Outsourcing: Cost-effective modernization tailored to the carrier's business model

Jul 10, 2002 12:00 PM, Mark Farmer

In challenging economic times, carriers are more focused than ever on their balance sheet. How will they increase ARPU (average revenue per user) and more importantly drive toward APPU (average profit per user)? The investment community wants immediate returns and is not satisfied with businesses that grow spending but do not keep a holistic view on the balance sheet.

Many of these pressures are counter to each other. To launch new services requires investment, to improve interactions with customers requires investment, and modernizing infrastructure requires investment. With investment comes risk. Modernization requires significant upfront investment in hardware, software, training and floor space, as well as ongoing operational costs of the resources required to maintain systems. The consolidation of legacy onto a single modern platform is also a very complex and risky process. This environment along with restricted capital availability is challenging organizations to explore all avenues for increased operational efficiency to leverage the top line and bottom line of the balance sheet.

Outsourcing of applications provides a solution to cost-effectively modernizing and consolidating your legacy infrastructure. By contracting a third party to operate some or all of your IT operations a carrier can expect to benefit from:

• Controlled costs

• Improved operations

• Smarter allocation of resources

This article will explore how outsourcing as a solution delivery model can deliver these benefits.

Outsourcing basics

Faced with the need to modernize and consolidate legacy systems, carriers are constrained with capital spending limits and availability of expert resources to operate and maintain a new system. Outsourcing as an alternative provides a delivery model of IT solutions where an external supplier manages a portion or all of a carrier's business support systems (BSS) and operations support systems (OSS) infrastructure. Outsourcing contracts typically spread the cost of the service over the lifetime of the contract resulting in predictable cash flow for the carrier with less upfront cost. In cases where billing systems are at the heart of the contract, the carrier payments are usually linked to the monthly number of subscribers billed. This ensures that expenses are directly synchronized to growth. Capacity planning and investment ahead of growth is the responsibility of the outsourcing vendor allowing shorter time to revenue for the carrier and reduced risk of over investment ahead of actual growth.

Modernization of infrastructure and consolidation of legacy for reduced cost

Carriers are faced with legacy systems that are becoming outdated and slow to adapt to the intense competitive pressures of the market place today. As new lines of business emerged in the past, existing infrastructure that was not able to adapt resulted in new systems being developed tailored specifically to that new line of business. The result is a multitude of legacy systems each requiring dedicated maintenance and support teams and unable to leverage efficiencies of common systems across all lines of business. The need to leverage convergent infrastructure across all lines of business and maintain a single view of the customer is crucial both for operational efficiency and for improved customers interaction.

Consolidation of many legacy systems is a very complex process. While modernizing it is crucial that current systems continue to keep the business operating and gathering revenue. A well-planned conversion process is critical to ensure that there is minimal interruption to existing and new customers of the carrier as the migrations occur. This complexity introduces significant risk and requires highly skilled resources to be able to manage it successfully. These skills are not typically readily available within the IT organization of carriers. Carriers are then required to look to third-party organizations that can provide the resources with proven skills and a track record of delivery to manage and share in the risk of this process. Outsourcing provides a risk adverse means to achieve this conversion with highly skilled resources that have done many similar projects. This must be evaluated closely in any vendor due diligence and ensure that delivery promises are backed by a credible organization with strong incentive to live up to commitments.

Single-vendor accountability

Breadth of outsourcing solutions and skills is key. Many suppliers provide focused point solutions that will reduce costs of a portion of operations, but not leverage the efficiency of a seamless end-to-end solution. The portfolio of products being offered is key. Do solutions only focus on invoice production? Billing? Rating? Or do they also offer analytic tools for things like churn, fraud, revenue assurance, campaign management, data mining?

To get all of these solutions may require engaging with several vendors lessening the efficiencies to be gained from single point of accountability. Multi-vendor solutions often result in the lowest common denominator effect as full capabilities in back office aren't exposed to front office and systems with fragmented data stores that must be synchronized and maintained individually. Being able to purchase capability though as required and as capital permits is vital and all or none end-to-end solutions will not always provide the best leverage of current investments for carriers. However modular purchases should be looked at in the strategic context of growing to a larger end-to-end integrated solution over time.

