outsourcing network operations

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Telecom Sector:Outsourcing Network Operations

The Future

By Runa B Joshi

PGPX 2009, IIM Ahmedabad

Under the Guidance of: Prof. Rekha Jain



Table of Contents

Topic Page No

Executive Summary 3Introduction 4

Market Overview 4

The Journey so far 9

Market Evolution in the Growth phase 9

Key Drivers 10

Vendor Selection Process 15

Operator’s Financials 16

Operator Concerns 17Vendor Concerns 19

Managed Services- the future 21

Challenges in the future 21

Ingredients of a win-win relationship 23

Conclusions 24

Appendix1: Questionnaires 25



Executive Summary:

Telecom operators around the world have come under increasing pressure to improve

profit margins, which in turn has sparked an aggressive pursuit of lean business models.

Network sharing has taken hold as a way to substantially decrease CapEx and OpEx.

Sharing has also sparked innovation by enabling operators to increase rollout speed,

provide broader coverage, and introduce new applications.

By the end of 2007, newly forged sharing deals were noticeably larger than previous

deals in terms of network scale and number of subscribers affected. The Bharti/Essar

contract in India and the 3UK/T-Mobile deal in the U.K. are just a couple of notable

examples.

The continued pressure on both mobile and fixed operators to optimize their cost

structures, while simultaneously seeking new services to drive growth, is leading to a re-

evaluation— and a potential revamping—of the entire business model. Network

outsourcing and sharing, in particular, reflect aggressive new business designs that

transform the relationship an operator has with the network. While outsourcing and

sharing can provide significant financial benefits, these deals can be complex and

fraught with risk.

This is a broad-based study in order to identify best practices in forging and executing

network-outsourcing arrangements. This study includes primary research in terms of

questionnaires floated to senior executives at some of the equipment vendors and

service operators in the country. The findings on network outsourcing trends, their

implications for telecommunication executives, and steps executives can take to

anticipate and mitigate risks are summarized in this paper.

This paper also looks at some of the key issues that both the parties are facing in the

current business model. The report focuses on the execution challenges inherent in

realizing the promised benefits of network outsourcing—challenges that can, at best,

slow down implementation of a deal or, at worst, cause it to implode.



Introduction

Managed Services is a fast growing USD 16 billion industry which is attracting telecom

equipment vendors who are showing increasing interest to benefit from their existing

competence and take on new roles in the value chain, covering activities such as

network build, including planning and design, field operations, Network Operation Center

(NOC) operations, application & service development, and billing. In recent years,

operator awareness of Managed Services has increased significantly; Managed

Services is now beginning to be a standard element of telecom operator procurement

processes.

As per an estimate given by some of the leading managed Service Providers for

Network operations like Ericsson, Nokia Alcatel-Lucent, etc, there can be a 20% saving

in the net spending for a service provider. Although other industries have long since

adapted the Managed Service model in their IT operations, the idea is still in the nascent

stage in the Network Operation area for the Cellular Service providers. Operators at one

time considered the management of the Network operations also to be a core area in the

overall business. But they have increasingly begun to realize that although the network

may be core to their business, network operations are not. And hence the increasing

shift towards the managed services model. Ericsson, in their site, claims to have

announced more than 100 contracts for managed services with operators worldwide

since 2002. The equivalent number claimed by Nokia Siemens Networks is a combined

portfolio of more than 160 managed services contracts. Thus we see that the equipment

vendors are seeing the opportunity and trying to push the concept further ahead with

each vying to get a piece of the pie.

Market Overview

Defining Managed Services: A Managed service (as defined by Dr. Gerard Macioce) is

the practice of transferring day-to-day related management responsibility as a strategic

method for improved effective and efficient operations. The person or organization who

owns or has direct oversight of the organization or system being managed is referred to



as the offerer, client, or customer. The person or organization that accepts and provides

the managed service is regarded as the service provider.

Typically, the offerer remains accountable for the functionality and performance of

managed service and does not relinquish the overall management responsibility of the

organization or system.

