations centers that can improve and scale over time. For instance, NSN starts any project based on a standard operating model and benchmarks derived from previous projects. In addition, the vendor has staffed up and grown two global network operations centers — one in India and one in Portugal — to deliver standardized operations managed services around the globe, NSN's Chowdhary said. “We have a very standard way of doing things,” he added. “Where we have to customize, we will, but by doing lots of projects we're able to achieve true economies of scale.”

Another approach is to focus on pieces of the business that are firmly commoditized, such as in the BT/Tata voice outsourcing deal, in which the service provider turned to Tata's wholesale arm to handle a part of its business that, while still vital, has been fully commoditized. “In those kinds of deals, where there are already low margins, we can really help a service provider take advantage of our low-cost infrastructure and existing termination relationships,” said Srinivasa Addepalli, senior vice president for corporate strategy for Tata. Off-shoring to low-cost regions, central to Tata's strategy, is becoming a central part of any outsourced or managed services relationship, Addepalli said.

Yet analysts warn that outsourcing and managed services are not a panacea. Yankee Group's Mendler warned that “outsourcing can bring rapid balance sheet results, but that doesn't automatically translate into long-term business value.” A short-term financial focus can be especially tempting during a downturn and also when facing an environment in which competitors are gaining attention from trumpeting outsourcing savings.

Service providers must avoid such shortsighted thinking at all costs. After all, experts say, the ultimate strategic vision for becoming a “virtual telco” should be to turn the organization's attention to more pressing issues — creating new services, improving customer attention, winning new markets — not just slashing the bottom line.

TELECOM OUTSOURCING DEALS

Operator	Partner	Deal	Why it's important
Sprint	Ericsson	Up to $5 billion deal to run mobile operators network operations	Signed in July 2009, largest U.S. network outsourcing deal to date — will it set precedent for others?
BT	Tata Communications	$1.5 billion agreement has Tata terminating all of BT's international calls	Via a wholesale arrangement inked this summer, yet another way for large telcos to cut costs and improve service for commodity offerings
Embarq	Nokia Siemens Networks	Inked last summer, NSN is nearing completion of project to take over Embarq NOC and 250-plus employees	Pioneering U.S. land-line deal didn't open the floodgates but showed what's possible
Bharti-Airtel (India)	IBM	10-year, $750 million deal focused on IT and data center outsourcing	Inked in 2005, this deal set the bar for how new providers in emerging regions could change the game