The Seventh Strategy for Fixed-Line Carriers

Outsourcing Network Maintenance and Operations

No matter who you are or where you are in today's telecom industry, the goal is the same: returning to the high financial returns and profitability that prevailed before 2001 and the onset of the well-known "nuclear winter." Most carriers have tried to recapture these heady days by pursuing any one of six strategies that are directed at growing the top line or driving down the cost structure, or both (see figure 1). While these strategies have helped carriers improve their business performance, some more than others, the analysts and markets continue to demand more. So the search for the next line of attack continues, with most fixed-line carriers looking for the silver bullet—the "seventh strategy" that could lift operating profits by 15 to 20 percent or more.

In our experience, this strategy already exists and is being implemented by a handful of carriers. The approach? Outsourcing elements of network and maintenance operations. Brazil-based Telemar and Telecom New Zealand are both examples of carriers that have implemented or are in the process of implementing network outsourcing strategies and realizing significant returns as a result. They are cutting costs and expenses by 20 to 30 percent, reducing headcount by 40 percent, improving lines per employee by 60 percent and increasing revenues per employee by upwards of 50 percent. Combined with improved cash flows, reduction in capital expenses and freeing up management to focus on customer-centric issues, the impact on shareholder value has been extremely positive. That's not all. By outsourcing network maintenance and operations, carriers are:

• Reducing resources and OPEX and CAPEX investments. Rather than the carrier, the outsourcer takes on the costs and responsibilities for process improvements, cross-training, investments in new automation, and most light assets such as tools, vehicles and PCs. The result is that the carrier doesn't have to make a capital investment, or wait two to three years to achieve results.
• Improving customer focus. By outsourcing network operations, carriers increase the number of employees directly involved in customer activities, thus formally changing the organization to one that is customer centric.
• Creating a variable rather than a fixed cost structure. Outsourcing provides for a variable cost structure that allows carriers to be more flexible and better align their costs with actual market demand.
• Meeting the demands of a fluid market. With new competitors on their heels, carriers have to stay a step ahead. They must be able to influence product rollouts such as DSL, and create special offers or bundles that address changing market conditions.
• Increasing cash flow. Slashing operating expenses combined with the reduced need to purchase light assets quickly improves cash flow.

By outsourcing network maintenance and operations, these carriers are supporting a customer-centric strategy while setting the bar for future competitive advantage—perhaps even securing industry leadership for the rest of the decade and beyond. Hutchinson Australia and Cesky Telecom are solid examples of companies that used outsourcing to significantly increase shareholder value. Hutchinson increased share price by 30 percent after announcing its intention to outsource 3G managed services to Ericsson. Cesky Telecom increased its share price by 9 percent by signing a non-binding memorandum of understanding on outsourcing.

Today, if you're the CEO of a fixed-line carrier, you should be outsourcing your network maintenance and operations. Not only is it an available option, it is an intelligent one.

The Truth About Outsourcing
For years, companies and industries have turned over some non-core functions to outside providers—from information technology, building maintenance, security and fleet management to HR, call centers, and credit and collections. The practice has been particularly vigorous in the airline and automotive industries, where companies have spun off functions they once considered core, such as production, to strategic partners. The telecommunications industry is also not a stranger to outsourcing. Carriers have been generally comfortable handing over much of the network deployment function to close technology partners, allowing them to design, build and install switches. Third-level maintenance support is also outsourced under the umbrella of network maintenance contracts that covers spare parts and technical support for major problems or outages. And most carriers outsource the construction function to subcontractors.

But, if outsourcing is nothing new to carriers, why is it suddenly considered the seventh strategy? The answer has to do with what is being outsourced. The differences between outsourcing construction and outsourcing network operations are night and day. The first is not core to the business so it is mostly risk-free, while the latter is still considered a core competence, which means there are more potential risks that require a more strategic and longer-term transformation plan.

Deciding what makes the most sense to include in an outsourcing initiative often depends on how a carrier views its core versus non-core, or strategic versus non-strategic, functions. For example, how critical is it to continue to own the network switches? The network planning function? Both areas could be viewed as strategic or they could be considered non-strategic and therefore candidates for outsourcing. The decision depends on the operator, its corporate strategies, and its explicit labor and vendor situations.
 
In Network Operations, What Is Core, What Is Not?
In recent years, the definitions of core and non-core functions have expanded as technologies have become more sophisticated. For example, the provisioning and assurance functions are critical from a customer satisfaction level, and have long been considered core functions. Today, however, some carriers are cutting costs by outsourcing these functions to suppliers that are more able to deploy innovative technologies and cross-train technicians. The business impact of doing so can be significant and the implementation effort is more manageable and relatively fast (see figure 2). 1   

Figure 3 illustrates the basic processes of a fixed-line operator. The following is a rundown of common functions and describes to what degree each is appropriate for outsourcing:

Network planning and development. This function typically incorporates the network planning and design activities, which most carriers view as strategic and are therefore not willing to consider for outsourcing. However, a few carriers are beginning to change their minds—believing that certain technology providers can perform this function more effectively if they openly agree to best-of-breed design criteria.

