Second-generation telecom outsourcing: Regaining control and innovation power
For large telecom operators, outsourcing solely to cut costs is no longer a viable solution. Instead, the next generation of outsourcing deals should be structured to allow greater control over operations, the flexbility to change business models when needed, and the ability to bring new products and services to market quickly.
Secondgeneration telecom outsourcing Regaining control and innovation power
Beirut Chady Smayra Partner +961-1-985-655 chady.smayra @strategyand.pwc.com Buenos Aires Ariel Fleichman Partner +54-11-4131-0432 ariel.fleichman @strategyand.pwc.com Düsseldorf Stefan Eikelmann Partner +49-221-3890-110 stefan.eikelmann @strategyand.pwc.com Roman Friedrich Partner +49-211-3890-165 roman.friedrich @strategyand.pwc.com
Madrid José Arias Partner +34-91-411-5121 j.arias @strategyand.pwc.com Milan Luigi Pugliese Partner +39-02-72-50-93-03 luigi.pugliese @strategyand.pwc.com Moscow Steffen Leistner Partner +7-985-368-78-88 steffen.leistner @strategyand.pwc.com New York Christopher Vollmer Partner +1-212-551-6794 christopher.vollmer @strategyand.pwc.com
Paris Pierre Péladeau Partner +33-1-44-34-3074 pierre.peladeau @strategyand.pwc.com Riyadh Hilal Halaoui Partner +961-1-985-655 hilal.halaoui @strategyand.pwc.com São Paulo Ivan de Souza Senior Partner +55-11-5501-6368 ivan.de.souza @strategyand.pwc.com
Tokyo Toshiya Imai Partner +81-3-6757-8600 toshiya.imai @strategyand.pwc.com Vienna/New York Klaus Hölbling Partner +43-1-518-22-907 +1-917-284-3906 klaus.hoelbing @strategyand.pwc.com Thomas Aichberger Principal +43-1-518-22-909 thomas.aichberger @strategyand.pwc.com Zurich Alex Koster Partner +41-43-268-2133 alex.koster @strategyand.pwc.com
Adrian Blockus also contributed to this report.
About the authors
Stefan Eikelmann is a partner with Strategy& based in Düsseldorf. He leads the firm’s European communications, media, and technology practice, and focuses on strategy-led transformations of international companies. Karsten Kemeter was formerly a principal with Strategy&. Thomas Aichberger is a principal with Strategy& based in Vienna. He focuses on telecommunications technology, including network and IT strategy, transformation, sourcing, and business processes. Florian Poetscher is a senior associate with Strategy& based in Vienna. He assists clients in consumer-oriented industries like telecommunications, technology, and media to develop new business, build digitization-driven strategies, and enhance their operational capabilities.
This report was originally published by Booz & Company in 2013.
Over the past decade, virtually every large telecom operator has turned to outsourcing, primarily in hopes of cutting costs. But the results have been decidedly mixed. Though many have indeed succeeded in reducing expenses, they have all too often found that the deals led to a loss of control, decreased business flexibility, and weakened innovation efforts. This is no position for operators to be in, particularly as the telecom industry undergoes disruptive changes and competition increases on all sides. Some operators are already taking the steps necessary to enter into the next generation of telecom outsourcing deals. When done right, such deals offer a greater degree of control over operations, the flexibility to change business models and processes when needed, and the ability to bring new products and services to market quickly. Second-generation outsourcing enables operators to retain their most important operational and customer-facing capabilities while ensuring better relationships with outsourcing partners. But the shift to this new approach to outsourced relationships can be difficult. It requires a well thought out strategy for whom to partner with and how, along with a strong implementation plan. This is especially true when entering into a “re-sourcing” deal, or moving from one outsourcing vendor to another. Here, operators must be particularly cautious about the approach they take, and prepare fully for the negotiating and contracting steps.
The first generation
Several years ago, a Central European mobile operator with more than 10 million subscribers agreed to an outsourcing deal with two global vendors to build and run both its networking operations and its IT operations. The initial result was a savings of 20 to 25 percent in operating expenses, with the expectation of further annual savings. Once the transition phase was complete and the necessary staff transferred, however, the problems began. Both vendors, facing increased cost and pricing pressures, began reducing their own cost structure and changing the way they provided outsourced services to the operator. They boosted scale by merging the internal processes and systems they had developed for the operator with those of other clients, scaled back process execution, moved key people into new positions where they could share their knowledge across all clients, and transferred many operations to low-cost countries — thus effectively draining the brain pool dedicated to serving the operator client. As a result, the operator — having effectively transferred its design processes to the vendor — lost its prowess in this area. Worse, it could not control the complexity of the outsourcing deal. Despite several unsuccessful attempts to address the problems, the operator eventually had no choice but to search for alternative outsourcing options. In retrospect, the operator should have focused the deal on increasing its own business flexibility in order to support internal innovation, faster time-to-market for new products and services, and simple off-the-shelf IT that could support smarter and simpler processes.