Adaptable systems and business models

The systems being outsourced must also be able to adapt to rapid business changes including the rapid introduction of new services, automation efficiencies through improved order handling and problem resolution, to name a few. When carriers start considering initiatives to modernize their systems, outsourcing provides an opportunity to rapidly leverage the benefits of modernization through experienced personnel who are already familiar with the systems being managed.

One size does not fit all. Often outsourcing providers are limited in their ability to adapt an appropriate business model for the carrier. Some offer only service bureau implementations with vanilla billing solutions. These are cost-effective but provide less leverage for differentiation of service over others that also use the same service bureau. Large operators look to BSS and OSS infrastructure as a strategic weapon. For those carriers, solutions must be customized precisely to their needs while still delivering the costs benefits and operational efficiencies from an outsourced operation.

It is vital that the business model be adapted to the carrier rather than the carrier trying to adapt to the outsourcing vendors limitations. An optimized blend of the carrier's existing assets and expertise into those of the outsourcing supplier should be developed. The right balance is determined by focusing on each individual customer's business needs and tailored primarily in three main areas:

• Ownership of the assets and resource need for outsourcing services may be leveraged to achieve financial advantage in such areas as facilities, staff and software licenses. Economies of scale for an outsourcer may provide greater purchasing power than individual carriers

• Responsibility for each operational service is assigned to reflect the level and method of control required by the carrier

• Location of the facilities is determined with a view to maximizing benefits from the respective assets of the carrier and the outsourcer.

In today's economy flexible vendor business partnerships can be a key strategic advantage to cost-effectively modernize operations.

A strategic partnership managed through SLA

While the financial control is an obvious benefit to the carrier, operational control must be put in place. A service level agreement (SLA) between the carrier and the vendor guarantee the operational level of performance of mission-critical systems that are now run by an external organization. The SLA becomes the definition of the strategic partnership between companies instead of arms-length customer-vendor relationships, which may lead to conflicting interests over time as the business changes.

SLA's are often used internally within organizations to define "customer relationships." This same level of cooperation can be developed with an external supplier if the critical business drivers are clearly identified and expectation targets used to identify compensation. Below expectations, the vendor will be charged penalties accordingly and when the vendor meets or exceeds expectation, bonuses can be offered. When the bottom line of the supplier is directly tied to meeting or exceeding customer expectations, there is a resulting total commitment to deliver that would be difficult to match even within the carrier's organization. To be effective, a true strategic partnering approach must be taken to ensure success.

Smart resource allocation

Strategic focus of company excellence is a key consideration in today's environment. There is recognition a company can't be excellent at all things. Some feel that they can maintain and operate their own systems more effectively and with greater competitive advantage than their competitors, and so they choose to have systems delivered into their data centers, and once integration is done the system will be turned over to their operations teams who will maintain the system and operate it. With resource churn, training costs and upfront capital outlays, however, other carriers feel better served by outsourcing IT operations that while mission-critical are not their primary leverage for execution excellence. From this they can then gain cost reduction through normalizing the costs across the entire project lifecycle instead of front-end loading everything with risk of return coming later in a project lifecycle. Through staff augmentation, shared asset ownership to completely outsourced operations at remote data centers, each carrier is unique and will be better served by being able to tailor their vendor partnerships.

So when does outsourcing make sense?

When a communications provider is focused on the ability to modernize its infrastructure for improved operational performance and economies across lines of business. All of this is achievable while controlling predictability of costs and ensuring less risk throughout the lifetime of a project. By tying cost to growth in the business, an operator can keep costs in synch with actual growth and minimizing the need to invest ahead of revenue. Equally important is the freedom to allocate resources intelligently to focus on core business innovation while having world-class telecommunication professionals accountable for management of your operations.

Mark Farmer is Director of Product Marketing for Amdocs.

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