Operators bold enough to throw away their preconceptions could find that outsourcing parts of their network can be a solution to their cost problems. Jurgen Wittkopp of PA Consulting Group explains.
How can mobile operators respond to the ever-increasing pressure to cut costs without compromising the future viability of their business? Regulators, competitors and growing technical complexity are all contributing to the margin squeeze that we currently see in the industry. In a tight spot, selling off non-core assets or freezing investments looks like a handy ‘quick fix’, and it is one that some operators have gratefully seized. Unfortunately, this often does not go far enough.
One of the avenues to consider, we believe, is to outsource parts of the network to partners that can do things more efficiently. This step may seem to go against everything that mobile operators think they stand for, but it would be a mistake to dismiss it out of hand. Our projections, grounded on a case study for an “average” European mobile operator, suggest that network outsourcing could reduce costs by around 10% and debt by up to 15% — without necessarily giving away strategically important tasks or jeopardising the responsiveness of the business.
Such a bold step could rid operators of several chronic inefficiencies and significant cost. For example, one has to ask whether it is appropriate that large parts of a network operation should be run by highly skilled engineers who need to be trained in new software or equipment every six months? Or does the relatively miniscule traffic that passes through GPRS and mobile hosting equipment justify throwing huge resources at them when players in the fixed internet world often have derived very cost-efficient processes to utilise infrastructure optimally? Outsourcing could lift burdens like these from the operators’ shoulders.
Along with these industry-specific benefits, operators could gain the advantages associated with all well-designed outsourcing deals, together with some larger strategic wins that have been demonstrated by the new style of outsourcing partnership deals now being signed within the IT industry. The benefits are summarised in figure 1.
Missed opportunity
If outsourcing of parts of the network has such potential, why has it not happened to any significant extent? Network operators’ cautious approach to explore the option stems from the belief that they should, literally, operate networks. Yet there is little logic to this view. Most operators identify their main assets as brand and the ability to build customer relationships, with ‘the network’ increasingly being seen as a commodity; in some cases, operators are already banding together to operate shared 3G networks. Even if ‘the network’ is viewed as a core activity, the operators already outsource other core activities such as customer care and billing. Nonetheless, for now the network remains the industry’s sacred cow, with as much resistance to outsourcing it as there was to outsourcing mainframe computing ten years ago.
And that, perhaps, explains why the industry lags behind the IT community when it comes to reaping the benefits of implementing a proper sourcing strategy that includes outsourcing as an option. Such outsourcing as has taken place within the mobile industry is at a fairly superficial level: installation work is easy to contract out piecemeal, but not surprisingly the payback is modest. By contrast, recent outsourcing deals in IT have demonstrated the power of creative partnerships between supplier and customers to deliver major cost savings and debt reductions. There are multiple ways in which these partnerships can deliver value for both parties — reductions in the number and complexity of supplier-customer interfaces, sharing of overheads, volume effects, and so on.
Evaluating all the options
Outsourcing must be worth evaluating, at least — so how should mobile operators set about the task? One of the main roadblocks we have found is that mobile operators quite often do not fully understand where their cost comes from and whether what they spend is good or bad practice. However, this knowledge can only help companies to systematically assess the business case for an (out) sourcing deal. Actually implementing it is complicated, given the multiple possibilities: for example, splitting off a separate com-pany, gradually handing over systems to a partner, or buying in standard services.
The best way to tackle the evaluation is to create a multidisciplinary team, equally at home with industry processes, technical issues and financial aspects. Given the lack of precedents within the mobile sector, such a team will need to include individuals with experience of setting up the more innovative outsourcing deals found in other industries, such as IT. This same team can, if appropriate, go on to help plan and implement the outsourcing deal. However, the ultimate benchmark and decision on whether to opt for outsourcing must be the improvement of shareholder value.
While the involvement of the operator’s key staff is essential, purely internal projects are unlikely to succeed; operational staff will inevitably be biased against the idea of outsourcing, while finance specialists may lack sufficient understanding of business processes and technical detail. Ideally, therefore, the evaluation and planning tasks should invoke the help of an independent third party — independent also in the sense that it does not itself offer outsourcing services.
What about the supply side of the equation? In general, there is no shortage of would-be providers of outsourced services. Candidates include networking equipment vendors, for whom offering network outsourcing services could avoid the need to lay off staff who might otherwise be temporarily surplus to requirements. IT outsourcing specialists, too, are very interested in this potential new business area. The difficulty is likely to be in selecting the best contender with the optimal risk-reward ratio; here again suitably-experienced third parties can help. They can conduct thorough assessments and identify suitable partnerships and later broker deals that are to the advantage of both partners.
A different approach
For mobile operators, PA recommends a four-phase approach to assessing, defining and preparing to implement sourcing options — an approach designed to guarantee that theoretical advantages get converted into real cost savings and sustainable value improvements. The four phases are described in the box. For a typical company all four phases can be completed in a matter of months. At the end of this period the mobile operator can, if appropriate, be ready to enter into an outsourcing agreement, equipped with an implementation plan and having selected an appropriate partner. Rapid as this timescale may sound, experience shows that it is realistically achievable.
The success of a project like this — and particularly of the crucial fourth phase — depends heavily on the inclusion in an evaluation team of personnel with prior experience of similar outsourcing deals. That is to say, companies need to have access to individuals who have set up strategic partnerships, rather than simply the more conventional contracts for the delivery of a specified service, which are associated with lower risks but much lower rewards. These individuals are the only ones who can confidently translate the theory of outsourcing into a practical outcome, ensuring that the benefits worked out on paper materialise in reality.
Given the mobile industry’s track record, this experience is most likely to have been gained in other sectors, so it is essential that the team include members with in-depth experience of mobile communica-tions, at management and technical levels, both within and outside the company for whom the project is being conducted.
From neutral to top gear
Taking a neutral view it becomes clear that everything that does not provide a sufficient differentiation or can be seen as commodity is bound to impact share-holder value negatively. Even though the reluctance to admit this is in the mobile operator camp is still high, over time they will be forced to change their thinking and follow economic rules.
Outsourcing may not be for every com-pany, but the one thing mobile operators cannot afford to do is to ignore the possibility. Those that neglect even to evaluate the potential benefits of outsourc-ing will find their investors knocking on the door demanding to know why.