Network engineering. Carriers are split as to whether or not the actual engineering of the network must be retained in-house, with some carriers expressing concerns about the security of the network if it is outsourced. Given the issues of national and international security, these concerns are understandable and legitimate. However, as companies become more adept at ensuring security and protecting network integrity, network engineering may become an outsourcing option.

Construction. Most carriers already outsource network construction  to subcontractors, but continue to manage it to control quality and performance. These same carriers also prefer to retain the materials management function to ensure quality and to help negotiate lower prices. Yet as network infrastructure providers gain scale, they are becoming more effective project managers and many are negotiating lower prices for materials, at times obtaining prices even lower than the carriers obtain.

Network documentation. Many carriers still rely heavily on paper drawings to document the location and engineering details of their outside plants. Those that upgrade this to an electronic format and outsource it to a qualified provider are realizing significant rewards. For instance, by digitizing the elements of the network, the providers help carriers improve service provisioning, and key performance indicators (KPIs) for repair and maintenance. However, carriers that outsource this function should maintain ownership of the database or the value is lost.

Network management. Today, most carriers oversee routing traffic by handling peak surges, establishing network priorities and restoring service as strategic functions. The job requires a limited number of highly skilled employees and is generally centralized into one or two centers. As a result, most carriers consider network management as a "phase two" outsourcing opportunity.

Service provisioning and assurance. The heart of any service is activation. Thousands of work orders are issued, each of which require special skills and expertise to complete. By necessity, service provisioning is decentralized and comprises the largest segment of the network workforce. Carriers that outsource this function do so because they recognize that an outside provider can increase efficiencies by automating processes, improving records management and cross training the workforce.

Service assurance is divided into on-demand and non-demand activities. On-demand activities are the normal request-for-repair calls that have a direct impact on customer satisfaction, while non-demand activities are preventive maintenance calls, which have a direct impact on the demand activity and can extend the life of network components. As with service provisioning, this is a decentralized function that encompasses a significant part of the workforce.

Dispatch. The daily scheduling of customer provisioning and repairs is integrally linked to a carrier's workforce management system. Dispatch is typically integrated with service provisioning and assurance and has an impact on the overall network KPIs. Therefore, a carrier that decides to outsource service provisioning and assurance should outsource dispatch to the same provider.

Logistics and warehousing. Operating a network requires a significant logistics capability. Maintaining inventory levels requires considerable amounts of capital, which only creates value once it is activated. Warehouse operations are expensive and do not provide much in the way of customer value. Lost, inactive or underused inventory is not an easily identified expense—and few carriers are able to track assets at the item level. Carriers that outsource this function to network infrastructure suppliers achieve more efficient logistics and warehouse operations and maintain lower levels of inventory that could potentially be used across multiple customers.

These are the major elements of a network. But given the number of full-time employees in the network unit of a carrier, other support functions are also necessary. Activities such as IT, human resources and finance, which are dedicated to the network unit, need to be identified, isolated and incorporated into any network outsourcing evaluation.

Building the Business Case
An initial assessment provides a basis for building a strong outsourcing business case. This should incorporate all "in-scope" activities, such as identifying all costs (including support costs), outlining forecasts and the potential rate of return, and valuing all assets. Other functions will also logically fall into the initiative. For example, construction management, logistics and materials procurement are all complementary to the network and would help provide a holistic, end-to-end approach.

A well-defined program management plan will ensure that the business case is developed around actual costs that can be offset by network outsourcing. It will also identify potential risks. These mostly involve process and governance issues, but can also include rushing in without first devising a rigorous evaluation process for each outsourcing provider.

Also, the business case should call for internal improvements prior to outsourcing. This point is key because employees might initially reject the new strategy, claiming the benefits can be achieved without outsourcing. Therefore, ask managers to incorporate the proposed benefits of outsourcing into their current or next year business plans. This exercise can generate some internal improvements not previously considered, and if the decision is made not to outsource, the internal organization will have a plan to execute against and achieve the targeted results.

Finally, the plan should address the need for a formal performance evaluation process. This will alleviate confusion brought on by outsourcing suppliers that have a slightly different approach to network outsourcing and will try to steer carriers accordingly.

Who's Who Among Providers
Finding a good network provider can be a challenge. There are fewer major carriers in each regional market than five years ago, and the convergence of technologies across wireless and wire-line segments means the market for traditional providers of network infrastructure equipment and products is much tighter.

As a result, network infrastructure original equipment manufacturers are expanding their service offerings into new areas—including becoming third-party network infrastructure providers. Indeed, the major players, such as Alcatel, Ericsson, Flextronics, Lucent, Motorola, NEC, Nortel and Siemens, are developing their services businesses to support the evolving network outsourcing market. As network infrastructure providers, these companies offer distinct advantages: They can employ international best practices, cross train the workforce, deploy newly automated tools and, most important, leverage their process improvements across geographic regions and customers.

However, before making a deal, carriers should rigorously evaluate which network provider is best positioned to meet their needs. Each provider will have a slightly different approach to network outsourcing and will try to steer the carrier accordingly. This can be avoided by using a multi-step evaluation process in which "go and no-go" decisions help ensure fairness and thoroughness (see figure 4).

