Hard Lessons from Telecom’s Depression Now Drive Technology Sourcing
Ed Finegold
03/01/2007
Telecom service providers are still feeling pain from the wounds they received in the late 1990s. Back then, best-of-breed OSS was the popular trend for IT architecture. Service providers spent billions with their trusted systems integrators (SIs) and network equipment manufacturers (NEMs) to weave together unproven network technology and software. Many of these efforts fell far short of stated goals or were outright disasters. The sting of these failures remains, and it has transformed how telecom providers are sourcing work to their suppliers today as they continue trying to create wholly new technologies and services.
Risk is of primary concern, as is amortizing costs over longer periods. The main focus, however, is to get through transformation successfully. To do so, service providers are breaking the task down into manageable pieces that they source to specific partners in order to reduce risk, restrain costs, and have one point of supplier accountability for any defined segment of the transformation program. The result has been significant growth for companies like Amdocs, Convergys and the Indian SIs that are benefiting from this new multi-sourced, risk-averse strategy.
A Single Point of Accountability
“I’ve had customers say, ‘I want one throat to choke, and it’s you,’” says Ted Fadick, director of Convergys Corp.’s professional services group. This sentiment seems to contradict the idea that carriers no longer want one prime integrator to manage their massive technology programs. These two concepts do go together, however, and are important to understanding how technology sourcing is unfolding.
Fadick says that carriers “want that one prime person now that has both the integration skills and the software coming in.” When he says “prime,” he’s speaking as a strategic supplier of OSS/BSS software and related professional services. If transformation is broken down into pieces, one big piece that can be further broken down is operations transformation, where a company like Convergys or Amdocs can play a major role. These companies are competing to take over as the prime supplier and integrator for the entire OSS/BSS domain, though it won’t be transformed all at once.
This role is radically different from the prime integrator role, which traditionally encompassed all of the needs of a given service, from down at the network up through operations to billing and customer care.
Burned by Best of Breed
The large prime integrators like PriceWaterhouseCoopers (now IBM Global Services), Cap Gemini and Accenture often led the way on these projects and steered service providers toward best-of-breed operations architectures. The best-of-breed concept promised flexibility when the future was unclear and no one wanted to commit to one technology track, but “it set an expectation of pre-integration out of the box, and that has never been the case and still is not the case,” says Paul Vedam, president and CEO of Tier One OSS. When things began to go wrong, he says, “the prime contractor had all the risk, but … there were too many players involved to figure out where the problem was coming from.” The ensuing spectacular failures taught service providers some lessons and redirected their sourcing strategies.
No one is winning the massive, end-to-end prime integrator deals anymore, at least not in the United States or Europe. A service provider that wants “one throat to choke” is looking to source a specific domain or program that may be sizeable, but not an end-to-end, do-all role that ends with the integrator walking away. “McKinsey’s advice to the large telcos today is that if you see a large SI come at you with a big price for a large transformation project, you should say no to it, because there’s no experience behind any of this anywhere,” says Vedam. “You need to take on these problems in slightly smaller chunks.”
The Rise of the ISV
As transformation is divided into those chunks and operations transformation is extracted, it’s not surprising that companies with strong billing and customer care software would gain ground. In just the past few years, Amdocs and Convergys have expanded their influence significantly within the large service providers’ IT shops. Besides their software, however, their professional services are generating considerable growth. Fadick at Convergys says, “I’ve had clients say to me, ‘Heck, who knows your product better than you do?”
A major point behind bringing in such expertise is to reduce the risk of failure.
“What has changed,” says Gordon Rawling, marketing director for Amdocs, “is that we now receive RFPs and RFIs for billing and CRM at the same time. They want us to take accountability for the business process, and that’s fundamentally about risk management.” Carriers today are breaking projects into more manageable pieces and assigning them to the right experts.
“You put the risk with the folks who are best able to handle it,” says Rawling. “The risk is with the products and integrating them into the environment.” Integration has always been a foremost source of risk. The ISV-SI lends itself to taking on more of the integration risk, because so much of its own product reputations and futures are wrapped up in the long-term success of every deployment. ISV-SI relationships with carriers are looked at more as long-term development, launch and support relationships where the SI can never really walk away.