A new approach
Like companies in most industries, telecommunications operators, especially mobile operators, have long turned to various outsourcing schemes in hopes of cutting costs and focusing on their operational strengths — the “my mess for less” approach. And like the operator above, though they have reduced costs, they have not, for the most part, achieved the results they had hoped for. Because of this, many operators — notably large incumbents with large fixed-line operations — are still limiting their outsourcing to IT and network field-services activities. They have not yet moved beyond this first generation of outsourcing to turn over larger portions of their value chains to providers. This is largely due to a lack of experience and confidence in the process on their part, and to limitations in the scale and scope of the offerings available from outsourcing vendors. That’s changing. A number of more adventurous operators have begun moving to a second generation of outsourcing, and turning over entire domains — such as IT, mobile network operations, and cable networks — to vendors. The goal of this effort, which we call re-sourcing, is to gain greater flexibility in transforming their own operational models, to restore some of the capabilities lost in turning over operational control to vendors in the past, and to reboot their innovation efforts. At the same time, outsourcing vendors are evolving to become true service partners that are more tightly integrated into operators’ delivery chains, taking much more responsibility for the execution and improvement of their end-to-end processes, along with the accompanying risk. (Vendors that don’t evolve in this direction will likely soon leave the managed services market entirely.) This trend has its rewards, but also its complications. On one hand, operators stand to gain the economic and technological flexibility to concentrate more fully on the parts of their business that truly add value. And they can build the essential capabilities needed — often in partnership with their outsourcing providers — to succeed in a rapidly changing telecom market. On the other hand, outsourcing more and
more links in the value chain can lead to a loss of critical capabilities, innovation, and economic leverage over service providers. Moreover, negotiating the re-sourcing contracts requires special skills and considerations. The key to success is to achieve the right balance of control (see Exhibit 1, next page).
Exhibit 1 Operators can gain considerable benefits in re-sourcing through second-generation deals
Value to the business Second-generation outsourcing First-generation outsourcing In-house
– Outsourcing is mainly driven by ﬁnancial KPIs, achieving signiﬁcant savings in operational costs – Infrastructure services are provided in-house – Outsourcing vendor follows own cost management goals, leading to strategic misalignment and draining of dedicated brain pool – Flexibility needed for innovation and transformation is not maintained; operators lose design competence and control over complexity of the outsourcing deal – Operators can rebuild internal core capabilities and set up an operating model that fosters innovation and change – Continual cost and quality improvement is enabled via new processes and division of work – Partnership development is typically a multivendor situation across the entire service stack – Key operator challenge is to avoid vendor lock-in after outsourcing end-to-end responsibility
Source: Strategy& analysis
Four factors are transforming the telecom industry from within and without, putting new pressures on the traditional telecom business model, and thus forcing operators to rethink how and what they outsource, and why they should do so (see Exhibit 2, next page). Economic efficiency Operators now face constant pressure on margins, caused by decreasing average revenues per user and the massive investments they must make in new infrastructure such as fiber and LTE technology to keep up with soaring data traffic. This pressure demands that they continue to improve their cost efficiency, requiring them to build highly efficient operations that can deliver their growing range of products and services with greater levels of speed and quality. At the same time, they need to remain flexible enough to withstand significant changes in their business models, such as splitting up their networking and services operations, moving to network sharing, or selling assets. Capabilities focus Telecom operators are no longer competing solely with other operators. Instead, all kinds of players, including cable companies, providers of over-the-top (OTT) services, and digital content providers, are entering their space from adjacent markets. The increase in competition and the rapid evolution of technology are forcing operators to keep those innovation capabilities strong. To innovate effectively, however, they must first determine their strategic value proposition — or “way to play” — given their current strengths and position in the marketplace. This analysis will reveal the distinctive capabilities they will need to capture market opportunities. With that strategic clarity, they must embark on a cost savings program, focused on noncore activities, that will enable them to finance the buildup of those capabilities.