As one browses through the internet, the definitions vary to some extent across the

vendors. Motorola defines the concept in a 2003 white paper (Ref:

http://www.motorola.com/governmentandenterprise/contentdir/en_US/Files/SolutionInfo

rmation/FEDWhitePaperOverview.pdf ) as “A Motorola Managed Services solution is

based upon a collaborative effort where Motorola assists the customer in the optimum

management and maintenance of their wireless communications network. The

customized solution can supplement their current staff and responsibilities or provide

end-to-end operations management.” Ericsson, in their site (www.ericsson.com )

explains the concept and scope of managed Services as “Managed Services

offering…consists of four segments; Operations, Field maintenance, Operational

readiness and Shared solutions. All the service segments are flexible in terms of scope

and set up and can be adapted to fit the customer’s needs. Typically Managed Services

includes activities such as designing, building, planning, operating and managing day-to-

day operations on behalf of a customer.” Nokia defines “Managed Services as the

delivery and management of professional services under a long duration contract that

includes a service level agreement with incentives.” (www.nokiasiemens.com )

Thus typically a managed service is a contract wherein the service provider takes over

the traditional network operations from the Operator. Managed Services functions

typically include:

• Plan and design – planning, optimization and development. These functions can be

applied to areas such as the actual network, end-user applications and services, and

business support systems, for example systems related to billing and CRM.

• Build – technology integration and implementation of networks, services and business

support systems.

• Operate – day-to-day operations such as operation and maintenance of networks,

services and business support systems, field services, customer problem management

including helpdesk, and service and resource fulfillment.



The term also covers the case where a provider takes responsibility for providing the

required network capacity to an operator when and where needed. Furthermore, the

term Managed Services also covers hosting business model scenarios, where the

provider hosts service applications and enablers such as MMS, push e-mail and music

for the operator. The provider owns the infrastructure and delivers the capacity and

functionality as desired by the operator. The operator has to decide whether they wish to

have a multi vendor environment or a single vendor one. In most cases, as seen in the

Indian telecom industry, operators usually start with a single vendor for some of their

operations and slowly move out to a multi-vendor environment. For example, Bharti

Airtel, the pioneer in the Indian context started off by giving the MS contract to Ericsson

in 1999 but few years down the line gave the rest of the circles to Nokia Siemens

Networks.

Service Level Agreements or SLAs are defined to control and implement the contract

between the two parties. The measurements are defined in the KPIs or the Key

Performance indicators. There are different business models for managed services:

larger operators tend to outsource individual tasks necessary for running the network,

while many smaller market participants do not even bother to set up their own

infrastructure at all, and they entrust the entire operation and maintenance of their

network, from the outset, to an external partner. The scope of Managed Services

contracts depends on the operator’s strategy and on its organizational and businessneeds. A way of modularizing the Managed Services concept, based on the parameters

of scope and reward, is illustrated in Figure 1 below. However, in practice, the

agreements may vary in scope and may not fit into standardized, distinct modules as in

the model below.



Figure1. Managed Services structured from a scope and reward perspectiveSource: Official site of Ericsson (www.ericsson.com )

The figure above describes Managed Services from a scope-oriented view, indicating

that the more responsibility that is handed to the Managed Services provider, the greater

the savings and reduction of risk profile for the operator. The level with the most limited

scope is Out-tasking. This refers to the Managed Services provider taking on the partial

operation of a function/process typically related to the management of a network or

service. Performance measurement is made using task-based KPIs, where the Managed

Services provider supports its customer in reducing headcount-related operational

expenditure (OPEX) through alternative means of acquiring resources.

As for the next level of scope, Full Technical Operation, the Managed Services provider

takes on the end-to-end KPI responsibility for the full operation of a network or service,

including technical operation, optimization, design and build activities. So far, this has

been the most common Managed Services model used in the telecom industry. The Full

technical operation typically includes staff transfer from the operator to the Managed

Services provider, opening up for more substantial OPEX reductions compared to Out-

tasking.

Increasing the scope further, the Managed Services provider handles not only the full

technical operation but also the Site and transmission cost management on behalf of the



operator. This may constitute site and common infrastructure sharing solutions for

towers, shelters, power and so on. End-to-end KPI responsibilities are included. Also in

this type of set-up, staff transfer from the operator to the Managed Services provider

might occur. With this set-up, not only is headcount-related OPEX reduced but network

related OPEX is also affected positively. The set-up may also have a positive impact on

capital expenditure (CAPEX).

