Outsourcing Trends in the North American Telecommunications Market

7/28/2019 Outsourcing Trends in the North American Telecommunications Market

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Perspective Barry Jaruzelski

Raul Katz

Frank Ribeiro

Outsourcing Trends inThe North AmericanTelecommunicationsMarket


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CONTACT INFORMATION

Florham ParkBarry [email protected]

New YorkFrank [email protected]

Buenos AiresRaul KatzExecutive [email protected]

Originally published as:

Outsourcing Trends in the North American Telecommunications Market,by Barry Jaruzelski, Raul Katz, Frank Ribeiro, and Rakesh Bordia, Booz Allen Hamilton, 2004.


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Booz Allen Hamilton recently conducted a major

study on the evolution of the value chain and the

potential impacts of outsourcing on the North

American telecommunications industry. As a part

of this study, senior executives from major Service

Providers and industry experts across North

America were interviewed to examine the drivers

and trends for outsourcing in telecommunications,

with a specific focus on network-related functions.

Interest in this study has been positive, under-

scoring the relevance of the topic for senior exec-

utives today. This effort complemented a similarstudy conducted by Booz Allen in the European

market late 2002.

The North American-based effort covered more than

80% of the domestic wireline and wireless markets,

and included incumbent local exchange carriers

(ILECs), long-distance carriers, wireless carriers, and

smaller players. A Booz Allen team interviewed senior

business leaders (approximately 80% of executives

were VPs or higher level) across key functional areas of

the organization typically involved in making outsourc-ing decisions in network operations, finance, procure-

ment, and corporate strategy.

The discussions focused on the following key questions:

Given the market environment, is outsourcing viewedas key lever for the business?

What are the critical drivers and obstacles for outsourcing?

Do companies currently outsource core activities?What activities are companies considering outsourc-ing in the future, and why?

Which functions are involved, and at what levels areoutsourcing decisions being made?

What are the key selection criteria for choosing anoutsourcing vendor? What are the preferred types of

vendors and outsourcing models?

Overall, as companies continue to reevaluate business

models in the face of a tough economic environment,

outsourcing will become an increasingly important com-

petitive lever for Service Providers in North America.

As a result, telecommunications outsourcing (includ-

ing network activities) will grow within North American

Service Providers as they further drive performance

improvements to remain competitive. This document

summarizes the findings of the study and incorporates

the experiences and insight Booz Allen has gathered

from working with clients from many industries, includ-

ing telecommunications, on outsourcing issues.

Different Segments, Shared Priorities

The telecommunications market has been in a down-

turn since 2000, and this environment is clearly shap-

ing most Service Provider priorities today. Not surpris-

ingly, they share a clear set of strategic priorities in

response to the increasingly challenging environment.

Though the market environment has affected wireline

and wireless segments differently, most executives

interviewed share the same number one priority

Outsourcing Trends in the North American

Telecommunications Market


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improving financial performance (see Exhibit 1). Beyond

the financial priorities, wireline players are concerned

most about declining market growth and revenue due

to pressure from wireless and cable substitution.

Wireless players, though concerned about growth, are

increasingly focused on managing the growing complex-

ity of the business along several dimensions, includ-

ing technology, regulation, and customer preferences.

Wireless and wireline executives agree that focusing

on core competencies is a priority. By focusing on core

activities, Service Providers expect to shed unprofit-

able functions and clarify their value proposition, bet-

ter positioning themselves for revenue growth and

improved margins.

The combination of growing business complexity and

changing customer preferences, coupled with strong

pressure from the capital markets, is forcing the com-

panies to act. They are reassessing their strategic

direction and operating models, which in turn effects

activities along the value chain to be kept in-house and

those to be outsourced to a third party. As a result,outsourcing has emerged as a key business lever for

players today.

Outsourcing as a Business Lever

More than 75% of the executives consider outsourcing

as a key business lever that allows their business to

better respond to market challenges. Smaller players

tend to emphasize outsourcing more than larger players

and leverage outsourcing as a means to retain focus

and gain scale. Larger players use outsourcing more

opportunistically, for example, during market downturns,

or in subscale geographies to manage costs.

The reasons Service Providers give for outsourc-

ing are closely aligned with their strategic priorities.

Overwhelmingly, the number one reason Service Providers

give for outsourcing is Opex reduction and Capex opti-

mization (see Exhibit 2). The primary mechanisms men-

tioned to achieve this goal through outsourcing are:

Improve scale

Transfer fixed cost to variable

Leverage vendor expertisee.g., improved processes,proprietary tools, lower cost structure, etc.

