What's it worth?

Operations support systems are the lifeblood of the telecommunications carrier industry. They play a consistently crucial role in quality of service, efficiency and the cost-effectiveness of operations.

In 1999 alone, carriers spent $10 billion on OSSs, and every year some 3% of total carrier revenues will be paid to OSS suppliers. All of that spending for a single, crucial cause: obtaining the software that makes it possible to maintain and continuously improve telecommunications operations.

For $10 billion, here's what you get: all the software and support necessary to bring new customers and services online, manage existing subscriber's networks, handle customer care and billing and ensure the reliability of carriers' collective networks. In short, an operationalized business.

The demand for commercially provided OSSs once was modest. During that time, incumbent carriers didn't hesitate to create their own software, and there were simply fewer buyers. During the mid- to late-1990s, however, more backbone network operators have emerged, in addition to more competitive local exchange carriers, Internet service providers and wireless carriers. In the U.S. alone, more than 1000 new companies have emerged, each needing multiple OSSs. Quickly.

Few of those emerging carriers have the appetite to create their own OSSs. Today, dozens of software companies sell specialized solutions to the carrier market. Regardless of the application, alternative suppliers - and lots of them - exist. Competition is intense. Because many buyers are young companies, and hence first-time customers, they grapple with a myriad of buyer issues. A road map to the issues would be helpful for them when making purchase decisions.

At the same time, many of the suppliers are young businesses. Coming of age in recent years, they all are angling to sell to a new breed of carrier - and they have questions about the prospective purchasers.

Given the uncertainty, The Eastern Management Group sought to clarify many issues facing buyers and sellers. The firm undertook a five-month study, delving into the carriers that are purchasing OSSs and the many software companies that sell them.

>From the buyer's perspective, the study examined the life-cycle cost of >ownership, the advantages and disadvantages of point products and OSS >suites and the project management practices best suited to OSS deployment. >The firm probed software developers to determine whether carriers base >decisions on first cost or life-cycle cost and how carriers make their >decisions. Some 44 carriers participated in the study, which assessed 82 OSS implementations and bids from 30 vendors (Figure 1). The installed base of OSSs included in the study reflects the following distribution of applications: service management, 25%; network management, 25%; element management, 15%; customer care and billing, 15%; interconnection, 13%; work force management, 4%; and inventory management, 3%. More than 95% of the OSSs included in the study had been installed for three years or less, with a mean average of two years.

Table 1 lists some of the vendors that provide OSSs in these application areas. Systems provided by a number of these vendors were represented in the study, which primarily focused on the newer market entrants.

Those hidden costs

There is more to purchasing an OSS than laying proposals side-by-side and checking out the numbers. The companies surveyed that just looked at first costs had the most disquieting stories to tell. The study revealed that there are six hidden costs to assess before doing any buying: poor software quality, extensive internal support requirements, inadequate flow-through performance, the high cost of scaling, complex interface requirements and insufficient system functionality.

Poor software quality was a recurring theme among respondents. Many reported that their resources were overwhelmed by the need for frequent installation of patches to fix bugs, which in turn required full regression testing. Some respondents reported receiving patches for bugs on a weekly basis and that the drain on their resources was so great that they renegotiated contracts to stay one release behind.

Routinely, carriers have found it necessary to devote substantial internal resources to support newly purchased OSSs. Unsuspecting purchasers have awakened to 50% to 100% budget overruns, and their comments reflected dismay. "The seller expected much of the work to be done by us, and we do not have enough staff," said one buyer. "They expect the buyer to do a lot of programming," added another buyer.

Good flow-through performance means that OSSs will indeed automate work steps otherwise performed by humans. Inadequate flow-through performance forces the carrier to deploy additional internal resources to pick up the slack. Several carriers professed dismay with their flow-through rates, citing numbers around 25% when compared with the 90% rates that some systems can reach.

The ability to scale is one thing; the cost is quite a different matter. Many interviewees did not fully assess the cost of scaling, only to learn later that additional license fees - incurred as the business grew - could escalate expenditures three- or four-fold. One respondent commented that his company has had to scale and re-scale systems a number of times.

Half of those surveyed blamed interface requirements for the cost overruns they experienced. One OSS user indicated that the complexity and sheer number of interface requirements was a surprise and had been underestimated by a factor of two or three. Sometimes, additional costs are incurred in connection with interfaces that are thought to be covered but in reality are not. One carrier said the OSS it bought from a hardware vendor would not support a competing hardware vendor's network elements, although the carrier expected it would.