The most extensive scope of Managed Services includes Asset optimization and supply

chain management. This means that the Managed Services provider optimizes the

coverage and capacity on behalf of the operator, through providing the required network

capacity to an operator when and where needed. Since deployment of the network

closely follows actual demand, and thereby reduces over and under capacity, the

optimization of cash flow and capital employed optimization is a clear benefit for the

operator. The operator only orders and pays for the needed coverage and capacity on a

continuous basis against an agreed SLA with end-to-end KPIs. Asset optimization and

supply chain management puts high demands on trust and cooperation between the

operator and the Managed Services provider. For the operator, it means a high level of

risk and cost reductions (both OPEX & CAPEX). The Managed Services provider

manages technical operation, site and transmission cost management, as well as

capacity and coverage management of an entire network. Staff transfer may also be

included. With this in-depth partnership, operators secure competitive OPEX efficiencyand CAPEX productivity, since the vendor optimizes the total cost of ownership of the

entire network.

Managed capacity (MC). In a managed-capacity contract, the operator avoids initial

capital expense (CapEx) investment in favor of a “pay per use” approach, thereby

sharing the market risk with the vendor. The network assets are owned and operated by

the vendor, who is paid on a variable-usage basis. This form of outsourcing is most often

used in completely new situations—for example, Bharti/Airtel’s agreement with Nokia-Siemens, or Ericsson rolling out the GSM network in India. Managed-capacity contracts

will likely be the exception rather than the norm, as few vendors have demonstrated the

ability to profitably execute such deals.



The Journey So far:

As indicated earlier there were many reasons why the Managed service model evolved

for the telecom operators and soon became a key Business proposition for both the

operator and the vendor. We will discuss this evolution path and a few of the key drivers

responsible for the success (?) of the model.

Market Evolution in the Growth Phase:

Significant changes are happening in the telecom industry and the competition for the

same set of subscriber base is heating up. As a result, operators are considering how to

manage the new challenges for their own benefit. The traditional criteria of coverage,

capacity and quality are outmoded in the mature mobile market. Operators need to

rethink their business logic and position in the market to maintain and reinvent their

sustainable competitive advantage. Operators now are realizing that in the changed

environment they have to focus more on the core customer-facing aspects of their

business such as service development and management, marketing, branding and

customer relationship management. This is where the OEMs or equipment vendors are

coming into the picture as an alternate solution to “Manage on your own”. To facilitate

this aspect many of the operators are now outsourcing much of their technical

operations activities to managed service providers.

Looking at Figure 2 below we get an idea of this model. Operators are essentially

outsourcing away the more standardized part of their business. As the CEO of one of the

telecom circles said during the initial process of outsourcing,” We know how to sell the

SIM better; they know how to run the network better.”



Telecom operators have been the traditional customers for Managed Services, with

various contract scopes. Green fielders, incumbents and lower-tier operators have all

entered into Managed Services engagements. Initially, vendors have focused on

contracts in which they establish an organization and then transfer responsibility to the

operator. So far these contracts have been customized and of varying scope. Other

types of customers are now entering telecom Managed Services agreements. As

operators consider which functions to outsource they are assessing their roles and trying

to identify and focus on core competencies. Consequently there has been a shift in

responsibility for functions in the value chain, as illustrated in Figure 2 (above). Some

functions are increasingly being performed by vendors that offer their services as

Managed Services providers that are network build including planning and design, field

operations, NOC operations, application and service development, and billing.

Key Drivers:

There a number of reasons behind the success of this model in its current form. A few

have been indicated in the figure 3 below.

CustomerRelationshipManagement

ServiceManagement

Managed services forNon Differentiating activities

Enhanced management focusImproved EBITDA

PositionIn the future

PositionToday

TechnicalOperations

Operator

Operator

Figure 2: Operations outsourcing – The restructuring of the value chainSource: www.nokiasiemens.com



Figure 3: Managed Service- Market Drivers

Source: www.ericsson.com

The earliest Managed service contracts were drawn up in the late 1990s but it is only

after the severe telecom industry crisis of the year 2001-2002, facing a financial turmoil,

the concept of Managed services in the telecom space started to gain acceptance and

popularity. Operators, in the mature markets, faced with the double trouble of the

financial crisis and increased competition, started to seriously consider the efficiencies

that the vendor companies could provide in terms of cost benefits and operational

efficiencies. This pressure to reduce costs is ongoing, especially as competition

increases. Scale based synergies increase as the large Service providers start to sign

more and more contracts and economies of scale kicks in. The larger the scope of the

agreement, the greater is the potential for Managed Services providers to maximize

efficiencies and reduce costs. It is very difficult for an individual operator to achieve that

kind of scale economies on its own. This is true more for the smaller operators but can

also include larger operators that have identified business elements that can directly

benefit from scale, for example field services. Without the synergies across operations

available to large Managed Services providers, it is unlikely that individual telecom

operators could achieve the same levels of efficiency and cost savings.