During this process, the carrier should ensure that the potential provider can meet the required responsibilities, can be held accountable for its performance as measured by defined service level agreements (SLAs) or key performance indicators, and has the scale necessary to achieve the expected cost reductions. Our experience at one European telecom company demonstrates that an outsourcing provider can achieve, and in some cases exceed, aggressive SLA and KPI targets within 90 days.

Also, carriers should pay special attention to the commercial aspects of the outsourcing provisions. For example, it is critical to split the scope of work into distinct services, identify a clear scope of work and define responsibilities for each service. This avoids conflicts as to what services the provider gives for the agreed-upon price. It's also a good idea to calculate the current internal prices per service so that you can properly compare price quotes of potential providers. And if you are signing a multiyear contract, make it "modular" to provide the flexibility necessary to accommodate changes in market conditions, technology and services.

For compensation, it is best to establish a fixed/variable scheme. This provides the flexibility that fluctuating markets require and the month-to-month predictability that a carrier needs. Also, firms that establish specific KPIs that properly reflect the targets of their sales and marketing organizations have a better chance of meeting their goals. Strict forecasting requirements will ensure that providers deliver the expected services with the targeted KPIs and SLAs, while penalties for falling short should be incorporated into the agreement.

In addition, if tangible financial rewards can be linked to the provider's overall performance, put them into the agreement as well. All of the commercial elements should be incorporated into a master agreement with supporting service documents that can be modified as conditions for a specific service change. Step-in rights and governance along with exit, liability, renewal and key operating provisions should be addressed in the master agreement.

Finally, given the complexities of most outsourcing agreements, a strong legal team, supported by experienced outside legal counsel, is generally required. The commercial terms should be agreed upon during the evaluation process and nailed down in a detailed memorandum of understanding early in the process.

Success Breeds Success in Network Outsourcing
The most successful initiatives are those based on a solid foundation of pre-outsourcing strategies. For example, before outsourcing we often recommend cutting costs by consolidating functions into larger regional centers. We also suggest automating processes to improve efficiencies and reduce redundancies, and aligning the workforce to match current and projected market conditions. Other pre-outsourcing tactics include rationalizing networks and developing a multiskilled workforce.

Combined, these steps help drive down costs and increase returns prior to outsourcing. They also force the new provider to use its own skills, competencies and technologies to achieve the next, incremental level of savings. At one carrier, pre-outsourcing tactics reduced total headcount by 29 percent. The outsourcing initiative then identified an additional 35 percent reduction in headcount.

In our experience, successful outsourcing initiatives require several key actions:

Ensure executive-level involvement. Top executives must be involved from the beginning of the network outsourcing project. The board of directors and, if appropriate, supervisory boards need to be advised and updated throughout the process. Depending on the final scope and scale, this is likely to be one of the most significant projects for a carrier, which means all business units must be informed and engaged. Additionally, be prepared to communicate with the financial investment community and media outlets. When they learn of the project, they will want to discuss the financial and operating implications of network outsourcing with senior managers. In countries that require public disclosure, regulatory approvals, or union coordination, carriers must coordinate strategies and hammer out the details. Early and open disclosure is the best approach to communicate the process.

Clearly define the operating model. The scope of activities to be outsourced and the interfaces that will be required are central elements in the network outsourcing operating model. In-scope activities should be based on processes and not technologies that can then be aligned with specific service offerings such as DSL provisioning or assurance. A process approach will help simplify and reduce the number of required interfaces. The operating model should be designed to give the provider the flexibility to make it work and to ensure financial success. Figure 5 depicts the key success factors in the operating model.

Design the outsourcing process. The right design has a major impact on the overall benefit to the carrier even if the project is stopped at one of the go or no-go decision points. The four main outsourcing process steps are:

• Optimize relevant processes before outsourcing
• Define distinct phases and make go or no-go decisions at the end of each phase
• Assess what outsourcing offers against the internal improvement options
• Plan implementation on a phased basis to test the operational quality of the selected provider

Create a life cycle process. Finally, the outsourcing process has to be understood as a lifecycle that requires re-assessments over time based on changing conditions. Management needs to continuously monitor the outsourcing agreement and the supplier to ensure the company is achieving maximum benefits.

Get Smart
Fixed-line carriers are witnessing the rapid erosion of their traditional revenue streams as new competitors force prices down, wireless and fixed-voice services converge, and new services increase the substitution effect. From now on, success for carriers will depend on their ability to significantly reduce their cost structures to free up investments for future service offerings that really add value for the customer—including fiber to the curb, VoIP and other content-based offerings.

Ultimately, fixed-line carriers will likely follow the path of technology manufacturers. When faced with high cost structures and collapsing markets, the manufacturers were smart enough to outsource significant parts of their operations. Fixed-line carriers that adopt the seventh strategy will be well ahead of the game.

¹ The evaluation and pre-implementation processes require approximately 12 months and savings can be achieved in the first year of implementation.

Consulting Authors

Mitch Mitchell is a vice president in A.T. Kearney's Plano office.

Bruce Marshall is a principal in A.T. Kearney's New York office.

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