The effect of mergers on BSS/OSS vendor sales

Consolidation has been and will continue to be a vital part of the telecommunications industry’s effort to right itself from the over-exuberant “build it and they will come” strategic mentality and introduction of failed business models in the decade following the 1996 Telecom Act.

During the past twelve months, the U.S. telecommunications industry has seen several mega-mergers both announced and completed. In December 2004, the just-completed $36 billion merger of Sprint and Nextel Communications was announced. This followed on the heels of the successful merger of Cingular and AT&T Wireless. In January 2005, SBC Communications announced it was acquiring AT&T in a $16 billion deal. And in early May 2005, MCI Communications accepted an $8.5 billion dollar acquisition bid from Verizon Communications. The last two have been vigorously contested with a lot of discussion about duopoly formation within the industry.

While the mega-mergers of SBC with AT&T and Verizon with MCI are wending their way through the regulatory and stockholder approvals, the Sprint-Nextel merger has been completed. Throughout these proceedings, we have been surprised that the operations support systems that will be required to efficiently manage these consolidated businesses have received rather limited attention. These systems will be at the crux of the ability of the enterprises to be combined, the synergies realized and the future profits earned.

We probed this vacuum to get the sense of how OSS/BSS providers think their portion of the industry will be affected by the mergers. We had extended conversations with senior managers of seven companies covering all aspects of billing and operations support systems. Somewhat surprisingly, they all agree that the SBC/AT&T and Verizon/MCI mergers will generate a flow of new orders to BSS/OSS vendors. In the words of one respondent: “We see these mergers as compelling events to move forward on strategic investments, rather than being events that delay activities. They may change the direction of investment to some degree, but that doesn’t mean that everything freezes. What we see happening is that it gets replaced by more strategic investments.”

As always there is good and bad implications for capital investments associated with mergers. The bad news is that consolidation causes individual company initiatives to take a back seat while the consolidation is sorted out, though this may be done rather quickly. The good news is that the compelling event of the mergers makes the need greater for strategic change and ultimately drives the transformation to convergence faster. The two transformation models synthesized from our interviews shown in the chart below are: (1) choose and go--then transform; and (2) freeze and transform.

Moreover, the mergers’ focus, which is to accelerate RBOC entry into the enterprise market, will increase the combined firm’s appetite for OSS spending. New OSS implementations need to accelerate time to market in a cost-conscious manner. That is, the newly merged companies need to lower their legacy cost structures and enable rapid service creation while controlling marginal cost. Where possible the merger partners will make a quick assessment of the assets that each brings, adopt the best in class; switch everybody to that, then plan for the next-gen converged architecture as a second evolutionary step. We are calling this “choose and go--then transform.” We believe this is the most likely scenario. Of course, nothing happens instantaneously. In the short run, they are going to take what’s working today and run with it except where really necessary to retain customers such as rapidly moving toward a unified customer view.

Two examples of the “choose and go--then transform” model are the HP-Compaq merger and the BT-Infonet merger. At HP a quick assessment of the assets that the two companies brought to the table was done focusing on which of the assets was best in class, and a switch was then made. Similarly, following a BT/Infonet internal assessment, Infonet is providing BT with the solution blueprint for how the merged company’s future OSS and BSS environments are going to look for global services, because Infonet’s best-of-breed approach has done a much better job of turning on services and minimizing order management issues.

Alternatively, the merged companies may choose to run their legacy systems in parallel while selecting their NGN OSSs and flash cut to the new systems. We’ve termed this the “freeze and transform” model. This is a real, though less likely, transformation.

It will be interesting to see how the OSS/BSS providers fare as competitors grow in scale and scope and competition broadens across the enterprise and consumer markets. David H. Yedwab is the Executive Vice President of The Eastern Management Group and can be reached at dyedwab@easternmanagement.com. Paul Robinson, PhD, CMA, CFM, is Vice President of The Eastern Management Group.