For technical operations of an operator, managed service including outsourcing is

understandably a major change. The operator needs to consider carefully the

advantages and disadvantages of this option. The major considerations are as follows:

• Is the managed service contract in line with the business strategies and

objectives of the company

• What is the scope of the operations to be outsourced? Which network domains

and technologies are included in the outsourcing deal? How will future network

upgrades be handled?

• What are the specific targets and objectives for the outsourcing and managed

services deal?

• What are the criteria for a successful managed services provider?

• How should the operator manage the outsourcing process?

Every operator will have its own set of reasons and motives for getting into a contract

and hence should consider its unique proposition when deciding upon the vendor and

the type and scope of the contract. Some of the key drivers towards this consideration

are as follows:

• The need to reinvent the business as the business environment changes

As the competitive pressures increase, the operator needs to rethink his

business strategy and position in the value chain. One solution – contributing

both to differentiation and cost leader strategies – is to simplify the value chain

and move closer to customers through mobile services.

• The need to be able to focus on the most differentiating activities Most

operators would want to differentiate with new mobile services, content and

portals. All of these require extensive efforts to develop, launch and market with

increasing time-to-market pressures. Being able to focus on these most

differentiating activities is a significant benefit – while the technological

environment is becoming more complex.

• The need to improve operations efficiency – to improve EBITDA Irrespective

of the operator's competitive strategy, there is a need to increase the cost

efficiency of basic technical operations. And after usual process optimization and

competence development, the main source for cost efficiency is economies of



scale. For very large operators and international operator groups it is possible to

gain significant economies of scale in-house. Small and medium sized operators

should consider also whether a managed service provider could deliver benefits

for their business by creating higher economies of scale on their behalf.

• The need to improve quality of services and operations In mature markets, if

the operator manages the operations and network properly with necessary

capacity increases and modernization, the quality of service will be meeting the

customer's expectations. However, the quality is unlikely to be a differentiating

factor as all the operators can deliver the same. But the new mobile services and

applications provide excellent possibilities for quality differentiation and grabbing

market share – in a certain time window. The operator should make the most out

of this with the chosen help of the experienced managed service provider.

• The need to manage technology and operational challenges In traditional

operator-vendor relationships, the operator has responsibility for deploying

mobile services – network technologies, billing and customer care readiness.

This integration responsibility has a fair share of risk involved in it. Managed

services contract can be set up in a way to reduce this technology and

operational risk, linking service provider’s incentives to operator’s business

objectives.

• The need to improve CAPEX utilization Improving CAPEX utilization is one of

the key opportunities for improving operator’s cash flow. Operators can reduce or

completely forgo significant investments in facilities for network operations/call

centers, warehousing, distribution and maintenance by leveraging these

resources of the Managed Services provider. The right Managed Services

provider’s scope of capabilities offers the operator flexibility to manage to their

optimal mix of CAPEX and OPEX. Network optimization on the part of the

Managed Services provider can also move out capital investments for network

expansion or better prioritize where and when those investments are made.

• Reduction in OPEX Operational expenditure: (OPEX) reduction is clearly a

common goal that comes to mind when looking to Managed Services. The

operator can realize reduced headcount related expenditures by leveraging the

Managed Services provider’s resource economies of scale and access to

efficient processes and expertise. The savings will vary depending on the

Managed Services model employed. Out-tasking small portions of an operator’s



network processes would be expected to yield less of a savings versus a fully

outsourced network that sees operator staff being transferred to the Managed

Services provider. For Greenfield operators, OPEX savings can primarily come

from:

• being able to forgo the recruitment and training of staff to run portions or

the entire network and

• leveraging the operational and cost management experiences of

vendors that have already successfully deployed and run networks.

