In the telecom industry Managed Network Services (MNS, aka Outsourced Network Operations) is likely to be a $10B business in ’08, with a CAGR (Compound Annual Growth Rate) of between 13-17%. Europe accounts for 45% of the market. The leading supplier in the market, Ericsson, rips-out other supplier’s equipment and installs its own in the networks it manages (e.g. H3G Sweden). So for any supplier in the telecoms industry, if you can not deliver your product as a managed service, you may not be delivering it for much longer. The MNS market breaks down roughly as follows: Ericsson – 32%, ALU – 30%, NSN – 15%, Motorola – 8%, the rest (Nortel, Huawei, ZTE) – 15%.
An Operator’s drivers for MNS are:
- Direct operational cost savings. Cost savings of up to 20% are possible thanks to the scale of the managed service provider (MSP) in aggregating resources over multiple customers. Simply, introducing an MSP provides an opportunity to break down the fiefdoms that lead to underused resources within the operator. The ‘Gridlock Economy’ by Michael Heller is worth a read on the topic of underused resources.
- Better use of capital and resources. More predictable and balanced operational and capital expenditure, and the substitution of fixed by variable costs to improve cash flow.
- Faster time to market. The ability to focus resources on strategic rather than operational issues; and access to resources and technical competencies in the MSP can improve the operator’s ability to deploy new technologies and bring new services to market.
- Business transformation. By focusing management on the core activities of services innovation, marketing and customer service; outsourcing network operations can enable operators to be more market focused and customer oriented.
MNS breaks down into network outsourcing and service outsourcing. Network outsourcing is buy far the larger business, roughly $8B, compared to service hosting at roughly $2B. Network outsourcing tasks include network planning, vendor management, network operations, network maintenance, network optimization, network build and deployment, site acquisition and management. Service hosting tasks include product/service definition, service delivery platform development, service delivery platform operation, content acquisition and management, application and content development, application operation.
Examples of Outsourced Network Operations include:
- 3 UK: MSP Ericsson, $3B over 7 year contract, >1000 people, network deployment and operations. Done to enable H3G to achieve profitability and focus on breaking the 5 million customer barrier.
- Bharti Airtel: Ericsson, Nokia Siemens Networks (NSN), $2.5B, >600 people, managed capacity/services for deployment and operations. Manage rapid grow on a $ per Erlang model. Removes expense and delays of RFP/Q process
- Brazil Telecom: NSN, $100m over 3 years, operations and maintenance of fixed and mobile core. Done to enable supplier to manage NGN migration.
In this previous weblog article I reviewed a typical mobile operator’s financials, and how that impacts its priorities. OPEX (Operational Expenditure) dominates its costs, at roughly 80%, and people costs costs are roughly one third of the technical operations cost – MNS addresses this cost. People issues dominate the MSP process and economics, re-assignment to the MSP enables many ‘fiefdoms’ to be removed releasing value; however, the conversion process is expensive, with typically a 20% loss in productivity during the process. In addition, the relationship between the operator and the MSP is complex and at times fraught, it’s essential to have a simple set of measurable targets between the Operator and MSP.
For any supplier in the telecom industry it will soon be a matter of survival to determine how they deliver their product as a managed service or find a way to fit into one of the MSPs’ solutions.