Another benefit of the ISV-SI relationship for carriers relates purely to accounting. “If they write a single contract with one vendor,” Fadick says, “it’s easier to amortize the cost over the life of the software—where if you’re working with an SI, you’ll be lucky if you can capitalize on 20 percent of that cost.” He says that carriers are now opposed to the idea of the “big bulge” spend where a great deal of expense is realized up front.
The Shortcut to India
India’s systems integration firms have seen incredible growth during the past five years. Satyam Computer Systems, for example, was virtually unknown; now it’s a billion-dollar juggernaut in development, integration and consulting.
Indian firms have also benefited from fewer U.S. trade restrictions and regulations since trade talks expanded in 1998. India’s pro-Soviet stance during the Cold War triggered embargos relating to any potential military technology. Many of those restrictions have since been lifted, making it far easier for U.S. corporations to export technology and technology-related work to India. Indian and U.S. officials continue to meet to further ease technology reviews in advance of exportation.
Much of Indian telecom SI firms’ initial growth has come from simple labor arbitrage, but they have also proved able to take on difficult development and integration projects. That has opened doors to more hands-on transformation work, particularly as carriers split up massive projects and seek alternative suppliers.
“We’ve seen a shift from total outsourcing to modular sourcing, and that is benefiting us and companies like us,” says Richa Govil, marketing director for InfoSys. When long-term contracts turn over, she says, it opens doors for others to step in and offer more value at a better price. “These deals have been long-standing, those that are coming up for renewal, and we think we’ll be benefiting,” says Govil.
Because transformation is so expensive, “that’s where the Indian SIs are starting to show up,” says Tier One’s Vedam. He argues that these firms tend to be particularly good at solving large enterprise problems and that “they can handle large transformations in customer care and other areas that aren’t necessarily specific to telecom.” He agrees that the Indian SIs are far more successful today against major players like Cap Gemini and Accenture “who always won in the past,” and that his company must compete with these firms far more now than ever before.
The Old Guard
Though the ISVs and Indian SIs have gained ground in the OSS/BSS domain against the likes of Accenture, they are still puny by comparison. Accenture has massive global resources and earns roughly $3.5 billion per quarter from a diverse business that serves almost every major industry. Dan Elron, managing partner for Accenture’s communications industry group, agrees that “when you look at the bigger initiatives, you see things more broken up and thus not as huge wins in one deal.”
He says that Accenture has been seeing cost competition for quite some time. Moving with the market, nearly 50 percent of his practice’s revenue comes from its offshore and business process outsourcing (BPO) services. Two major growth areas he’s seeing are in less mature, international markets—such as in Asia—and in the market for SDP solutions. “The growth internationally in less mature markets is about three times the growth of more mature markets,” says Elron, “and when it comes to more sophisticated systems or business integration, I see us gaining market share—not the opposite—because of our investments in our SDP offering.”
As for operations transformation programs, Accenture is playing a major role in Telstra’s ongoing transformation. In North America, Elron says, Accenture performs “part of the activity” for major carriers’ programs, and “in every one of those cases we are the ones accountable for a business result.” He also says that the mid-sized carrier market is strong for transformation business and points to a recent win at Hawaii Telecom as an example of a major mid-market success over the large ISVs and Indian SIs.
When it comes down to it, it would be unwise to count out firms like Accenture—simply because of their global reach, resources, diversity and depth of relationships at executive levels. Yet the company recognizes the changes in spending decisions and has adjusted accordingly. The growth of its BPO and offshore offerings are two examples of how this massive SI has accommodated market demand. “As much as we’d like to see a role for a prime integrator, like in the defense industry, the CEOs and CIOs are more cautious in terms of time frames and returns on the scope of the project,” says Elron.
The good news for the telecom industry in all of this is that carriers are trying to make decisions that are smarter, more measured, more risk-aware. Transformation must not just succeed, but succeed fabulously to pay for itself. The billions invested today should turn into hundreds of billions in opportunity tomorrow—the kind of opportunities that never materialized after billions were squandered on risky projects in the 1990s. One thing that all of these players have in common is that they are tied to the long-term success of the telecom industry. Each wants to prevent another nuclear winter.
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