OPEX savings are not limited to headcount but also across the entire network and

operations scope. The Managed Services provider may also be tasked to drive more

efficiency into site acquisition and preparation costs, optimize performance of the

network, provide creative transmission/backhaul solutions and automate end-user

provisioning, to name but a few examples.

The operator has to be very clear in the following aspects when deciding upon which

vendor to select:

• Establish realistic expectations about benefits and scope. Having a clear set of

objectives and a business case that can be benchmarked are prerequisites for

convincing senior management to make the commitment to network outsourcing.

• Define a detailed picture of the desired end-state early on. Operators that

successfully execute outsourcing deals define a detailed picture of the desired

end-state early in the process—and further validate this with the respective

vendors.

• Having a clear understanding of one’s expectations and requirements is central

to maintaining control throughout the vendor selection and negotiation process,

and then arriving at a satisfactory outsourcing contract.

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.



The process is characterized by the early development of the desired end-state by the

operator. A select group of vendors should be involved extensively to validate and test

the end-state, prior to the issuance of an RFP. These discussions should involve key

personnel who will be the leaders of the organization post-outsourcing. While the

investment in terms of resources and time might seem initially excessive, a clear and

jointly held understanding of the details and alternatives for a future outsourcing deal is

critical to future success.

Establish clear vendor selection criteria: However detailed the scope and contract

negotiations, it is impossible to foresee every eventuality in an outsourced relationship.

Selecting a vendor that one can partner with goes beyond evaluating its past

experience. The selection criteria should include an assessment of the characteristics of

the vendor such as experience, local presence, convincing business model and

compelling operations model, as well as an assessment of the vendor’s partnering

capabilities.

Align and communicate. Senior management support for the outsourcing initiative and

internal communication of the implications for employees are vital to ensuring success.

Insufficient attention to these elements has often resulted in attrition of more than 20% of

operator staff during the process, not to mention needlessly drawn-out negotiations with

potential vendors. How to align and communicate? On the first point, we’ve alreadynoted the importance of a sound business case and end-state model. With respect to the

second point, operators must supply their staff with early and honest explanations of

how the outsourcing deal will be implemented, what these changes will mean for how

people do their work, and how job performance will be evaluated and rewarded.

Operator's Financials:

As one delves into the financials of some of the major telecom operators, it is clear that

there exists an 80:20 split between the operational (80%) and Capital Expenditure

(20%). Capital expenditures cover the amortized investment in the licenses and building

the network infrastructure. The bulk of a mobile operator's costs are operational

expenditures, hence the importance of EBITDA (Earnings before Interest, Tax,



Depreciation and Amortization) as a metric of an operator's financial performance;

generally in the 25-35% range.

The operational expenditures breakdown into roughly:

• 40% Marketing and sales, building the brand, paying for all TV advertisements,

sponsorship, subsidies on phones, etc;

• 25% Interconnect, cost of calls terminated on other operators, generally a

regulated cost structure;

• 20% Technical operations; and

• 15% Other costs covering customer care, offices, etc.

The 20% Technical operations can be further broken down into the following three main

categories.

• 7% Transport, most mobile operators have to rent E1s or T1s from incumbent

carriers. As mobile broadband grows, operators need to find ways to have this

cost grow in line with revenue and not data volume;

• 7% People, This is a touchy issue and the focus of outsourced network

operations, a roughly $10B business, which is about breaking down

organizational silos to enable better teamwork, removal of redundancy and

leveraging economies of scale; and

• 6% Other (maintenance and site leasing), here we see suppliers being squeezed

on maintenance contracts and options such as site sharing.

Operator Concerns:

All operators, cutting across size, geographical boundaries and type pf market, are lured

by the Managed Services model due to the Cost advantages. Operators are seeing the

benefits of network outsourcing go directly to their bottom line, with 15% to 30%

reduction in OpEx (2% to 5% EBITDA improvement) and 50% to 60% improvement in

time to market. Such gains stem primarily from the better network management and

acceleration of new technology introductions that outsourcing affords.



As per an Oliver Wyman study carried out on 100 outsourced operators, the primary

objectives behind the acceptance of a contract differ across the globe. As a typical Asian

operator noted, “...to concentrate on sales and marketing core competencies and to

relieve network topics from the management agenda.” The operator gains about +5-10%

increase in customer satisfaction and >50% reduction in “fixed” costs. The European

operator gets into the contract for purely financial reasons only. As per one such

operator, “OpEx reduction is the overriding driver… achieve a reduction of around 20%.”