Exhibit 2 Four factors are driving the move to re-sourcing
– Highly efﬁcient delivery factories can operate at agreed-on quality levels – Deals optimize ﬁnancial beneﬁts through cooperation (e.g., network sharing) or asset sales (e.g., mobile tower carve-outs) – Operating models allow for ﬂexible trade-offs between capex and opex
– Value-adding focus on capabilities helps address increased competition (cable, OTT) and technology evolution – Commodity services can be sourced from vendors with cost advantages – Capabilities can be enhanced by adding specialized competencies from third parties
– Vendors have increased experience with end-to-end responsibility along value chain – More closely integrated partners allow for simpler and more ﬂexible macro-level steering – Integration also supports a partnership life cycle, enabling both parties to grow jointly
– Traditional service platforms are now highly integrated with IT – Business support systems include real-time functionality in areas like billing and CRM – Convergence needs to be reﬂected in outsourcing strategy to ensure effective vertical integration
Source: Strategy& analysis
Outsourcing is a key element in this process, for two reasons: First, operators can source commodity services from suppliers that specialize in certain technologies, services, or regions, gaining cost advantages through greater scale. Second, they can further enhance their distinctive capability set by integrating new capabilities from service providers seamlessly into their value chains. Of course, no operator should outsource any technology or business process if it provides the foundation for a distinctive capability. Partnership integration Outsourcing providers are becoming more and more competent in managing entire telecom networks, despite the increasing complexity of those networks, which now combine voice and data legacy systems with IP technologies such as LTE, IP radio access networks, fiber, and the like. Moreover, giving vendors end-to-end responsibility for a large scope of network management allows operators to steer the outsourcing partner on the right level of detail and share the risks appropriately, and lets them set the right incentives for vendors to optimize service delivery. Technology convergence The way that operators manage their technological infrastructure is changing: Network and services systems are now essentially highly integrated IT platforms. Business support systems are becoming increasingly real-time, processing network events and feeding the information to billing and customer analytics systems as they happen. As operators adapt their organizations and processes to reflect this change, they must also adjust their outsourcing strategy to benefit from greater vertical integration with vendors.
A long-term partnership
The case of a large European integrated operator demonstrates the benefits of second-generation outsourcing. Like most operators that have turned to outsourcing, this company was facing significant cost pressures and a loss of control over critical processes. Its goal, in addition to cutting costs, was to regain control and boost innovation. To that end, it developed a careful plan for which operations and capabilities to retain in-house, which to outsource, and to whom. The operator began the process by dividing its technology stack into separate domains — including billing and operational support services — outsourcing each individually, and partnering with a separate strategic outsourcing vendor to maintain large parts of its activities. This “divide-and-conquer” approach ensured that the company would not turn over too many elements of its operations to a single vendor. It could keep its focus on managing end-to-end quality of service, rather than having to monitor each individual network element, system, and application. And it could turn over specific activities to the respective partners and vendors through a clear plan-build-run process (see Exhibit 3, next page). To manage the process, the operator set up a steering and monitoring framework for its outsourcing vendors that establishes clearly defined mission and common objectives for the cost and revenue potential on both sides, while allowing the outsourcing partner to integrate other third parties as needed to deliver specialized tasks in the most economic way. The operator and its partner and vendors mutually decided on the key performance indicators (KPIs) with the greatest relevance to the operator’s business goals, thus setting the right incentives for motivating the outsourcers. Ultimately, the switch from specialist outsourcing to managed services for each domain enabled the operator to align all of its outsourcing activities. At the same time, it maintained control
Exhibit 3 Key capabilities across the telecom plan-build-run cycle
Before: Many different functions and capabilities
Plan Build Run
End-to-end systems engineering End-to-end process improvement
After: Focus on speciﬁc retained capabilities
Strategic planning, cross-domain integration, architecture, and asset management
Service and operations management
Integrated cross-domain test demand management
Retained functions to steer outsourcing Outsourced functions
Source: Strategy& analysis
End-to-end customer experience management
and retained the capabilities it deemed critical at each stage of the plan-build-run process, including strategic planning, quality assurance, customer relationship management (CRM), and product and service innovation (see “Retaining the Right Capabilities,” next page). And overall, the company reached its cost reduction targets.
Retaining the right capabilities
retaining key capabilities is critical to the success of any second-generation outsourcing partnership. But this is possible only if operators can maintain control over their end-to-end outsourcing partnerships. These eight capabilities are the most important for most operators to retain across the entire telecom value chain: 1. Account management: This is key to ensuring a smooth interface between business units and IT and networking outsourcers. The goal is to clearly translate changes in the product and service portfolio into concrete network and IT demand. 2. Strategic planning, cross-domain integration, future architecture: This capability is instrumental in determining overall strategy and defining network innovation, performance, and cost-efficiency goals. 3. End-to-end process improvement: Operators must maintain control of the management of their endto-end processes across the entire networking and IT landscape. 4. Partner management: This is the capability to oversee all aspects of the outsourcing process, including procurement, contract management, and cross-domain service delivery management. 5. End-to-end systems engineering: This capability is a “bridge function” that ensures technical interoperability across the network and IT domains. 6. Integrated cross-domain test demand management: Operators must be able to oversee the testing process when outsourcing and reconfiguring network and IT operations. 7. Service and operations management: Control over the interface between operations and sales is essential to rapid communication of any service interruptions or failures. 8. End-to-end customer experience management: Operators must retain the capability to ensure quality service and the overall customer experience.
