#4 – Managed services
Managed Services is dead, long live Managed Services
On a macro level, we still see overall revenue growth in managed services at a rate of 17 per cent each year. On a micro level, we see two out of four major managed service vendors retreating. Alcatel-Lucent announced it would review, and possibly exit, 25 per cent of their current 68 managed services contracts. Similarly, current financial pressure seems to impact NSN’s willingness to bring in new Managed Services deals. Ericsson and Huawei provide little visibility of their managed service profitability; as their profit margin figures are embedded in their compound reports of professional services. Clearly, the industry is in a phase of intense competition in the managed service space. Northstream believes that a three player market, with sustainable margins, will emerge. These vendors will also try to position themselves higher up in the value chain of managed services.
At the early stage of telecom outsourcing any unwanted operational cost structures that vendors were forced to inherit in order to secure a deal could be swallowed by an expanding professional services organisation. This is because they knew there were additional managed service deals around the corner where surplus resources would surely come in hand. However, for several of the deals made in recent years, it has been more challenging for vendors to achieve synergies than the scope suggested. This has meant that synergies have taken longer to come into effect and has negatively impacted vendors’ enthusiasm.
Northstream predicts that, in order to maintain profitability within managed services, vendors will become less willing to risk being squeezed in-between operators’ OPEX reduction requirements and the pursuit of increased flexibility. This, in turn, will lead to sterner terms and negotiations for operators nearing renewals of their managed service contracts.
Similarly, operators realise that to remain competitive in the mobile broadband and LTE deployment era; they must secure control of their most important asset – their networks. This means that OPEX reduction cannot sustain its position as the single most important criteria when defining the future of outsourcing. More likely is that aspects like network quality focus, capacity flexibility and CAPEX investment manageability will have more prominent roles when defining outsourcing business models 2.0.
This will involve less of a ‘blueprint’ on how to establish managed service models going forward; and instead an increasing amount of operator-specific responsibility sharing models. It is likely, a model will emerge where the core services with greatest synergy potential (e.g. global NOCs) will be combined with a more tailored, and local, solution for each operator. Especially for tier one and tier two operators, where a ‘blueprint’ simply does not fit. To succeed, operators and vendors must define business models and operational processes that promote the vendor to actively address the operator’s network OPEX as a whole, including legacy cost structure and maintaining (or improving) network quality and customer experience.