Other than operationalizing Capex, an operator reduces about 15-30% Opex and 5-7%

Capex. For a mid-size operator, irrespective of the geography, the rationale behind

outsourcing model is People and Technology. “Outsourcing allows us to quickly build up

intellectual property and capability, in particular on new technologies.” There is a 50%

improvement in time-to-market and risk for a new technology is shared between the

partners.

But not all is well with the model. Despite the above mentioned and heavily documented

advantages, there are many pitfalls and tradeoffs that the operator needs to be aware of

before getting into a contract. This is more so for the small to medium sized operators

with little or no experience. There is a vast difference between buying equipment from a

vendor and getting into a relationship with them.

Operators are locked to vendors and switching to another vendor in case of the

arrangement failing is very difficult. A badly written contract may result in mutualdissatisfaction and this may prevent the operator from acting swiftly to respond to

changing market conditions and customer priorities. A few other potential risks include:

• Loss of strategic control

• Dependency created with large suppliers

• Reduced capability to monitor supplier performance and manage network migrations

• Implementation costs and workload

• Network performance and quality of service issues

Overestimating savings, inadequately defining the scope of the outsourcing project, and

mixing outsourcing initiatives with other infrastructure projects (such as next-generation

networking migration) are a few common pitfalls that operators may fall into. Sometimes

the larger operators are too lucrative a deal for an upcoming vendor and they might



over-promise. But in an attempt to gain business, they may not look at the tight contract

SLAs and may not be able to deliver after a point in time. By then, even if the operator

wishes to, it is quite difficult to come out of the contract.

Governance may be another point of contention and there needs to be clear agreement

on the rewards and penalty system in the contract. If there are other third party contracts

that overlap in scope with this contract, it may become a major relationship issue with

some operators, especially if the parties concerned vary in market strength. The

operator may get involved in unnecessary tussle and in turn lose out on the competitive

advantage that it set to get in the first place. The operator has to ensure that the

outsourcing vendor effectively manages third-party equipment and services and

manages those relationships well.

An important concern for the operator during the initial phase of the transition is HR

transition. It is easy to transition out equipment but as with all human relationships, the

transition of personnel from one company to the other is the most difficult and

sometimes the cause of failure of the contract. The operator and the vendor may have

very different sets of HR policies. It is extremely difficult for the operator to explain to its

employees that they are no longer employed in the operator company but are now

external outsourced employees. These employees now have to still do the same job but

are paid by the vendor. Employee morale takes a severe beating. Attrition ratesskyrocket during these times and smooth transition may take a setback, if this happens.

The operator has limited control over the employees once the transition is over and there

have been cases of sabotage out of sheer frustration and the employee had to be

tackled without denting the morale of the rest. Operators must supply their staff with

early and honest explanations of how the outsourcing deal will be implemented, what

these changes will mean for how people do their work, and how job performance will be

evaluated and rewarded.

Vendor Concerns:

As more and more equipment providers are trying to get in to the arena, it is becoming a

tough fight for the pie across the world. In some cases, they are promising a whole lot



more than what they can possibly deliver. The contracts are getting tighter and the

margins are shrinking by the day. Traditionally the vendors have supplied the “boxes” to

them and the operators paid for it and managed the operations themselves. The

operators owned the network and the jobs responsibilities were built on this basic

premise. But as the operators outsource the operations to the vendors, this very premise

does not hold good any more. The vendors traditionally work on the premise of SLAs

and delivery of KPIs. The logic of ownership does not hold true for them. What they see

is a 5% of their business portfolio which delivers 70-80% of their revenues.

The model rests on the fact that the technology aspects are best understood by the

technology companies. But selling technology and managing operations based on those

technology platforms are two different ballgames altogether. Vendors are still operating

in their old mindset of selling boxes and making money. Most of the large players work in

silos. The vendor business can be divided into 3 main categories: Selling the standard

boxes, Customized high end service and finally the Managed Services. As one of the

respondents this author interviewed stated “When the contract is signed for a Managed

Service, one has to look beyond the money. The relationships are important, more so for

a country like India. One has to understand that India is not Europe. Here the people

aspect is very strong. So what works in the European countries will not work here.” It is a

common feeling in at least some of the contracts that while the operator is making

money out of the model, the vendor is not. The operator may think that the vendorcompany is more competent but fails to understand that if the business does not make

sense, the competency cannot increase. This has a direct impact on the quality of

service provided. The manpower is no longer the best. The competencies are not

developed; the tools provided are of inferior quality and sometimes are altogether

missing. Cost cutting goes to the extent beyond compare. Retention of quality manpower

becomes a challenge.