Planning the change
The shift to second-generation outsourcing will not be an easy one for most telecom operators. Those looking to make the move will need to prepare carefully and execute fully — a process that we see as requiring four discrete steps: 1. Define the outsourcing strategy. No second-generation outsourcing effort will succeed without a clear vision of which outsourcing approach makes sense for your company, and the specific objectives to be attained through the deal. In clarifying the objectives, make sure they cover all aspects of the effort, including financial and contract issues, operations, and the target operating model. 2. Identify critical capabilities and retained functions. This effort is key to determining the ultimate scope of which operational aspects get outsourced and which are retained. Careful consideration of the operator’s business model and way to play — both now and in the future — will be necessary to avoid future loss of control and innovation prowess. 3. Define the partnership model. Ensuring a true win-win deal with prospective outsourcing providers requires a clear understanding of the improvements the operator is seeking, and a thorough assessment of the partners capable of carrying them out. A phased partnership development plan will help the operator sort out which ones to work with, and on what schedule. 4. Implement the plan. Here, the initial negotiations with prospective partners are critical; success requires the ability to anticipate every potential scenario through a clear assessment of the business needs of all parties.
Making the re-sourcing deal
Operators that are already committed to a first-generation arrangement but looking to move to a second-generation deal face a complicated situation. They likely must switch vendors while also changing the scope of their outsourcing efforts. The key objectives for every operator must be to sustain operations and quality and hold down costs during the re-sourcing process, but that is never easy. At the beginning of the process, the old outsourcing partner will most likely lose interest in maintaining its current levels of service, even as components of the operator’s own organization push back against the coming changes. Once the current contract nears termination, the old partner is likely to further reallocate its skilled staff and resources to other projects. And during the transition and handover phase, the old and the new outsourcing partners must work together, with equal access to the operator’s network operations, setting up a potential “blame game” between the two, with a strong likelihood of dire consequences for the operator. To resolve these potentially severe outcomes, we recommend that operators carefully evaluate three approaches to re-sourcing. • Greenfield: Here, the new outsourcing partner builds up the necessary operations independently; once that is done, the operator terminates the contract with the old provider. • Transition: In this approach, the old contract is terminated, and the first generation’s staff is transferred to the new partner. • Acquisition: The new partner simply buys out the old one and then transforms how it provides services to the operator. These approaches offer varying levels of risk in terms of the smoothness of the transition, the degree to which the deal will result in operational transformation, and timing. The impact on costs will differ as well. The trade-offs among them are straightforward. The acquisition approach offers the possibility of maintaining the most stable operations but
carries over the entire legacy of the old vendor. On the other hand, real change — in the behavior of the partner, innovation capabilities, and costs — will most likely be achieved through a true greenfield approach, though this bears a higher business continuity risk during the switchover. IT interfaces are likely to change, while operational support systems will have to be rethought as the nature of the outsourcing changes. Attempting to combine the benefits into a transition approach often leads to years of parallel operation, increasing overall costs and creating greater governance challenges for the operator. Given how much is at stake in the re-sourcing process, and how important it is to ensure that it goes as smoothly as possible, thorough planning of the process — including the negotiation tactics available to the operator and the old and new partners — is paramount. Miniwargames can be a particularly helpful tool in simulating the dynamics of the situation. Different teams represent every relevant stakeholder in the deal — not just the operator and the old and new outsourcing vendors, but also employee unions, labor law courts, and the like. Each team plays its assigned role based on its understanding of the intentions, demands, and goals of the stakeholder it is representing. Simulating the negotiations and actions of all involved parties allows the operator to quickly identify potential deadlocks and previously unforeseen reactions. The many possible scenarios that will likely arise enable the operator to determine not only the best outsourcing strategy to pursue, but also specific aspects such as the most advantageous contractual terms and the strongest negotiating tactics.
Telecom operators engaged in outsourcing deals that haven’t delivered all the promised benefits should consider second-generation outsourcing deals to regain control over their operations, restore key capabilities, and boost innovation. The process requires a clear strategy, careful choices regarding the partnership model and the right partners, and determined execution. These deals can be difficult to carry out, but the rewards, in terms of both cost savings and renewed growth, can be significant.
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This report was originally published by Booz & Company in 2013.
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