Reinventing the Communications Equipment Provider

Dec 5, 2001 12:00 PM, Scott Brighton

The economic downturn from the events of September 11 has rocked the communications equipment provider industry. Stalwarts have been pushed to the brink by revenue declines that have approached as much as 40 percent year-over-year. And there does not appear to be any immediate relief in sight -- early indications are that carrier spending will total about $235 billion in 2002, roughly a 15 percent decline from 2001 levels.

In this difficult environment, equipment providers are forced to drive unprecedented change and reinvent the economics of their businesses. These changes will necessarily have implications for service providers and the manner in which they procure critical components for new network services. Understanding the nature of these changes -- and the key economic drivers that are creating them -- will better arm service providers in their future business relationships with equipment providers.

A manufacturing industry

The equipment provider industry has grown up as a traditional electronics manufacturing industry. As such, the industry has always had a substantial amount of capital tied up in both manufacturing assets and in-process and finished goods inventory. Historically, this has not posed a significant problem because demand has almost always substantially outpaced supply. As little as 2 years ago, 9- to 12-month lead times for product were not unheard of, and equipment providers often had to struggle to keep up with customer needs or risk their customers turning to alternative vendors. But as the industry has pitched into a downturn and demand has receded, the capital required to fund current equipment provider business models has become an enormous weight on the balance sheet. Tying up huge amounts of capital in increasingly undifferentiated operations simply makes poor business sense.

The new, emerging business model

Equipment providers have begun enacting more substantive changes in their business model in two principal areas. First, providers such as Lucent, Nortel, Alcatel and others have started outsourcing core portions of their manufacturing operations to third-party contract manufacturers like Celestica and Solectron. Second, equipment providers have been migrating their sales and distribution models toward more cost-effective direct models coupled with a proportionately more significant use of indirect channel partners. The net effect of these two adjustments is something approaching a "Cisco-ization" of the industry -- namely, adopting many of the approaches and business practices that have provided Cisco with industry-leading margins for years.

These changes have the potential to disrupt large, multi-business equipment providers. The existing information infrastructure that an equipment provider uses to manage its business -- one that is heavily ERP and supply-chain centric because of its historic manufacturing focus -- is ill-equipped to manage the "virtual" business of outsourced manufacturing and multi-channel distribution. In a virtual business, the core competency and currency of record becomes not physical goods but information. For a virtual business to operate effectively, the various partners -- from in-house product managers to outsource manufacturers to indirect channel partners -- must operate from a consistent information base surrounding the products it is selling. Given the complexity of equipment provider products, this is a much more difficult challenge than it might seem at first glance.

The product information gap

Product information -- including such elements as pricing information, configuration rules, marketing bundles, local market variances, customer-specific attributes and so on -- is mostly managed in a rather ad-hoc manner. At one typical equipment provider, more than 80 separate systems -- ranging from Excel spreadsheets to sophisticated enterprise applications -- are managing various elements of product information needed in the sales, installation and post-sales support processes (often referred to in the industry as "lead-to-cash" or "quote-to-cash"). What this points to is a critical gap in the information management capability of equipment providers -- namely, a product information gap (see figure).  The net impact of this gap is the deployment of literally hundreds of additional resources to manage the manual coordination of what products can be sold, installed and supported.   

Because products and pricing are so customer-dependent, developing a quote alone for the cost of a product can take months, increasing an already long sales cycle or possibly even discouraging the customer from purchasing the product at all. Current solutions are often inadequate because they rely on information that is already out-of-date, meaning that the quote finally given to the customer may be downright wrong. For equipment providers, the cost of these inefficiencies is staggering: one estimate shows these errors cost up to $1.4 billion annually in depressed sales productivity and manual correction costs. Even beyond the costs incurred, without a formal infrastructure to manage product information, equipment providers will never be able to achieve the adoption of the virtual business models that are the keys to future success and survival.

Filling the product information gap

To enable equipment providers to operate as virtual businesses and reap the economic benefits associated with this new model, a centralized product information management structure must be put in place. This would enable them to share key product information on a real-time basis with manufacturers and channel partners. However, this information platform must be flexible enough to represent information about various types of products (wireless, optical, core switching) in a format appropriate for the various constituents (sales people, engineers, manufacturers, channel partners, customers) and in a manner simple enough so that product managers can enjoy complete control. Crucial to the system's success, this information must be made available at the point of customer engagement, not just at the back office. This is a tall order and one of the reasons that equipment providers have traditionally struggled with this challenge of effectively managing product information. It is also the source of the set of "product simplification" initiatives that periodically enter the industry. While product simplification makes the problem easier to manage, it does so at a huge cost in customer satisfaction and competitive position.

To crack the code on this problem, equipment providers must invest in a product information management system that enables complex product information to be centrally managed and available to all the relevant value chain participants in a manner that is contextually relevant to them. For this to happen, standard approaches like Excel spreadsheets and horizontal "selling solutions" must be abandoned in favor of a new approach, designed specifically for equipment providers and the unique challenges they face. These challenges include the massive complexity of product information, the "virtual" nature of the emerging business model and the variable requirements of the different users of product information. 

Such a solution should give the sales force tools that match customer needs with appropriate product configurations, and provide quick and accurate price quotes. It should then provide all the materials necessary for the entire sales process, including catalogs, network or shelf diagrams, and proposals. Meanwhile, it should enable product, market and account managers to keep product and customer information such as pricing, availability and contract terms updated so the sales force is always armed with the most accurate information. A modular engine and data warehouse at the core will make all of this possible and enable the equipment provider to customize its solutions by adding or removing system modules. The equipment provider must also be able to customize how much product or pricing information is made available, so that product customization can be made economically viable while still satisfying customers.

What it all means for service providers

For service providers, the emergence of these new business models, and the new product information technology that will be used to support them, means that the way in which communications equipment is likely to be procured is changing.  While service providers should not expect the elimination of the "high touch" direct sales force anytime soon, the prevalence and availability of highly accurate and customer-customized product information will eventually enable service providers to procure equipment through multivendor integrated portals, supplemented by the sales force.

In addition, as product segments become commoditized over time, these products are increasingly likely to move to indirect and other more cost-effective channels. The bottom line is that service providers can expect a boom in electronic direct vendor relationships as vendors gain the capability to manage equipment provider product information at the levels required. This will save carriers millions annually in procurement costs, enable new equipment to be brought to market on an accelerated basis and arm vendors with more effective market information for future product development. Although the path to get there is a challenging one, the end result is a win-win for equipment vendors and service providers alike.    

Scott Brighton is Executive Director of Solutions Strategy at Trilogy Software, Inc. He can be reached at Scott.Brighton@trilogy.com.

Visit Trilogy Software, Inc. online.

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