The problem begins with the development of the business case itself. It all depends onthe aspects covered in the original agreement. There has to be clear understanding of

what the operator expects and what the vendor can deliver. There cannot be any major

deviation from the business case; at best a deviation of .5-1% is allowed and that results

in the later stages of failure. It also depends on the way the transition is carried out. As

the respondent compared the style of operation for two Indian companies, he mentioned



in one case the team was handed over to the vendor without the leader. This resulted in

a lot of confusion and misunderstandings. The attrition rates increased tremendously.

The operations suffered and a stage has now come where the operator has again

started to build up its own team and there are strong rumours that at the end of the 3

years, the contract may not be renewed. “There is no trust and the operator team

behaves more like policemen to watch over the vendor.” As opposed to this transactional

behaviour of one operator, the vendor’s experience with another operator has been of

complete trust. In this case the model was based on Managed capacity rather than on

Managed Services. Revenue sharing model has worked for this operator and its

relationship with the personnel even after they have been transitioned to the vendor

company, has been exemplary.” If the relation is skewed in terms of business

opportunities and profit, it cannot sustain for too long. As of now, in India, some of the

operators are earning to the tune of 30-40% whereas the margins for the vendors is

languishing way below at 2-3% in some of the contracts.

This puts unnecessary pressure on the senior management also and they are forced to

resort to less skilled manpower. They do not see the logic of enhancing the skill sets of

their teams because the business model does not allow them to do so. The short term

losses and pressures to meet the margins loom large and the long term aspect of

business and the very basis on which the MS model is based, that is the advanced

competency levels of the vendor management, is lost.

Managed Service- The Future

Challenges in the future:

As is clear from the number of Managed services contract being signed every quarter,

this concept is here to stay. But the nature of the contracts and the model may very as

time passes by. Some of the future trends evident from the way the new contracts are

being signed are as follows.

Network Sharing: So far, each operator gets into a contract with one or multiple

equipment vendor for its network operations. Thus an operator may have contracts with



different technology leaders. Going forward, multiple operators may come together to

share not only the passive infrastructure but also the active equipment like BSS, Switch,

TRXs cabinets, antennas, power generators, and shelters, as well as network operations

and maintenance staff. Operators can save up to 40% of total network costs through

such partnerships. However, aligning network technologies, roadmaps, and vendors can

prove difficult.

Asset Transfer models: Wider use of asset transfers beyond the current software and

test-bed transfers will start. Currently the network is owned by the operator and the

service and operation is under the aegis of the vendor company under the MS contract.

Analysts feel that the current model may give way to that wherein the network will also

be owned by the equipment provider and they may lease out the services to various

operators. This will also result in reduction in costs for both the parties. The vendor will

be able to consolidate its maintenance, manpower, expertise expenses for different

operators and give a competitive package to its clients. The mission critical areas like

NOC or Network Operational Control will be set up at the centralized place. This has

already started to some extent. But the service providers have to get used to the idea

that their operations may be controlled by the same set of people from under the same

roof as their competition. In the present world of network security, this may not be a very

difficult issue for them. Nokia Siemens and Ericsson already have in place their Global

NOCs that manage their Managed Service networks for both Vodafone India and BhartiAirtel from the same facility.

As is evident from the figure below, as the concept of Managed services mature,

operator s and the vendors, both will look for ways to make the contracts more failure

proof. Since any such deal is very difficult to exit with major implications on the credibility

of either, the future contracts will call for greater partnerships. As one of the persons

interviewed by this author said, “It has to be a win-win game for both. The vendors have

taken on the service industry but have yet to align their organization towards a servicemindset. They still do not work on an ownership model and are just concerned about

meeting the SLAs.”

