Capital expenditures are expected to drop by 10-20 percent in 2002, according to Hampton Adams, communication software research analyst with CIBC World Markets. Carriers surveyed by CIBC suggest purchases for hardware such as switching and routing are expected to be limited this year. At best, says Adams, spending may recover by summer. However, software for service management, network management and inventory cleanup should do better. These oft-ignored segments of OSS may become this year's market darlings, with growth potential as high as 20 percent.
Buyers Return to Financial Basics
The maturation in market pricing that has so heavily eroded profit margins has spawned a move away from feature functionality as the key buying criterion. Platforms that used to aim for enhanced revenues now strive to reduce the cycle time for receipt of those revenues, as well as improving the productivity of costly human resources.
While three- to five-year paybacks were common just two years ago, many carriers are insisting on near immediate break-even points. "It's not 12 months; it's six months," says Eric Nelson, CIO of IP VPN provider Netifice, adding that its execs won't even consider deals that aren't at least cash-flow-neutral within a year.
Chuck Walters, director of IT Systems for broadcast and videoconference provider Sonic Telecom, echoes that sentiment, noting the hand-to-mouth financial realities of the current market. "Having a positive ROI three to five years from now may look good on a business plan, but the reality is, what can we afford to pay out today to ensure that there is still cash in the bank for those unforeseen needs?"
Executives at Sonic Telecom are banking on qualitative as well as quantitative benefits from the end-to-end platform they are about to acquire, according to Walters. Using financial models for both cash flow and total cost of ownership, Walters predicts the investment will have a useful life of three to five years. He says he is forecasting an annual outlay of no more than 5 to 7 percent of revenues. This includes the initial purchase plus the overall operational expense to keep the platform functional. "The target is to make sure that we have a low cost of operation for the next three years, that we are competitive or better than competitive from an OSS and IT perspective," he says.
The single biggest challenge is identifying all of the costs. "The more we delve into the systems [we're] seriously considering to procure," he says, "the greater the risk, and the more hidden cost we uncover, particularly in the professional services area." Project costs include hardware, software, maintenance, training, rollout and even the cost to hire and keep necessary staff. He also recognizes that he has to account for two important factors: the cost to develop and deliver additional market-facing features and the likely decline in unit revenues in a competitive market, even if total revenues to the company increase.
While it would seem easy enough to simply control costs down to the desired level, Walters admits that delivering services on the cheap isn't necessarily the wisest strategy. "If I think I can operate on 3 to 4 percent of revenue, and I'm running at 1 to 2 percent of revenue, then I'm running too lean. While I want to cap my expenses, I don't want to operate so low that I risk failure. I've seen organizations try to run at sub-2 percent, and they end up paying for it. They either can't grow or start having quality issues, or they're missing opportunities in terms of supporting the organization."
But the end game, he says, is beyond strict financial return. In Sonic's case, the utility of the platform is fundamental to business success.
Vendors See The Light
The business case justification that is now de rigueur for platform purchases is changing vendor behavior as well. Serge Hippolyte, director of product marketing for Miami-based call center solution provider Cellit Technologies, says, "Unless you come into an opportunity and show how quickly you can give them a payback, what the impact on their bottom line is going to be, and the savings in operations that you're going to generate for them, they're not going to look at you."
According to Dan Leary, industry veteran and former vice president for product management at Longitude Systems, "They're going to rank projects first by timing of payback; the short term is key in anything. If it's got a huge dollar value on it, but it's two years out, it isn't going to fly. And then the next thing is they're going to rank them by the total importance to the business-how big is the dollar value? If it has a short payback but it's too small, it isn't going to get strategic attention."
In addition, carriers are insisting on multiple uses for a single project, so as to spread the ROI risks and benefits across several business units. This allows carriers to consolidate teams, processes and ultimately operational expenses. An even more ticklish customer demand includes payments to vendors commensurate with realized results, a shared-risk scenario that most vendors shy away from but will agree to when a big catch is at stake.
The Sales Cycle Lengthens
In most carrier OSS/BSS purchases the number of stakeholders is increasing, with involvement by the CFOs, COOs and CEOs (see "Make It Easy for the CFO,"). And as venture capitalists and boards of directors call for increased due diligence, purchasing decisions come under increased scrutiny, often doubling the length of time to make a purchase decision. According to Leary, "The balance of power has shifted. It went from the technical side of the organization to the financial side as the market has corrected."
So what happens when vendor cash flow slows down because deals take longer? Tactics range from increased sales staff and alternate distribution channels to financing and expense-only deal alternatives.
Linda Lancaster, North American operations and marketing director for CABS billing vendor Intec Telecom Systems, notes that rather than capitalize on a software purchase, carriers are opting for service bureau functionality with an option to license the software at a later date. "Up to now we've had probably 75 percent to 80 percent of customers purchase the system and run it in-house," she says. "But in the last year I would have to say that 80 percent of our sales were of the service bureau. They don't want to put the money out now."
Some customers opt for revenue-sharing agreements that allow Intec to charge a percentage of all CABS revenues. Says Lancaster, "They really don't have to put out any money; we just take a higher percentage of what they bill out, and then it goes down as the time passes and we recoup our setup fee. We even have done a 'lease to buy' and funded it for them on a three-year period so they can just pay us monthly for the system."
Everybody's Getting Into the Act
Every OSS vendor on the block, it seems, has an ROI model in its sales toolkit these days. ROI white papers, Web-based financial calculators and PC-based payback analysis tools are in use during face-to-face sales calls. According to Peter Jacobson, senior research analyst with New York investment bank Kaufman Bros. LP, "Virtually every OSS company out there is selling based on ROI. They have to. Clearly [service providers] are not going to buy because they get additional bells and whistles. They're going to buy because it either reduces cost or generates revenue. To the extent that you can demonstrate that, you'll get their attention and be able to compete for limited dollars."
"I'm a little skeptical of taking ROI models at face value," says Peter Giglio, vice president for equity research at institutional research and investment banking firm Gerard Klauer Mattison. "These models can easily be slanted in favor of the vendor. Selling ROI is what everyone should be doing in good and not-so-good times: looking for ways to increase revenue and lower operating expense. But the real burden is on the service provider to take the vendor's input and make it applicable to their particular situation."
While the ROI argument from the vendor may be a little one-sided, says Jacobson, "it's a critical success factor [for OSS vendors]. Even if the economy recovers in 2002, it's going to be a long time before [carriers] get back to a situation where they have an extraordinary amount of funds and feel that they can be liberal in terms of buying systems."
As important as ROI can be in the selling process, it isn't a panacea. "They're not going to [install your system] just because you put a bunch of calculations in front of them," Jacobson cautions. "Ultimately, they have to want that system, and they have to want to do business with you."
Finally, listen to the market and be sure you get in on the projects that are most likely to stay funded. "We're trying to get around [the longer sales cycle] by focusing on some of the mission-critical type work, today's hot spots-disaster planning, data backup, security, those kinds of things," says Paul Hammer, director of the communications practice at systems integrator CC Pace.
The net effect of all this financial scrambling, says Leary, will be a sharper, albeit possibly smaller, set of vendors and service providers. "In some ways, this downturn is a good thing," he says, "because it takes us out of the go-go days and forces us to shore up the basic processes. In the long run, it's going to be healthy for the industry." Netifice's Nelson agrees: "It's probably the only positive result of the trauma the industry is currently undergoing."
| Make It Easy for the CFO
|
