For many operators in MEA Region, the cost of delivering services will increase faster than revenues are keeping pace. In fact, this so-called revenue-cost gap is generally a global phenomenon, as operators find that single digit percentage reductions in expenses are simply not enough when it comes to meeting customer expectations for personalized multimedia services. As such the entire concept of “managed services” has changed.
The complexities of running both fixed and mobile networks and value added services continues to increase, while operators are increasingly required to focus their scarce resources given a highly competitive market. To maintain margin growth operations have focused on cost-cutting exercises which has accelerated outsourcing. Operator’s acceptance of partnering and acquisition of external expertise has grown in recognition of the opportunities and efficiencies such activities provide. Managed services has emerged as an important delivery model for network equipment vendors, systems integrators, BOSS specialists, applications and service specialist as well as network-owning operators themselves.
The main components of the old approach — NOC services, multivendor maintenance and network outsourcing — were sufficient in an environment where point solutions, cost savings and the bottom line were primary considerations. According to Analysts many companies are undercutting their own outsourcing initiatives by not managing them strategically. Most outsourcing initiatives do not attain the full desired benefits, especially cost reductions simply because Telcos fail to :
• Define a clear strategy of what activities should be outsourced, what objectives should be accomplished via outsourcing, and what boundaries should exist between any internal and external work. Aligning this strategy with the business units to maximize the value of any sourcing decisions is critical
• Establish a clear baseline of current costs (both the total and its components) and compare that to external benchmarks. Deciding what work can be optimized internally prior to outsourcing and use that as the basis to define cost targets with vendors is paramount
• Develop to establish a systematic demand management process that prioritizes project requests based on the proposed value creation for a business. And introduce consumption-based chargeback mechanisms to the business units to create an awareness of costs and to foster behaviors that are more conscientious toward usage.
Buyer organizations should use a structured, strategic approach to calculate the true costs of outsourcing, taking into account the risks and opportunities. If cost is a concern, then a clear knowledge of performance baselines before entering an outsourcing engagement is critical. To contain costs, companies should rely on benchmarks and adopt a consumption-based system that charges expenses back to the business units that incurred them.Providers and buyers must work together to apply sourcing discipline and craft outsourcing relationships that address near-term cost objectives and longer-term scalability and enhancement. Clearly companies need to turn transactional vendor relationships into strategic partnerships by doing the following:
• Clearly define the objectives and expected results (KPIs) from any outsourcing partnership.
• Assign clear roles and responsibilities to in-house personnel for handling various aspects of vendor partnerships, from overall relationship management to individual projects and their specific deliverables.
• Agree on an interaction model with the vendor to ensure day-to-day communications occur, expectations are regularly aligned, potential problems are identified and addressed early on, and future opportunities, especially those involving new technologies, are identified.
• Flexibility is the operative word for outsourcing strategies and contracts because outsourcing can never be separated from business goals. To drive the desired results, outsourcing relationships must constantly evolve.
In the traditional BOM approach, a qualified and trusted partner can share a portion of the risk in the early years of deployment with the network operator. Instead of paying all CAPEX up front before realizing any new revenues, the network operator can share the risk of build-out with the partner by deferring a share of the cost until it realizes subscriber growth.Since next-generation managed services are geared toward achieving business transformation via services-centric approach risk mitigation is evolving into a risk sharing approach. Risk avoidance will be an inhibitor for some companies to outsource, even those that could gain efficiencies from managed services and performance-based contracts with an external provider. Risk management best practice include a PLAN :
• To identify and evaluate technical and commercial risks due to outsourcing specific services.
• To take mitigating precautions wherever warranted, such as identifying alternate vendors for crucial pieces of work.
• To define and continuously monitor risk-related KPIs that trigger early action whenever a particular risk materializes.
Customers should understand that asking suppliers to accept a greater proportion of risk will have a direct impact on the level of charges payable under the contract. For example, the transfer to the supplier of risk which would be best managed by the customer will lead to an increase in charges.Customers need to take a realistic approach to risk allocation; there are some risks which cannot simply be “outsourced” to suppliers. Indeed, attempting to do so could damage their core business and potentially put them in breach of their regulatory obligations. In negotiating contracts, customers should focus on those risks which are real and important to their business. Where the risk is not important, they should take a pragmatic and commercial view in negotiations.
Although buyers expect service delivery performance to match what has been contractually agreed on, as the focus shifts increasingly to cost reduction, providers and clients must be able to manage the relationship and the expectations, not just the contract. Over the lifetime of the deal the focus is likely to shift rapidly toward improvement and innovation. The challenge will be in managing change while maintaining realistic expectations among the key deal stakeholders within the context of the deal.
To gain advantage from the major trends driving the rapid evolution of infrastructure outsourcing, buyers must accept — and when possible seek — opportunities for consolidation, industrialization and global delivery. The best outsourcing contracts ensure the proverbial win-win relationship, where both parties arrive at terms and pricing that is fair and promises long-term sustainable value. Contracts that leave the provider with only marginal profit or limited revenue growth will ultimately result in service quality issues.
In setting up these managed services contracts, operators’ main goal has been improved cost efficiency — a result of the outsourcing vendor’s ability to realize economies of scale, and the global knowledge and experience of the delivery partner. In general, the decision to contract for managed services is made at operating-company level based on local circumstances. While managed services contracts have cost efficiency built in, operators still need to see hard evidence of major cost advantages before they will be convinced to outsource more activities according to Ey.
There is fast growing trend toward sale and leaseback of tower infrastructure certainly in Africa. Telcos use of this technique varies on a regional basis, reflecting a lack of infrastructure players in some markets, and the fact that some regulatory authorities do not allow it. There is also a degree of uncertainty over the extent of the benefits to operators — and over whether the tower companies will share the same objectives as the operators in the future. In tower transactions, the contract and counterparties involved vary from an outright sale to a third-party infrastructure provider, to a transfer of assets to a tower company created and wholly owned by the operator itself, either on a stand-alone basis or in a joint venture.
Selecting the most appropriate supplier for a project can reduce risk substantially. It is incumbent on a customer to devise a due diligence process that will properly test and evaluate potential suppliers. A successful due diligence exercise should not just be a paper exercise; it should involve visiting potential suppliers, testing technology and speaking to other customers of the supplier. It is also important for customers to consider soft issues such as cultural fit. All too often outsourcing goes wrong because it was not possible to create an effective working partnership between customer and supplier.
It is clear that whilst the general economic situation remains difficult, customers will continue to be under pressure to reduce their costs and will look to their suppliers to help them do so. When it comes to entering into new arrangements customers should draft their contracts to allow for the maximum possible flexibility. No business or business environment remains static – change is inevitable. The contract should therefore contain a mechanism for managing contractual and operational change. Once again, good governance is key.
Through creative partnering and innovative risk sharing options, new managed services and outsourcing business model options provide the framework for creating a next generation enabled portfolio of services for consumers and enterprises ready for Telco 2 sided business model. Instead of short-term tactical advantages, the focus is firmly on long-term strategic gains . And only then will Telcos be able to reap the full benefits of managed services via trusted partnerships.
Sadiq Malik ( Telco Strategist )