Thus the key elements for the next generation of outsourced networks will be the

following:



• Shared active infrastructure elements and operations

• Asset transfers

• Adoption of fragmented out-tasking of O&M functions

Multi Operator

SHARING

Transfer

Single Operator ASSET OWNERSHIP

Infrastructure O&M

No Transfer

MANAGED CAPACITY

Scope of managed services

Figure 5

Source: Adapted from Oliver Wyman analysis (http://www.oliverwyman.com )

Ingredients of a win-win relationship:

Working as a team• Ensure joint goals and high level relationships

• Set up efficient governance to implement joint processes for

planning, transition, measurement, escalation, change management etc.

• Display trust – success is delivered together

TraditionalModel

Network

Sharing

NetworkOperations

Outsourcing

Next

Generation

Outsourced

networks



For the operator

• Clear understanding of business scope

• Allow managed service partner to build economies of scale

For the outsourcing partner

• Fully integrate outsourced activities and people into company processes

• Build in flexibility to the scope

Conclusions:

Network outsourcing by telecom operators is bound to spread, as it can generate 15% to

30% reductions in costs while presenting relatively manageable challenges. It offers cost

predictability, the ability to best use existing networks, and long-term commitment to

business success from both sides – the operators and the vendors. Yet there are risks.

That’s why operators should weigh the tradeoffs relative to alternative means of saving

money and achieving economies of scale— such as network sharing, internal

improvement efforts, and non-traditional outsourcing partnerships.

Implementing a network-outsourcing deal is far more complex than selecting an

equipment vendor. Thus, it requires close attention and model definition, due diligence,

contract governance, and work force communication by the operator’s management

team. Anticipating the unique pitfalls that network outsourcing presents will allow

telecom operators to make good on the promise: making a major impact on the bottom

line.

The maturity of the model and the way it is structured provide an operator a long-term

commitment of qualified service, along with predictability of costs, giving this model vast

potential for further development.

Managed services is about gaining operational and management efficiencies. It is about

handing wide responsibility to the experts while allowing the operator to manage the

core of the business, which has the potential of bringing focus to the operator's business

in difficult times.



Appendix 1 : Questionnaires used for primary research

Questionnaire ( Service Provider):

1. Name of the company you are working with

2. How long have you been associated with the telecom industry?

3. What is the nature of your responsibilities?

4. Have you been with the company before the managed services contract started?

5. What in your opinion was the logic behind the MS model?

6. Do you think it makes economic sense to outsource the operations?

7. What are the advantages you find after the MS implementation

8. And the disadvantages?

9. What are the challenges in maintaining multiple vendor relationships? You now

have to deal with your own employees and the NSN, Ericsson employees as

well?

10. Are there any challenges in the timely resolution if the Network Quality issues?

Do you think it would have been easier if it was an internal Network team?

11. How transparent do you think is the reporting system and other operational

issues?

12. Do you think the fact that the same vendor has the MS project with your

competitor may be a potential threat to the internal information security aspects?

13. Have you faced any employee related issues in this model? What in your opinion

may be the driving force for the MS employees towards your network? Do you

feel the levels of commitment may have been different between pre MS days and

now?

14. Why do you think the model has not been embraced by all the major Service

providers?

15. What do you think will be the future of the Managed services model?

16. Are there any changes that you would like to make in the model that can lead to

better performance- both for the vendor and the service provider?

17. Are there any regulatory issues being faced? Any future problems envisaged?



Questionnaire ( Vendor):

1. Name of the company you are working with

2. How long have you been associated with the telecom industry?

3. What is the nature of your responsibilities?

4. Have you been with the company before the managed services contract started?

5. What in your opinion was the logic behind the MS model?

6. Do you think it makes economic sense to outsource the operations?

7. What are the advantages you think the service provider company gets in this

relationship?

8. And the disadvantages?

9. What are the challenges that you face in this model?

10. Do you think it is possible to have complete transparency with the service

provider with regard to the operations, reporting and other such issues?

11. Do you think the operator has any information security concerns? The same

vendor manages the network for two competing providers.

12. Have you faced any employee related issues in this model? What in your opinion

may be the driving force for the MS employees? Do you feel the levels of

commitment may have been different between pre MS days and now?13. Why do you think the model has not been embraced by all the major Service

providers?

14. What do you think will be the future of the Managed services model?

15. Are there any changes that you would like to make in the model that can lead to

better performance- both for the vendor and the service provider?

16.Are there any regulatory issues being faced? Any future problems envisaged?

outsourcing network operations

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