Finally, sometimes system functionality is a source of unexpected costs when it is less than or different from what the carrier requires or expects it to be. Under these conditions, additional purchases or development work is necessary to acquire what is needed. Clearly, there are costs associated with OSS ownership that are not obvious during the bidding process. If a carrier does not factor these hidden costs into its evaluation of OSS bids, it can be burned - and many have been.

Pitfalls in the OSS purchase decision process

As a result of the hidden cost phenomena, carrier executives often are lured into three traps when making OSS purchase decisions: the first-cost trap, the best-of-breed trap and the near-term solution trap.

The first-cost trap. The highest priority for a start-up CLEC is time to market. These companies are under pressure to deploy the network infrastructure, begin operations and generate revenue. The executive leadership of these ventures is not always knowledgeable about OSSs and the impact they can have on the quality and efficiency of operations. As a result, the early OSS budgets tend to be limited. To exacerbate this problem, sometimes the individuals responsible for OSS implementation also are somewhat new to the world of OSS. In this low-budget environment, OSS buyers tend to buy primarily based on first-cost price, swayed by promises of support and future capabilities. In many instances, the growing project scope can affect actual first cost significantly. For example, one carrier noted that its vendor's sales approach included positioning the base software right-to-use fee at $150,000, but final requirements escalated the right-to-use expense by four times that amount.

In virtually all cases, a long-term OSS plan has not been developed as a framework for purchases and integration. However, once implementation starts, buyers receive a rude awakening when they realize how much internal support will be required to get up and running.

The best-of-breed trap. One approach that new carriers have taken to differentiate from other carriers is to purchase and integrate best-of-breed OSSs. However, often the definition of a best-of-breed OSS is simply one that fits the buyer's criteria better than its competition and may not be considered the best by other purchasers, according to The Eastern Management Group. Moreover, the task of integrating these point products can be underestimated. Some carriers surveyed noted that point solutions could have higher implementation costs than suite solutions (Table 2).

The near-term solution trap. Often, OSS purchase decisions are made with strong emphasis on near-term needs without regard to the long-term impact of OSSs on the efficiency of day-to-day operations. However, once the company begins to grow its customer base and expand its service offerings, scalability and ease of integration issues become paramount. At this point, companies may resort topiecemeal fixes to work around the problems. For example, middleware is often implemented in lieu of replacing older OSSs. But some carriers reported that this could begin a chain reaction of fixes, upgrades, personnel additions and license add-ons.

Emphasizing near-term goals also can inadvertently affect a carrier's market value. The study uncovered cases in which OSS integration difficulties adversely affected a suitor's acquisition bid. On the flip side, general knowledge of significant OSS issues could adversely affect customer acquisition/retention, profitability and market valuation. As a result, unhappy OSS customers sometimes are inclined to quietly stick with inadequate products while trying to pressure their vendors to tailor the products into what they really need. In such cases, the carrier usually winds up spending more money than if it simply phased out the problematic products and chose a new solution.

What to do

Based on the results of the five-month study, The Eastern Management Group devised several recommendations on purchasing OSSs:

- Think life-cycle cost, not first cost. Clearly, several components influence OSS cost of ownership, and some are not obvious. Buyers should be sure they understand the true cost structure associated with ownership of competing OSSs so they can compare vendors' offers effectively. The outline of the components typically included in first cost and life-cycle cost found in Table 3 might be helpful in sorting this out.

- Insist on independent verification of quality. There are a number of options for accomplishing this. Buyers may independently identify prospective vendors' existing customers and solicit information on their track records. Or, buyers may rely on assessments provided by independent certification bodies, such as ISO 9001 or Carnegie Mellon's Capability Maturity Model. - Get a thorough education about OSSs before making purchases. Regional Bell operating companies often are knocked for being "old school," but no one has excelled more at harnessing the power of OSSs. Using OSSs, the RBOCs have driven the flow-through rates for POTS up to about 90%, the flow-through rates for some enhanced services above 70% and they have driven down their cost per line. Although new service providers may not have the same needs as RBOCs, they must be as educated about their OSS purchases.

- Develop an OSS strategy with a medium-term view. New carriers should plan three years in the future because OSSs that meet immediate needs are not necessarily well suited for supporting medium-term goals.

- Keep in mind that "best-of-breed" is not a differentiation, best-in-class service delivery is. Claims of having "best-of-breed" OSSs are widespread, so the claim by itself is not a differentiation. Meanwhile, if a carrier acquires a track record for turning up service faster than competitors or for operating a better network surveillance process, that company will gain a leg up on the competition.