Core Competencies of Telecommunications Players

Given the market conditions and external market

pressure, its not surprising that 100% of the Service

Providers interviewed currently engage outsourcing ven-

dors for some aspect of their operations. While core

activities appear to be off-limits for now, the definition

ofcore varies by segment, as follows:

ILECs: Most network activities; customer care and

billing in many cases; IT activities sometimes due to

regulatory requirements

Exhibit 1Service Provider Strategic Imperatives

Source: Booz Allen Hamilton

Exhibit 2Reasons for Outsourcing



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Long-distance players: Most network activities except

installation and maintenance; customer care/billing

activities in few cases

Wireless players:Most network activities except instal-

lation and maintenance; Customer care/billing activi-

ties in few cases

Small players:Onlycustomer-facing functions

How the definition of core versus noncore evolves over

time is critical to understanding the true potential of

outsourcing. Critical questions to be answered include:What are the key obstacles, and is the current reluc-

tance deeply fixed or likely to change? And who would

be considered for outsourcing, and what outsourcing

models will be deployed? As part of the study, Booz

Allen explored these critical questions to assess the cur-

rent and future extent of outsourcing along the telecom-

munications value chain in the North American market.

Evolving Boundaries of Core Competencies

Looking at all activities across the telecommunica-

tions value chain, it is clear that Service Providers

are most interested in keeping planning and manage-

ment functions in-house and are more open to out-

sourcing field activities. Human Resources (HR) and

Information Technology (IT) are the two functions that

Service Providers most often outsource today. There

is a demonstrated track record of outsourcing benefits

in these areas and many functional specialists deliver

these services today. On the other hand, the telecom-

munications industry has been slow to embrace out-

sourcing for core technical functions or customer-facing

activities such as network planning and architecture,

platform development, and sales and marketing. The

customer-facing functions where outsourcing is most

leveraged are customer care and billing, predomi-

nantly for overflow call centers and bill processing.

Exhibit 3 (above) provides a view of activities currently

outsourced and planned for outsourcing in the future.

Exhibit 3Outsourcing Opportunities Along the Value Chain



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Evolving Boundaries of Network Activities

Given that outsourcing is not highly leveraged in net-

work activities today, the interviews focused on how

this area might evolve over time. In general, Service

Providers have been hesitant to outsource network

activities because they consider their networks to

be key competitive differentiators. However, given

the financial pressures they are facing, most Service

Providers are increasingly open to the idea of outsourc-

ing in this area. While Service Providers are hesitant

to use outsourcing for network-related functions in gen-eral, they are very open to outsourcing under specific

situations. Examples include force augmentation for

large-scale network deployments, technology migrations

requiring new technology expertise or capability to man-

age legacy networks, or lack of scale in certain geo-

graphical markets. (See Exhibit 4). In fact, over 70% of

executives interviewed either already outsource some

network activities, or would do so in the near future.

Not surprisingly, within the network area it is the low-

differentiated field functions that are the likely candi-

dates to be outsourced. Key reasons include:

Require limited differentiated technical expertise

Are big drivers of operating cost

Are in line with Service Providers propensity to keep

Exhibit 4Specic Likelihood for Leveraging Outsourcing, by Area


Function Wireline WirelessSmall

Players

Force augmentation for large-scale

network deployments (e.g., 3G,DSL)

High High High

Network implementation, mainte-

nance and operations for legacy

networks (e.g., TDMA network in

GSM overlay migration, C2P)

Low Low High

Field operations and maintenance

for subscale marketsMedium High High

Network deployment, maintenance

and operations for emerging tech-

nology platforms (e.g., 3G, VolP)

High Medium High

NOC support (24/7 or after-hours

only)Low Low High

Exhibit 5Outsourcing Opportunities Along the Value Chain



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planning/management functions in-house and con-sider outsourcing for field activities

Exhibit 5 (see page 4) provides a detailed view of

specific network functions where outsourcing will be

deployed today and in the future.

At a high level, Service Providers are most open toward

outsourcing installation and maintenance-related activi-

ties (see Exhibit 6). This is followed by new technology

deployment and network integration. There is limited

openness toward outsourcing engineering, network

operations, network design, and network planning.

Segment Differences

The analysis also provides a unique perspective into

how the various customer segments differ in their

propensity to outsource. In general (and also evident

from Exhibit 4, page 4), smaller players are most

open to outsourcing, and wireless players are more

open than wireline players.

ILECs

The ILECs show the least propensity of all segments to

outsource network-related activities. Their represented

workforce is a critical inhibitor, and there are other

cultural and philosophical obstacles. ILECs regard

their network as the core to their business, and are

unwilling to relinquish control over network activities.

Further, ILECs possess scale in most geographies and

are much less drawn to the scale benefits which often

form the basis of an outsourcing business case.

Inter-exchange Carriers (IXCs)/Long-Distance Players

The long-distance carriers have a more pragmatic

approach toward outsourcing. Represented workforce is

still a critical inhibitor, but they generally are more open

to outsourcing. The executives interviewed indicatedthat their primary objective is financial improvement and

that they are actively exploring approaches to work with

a represented workforce on outsourcing opportunities.

Wireless Players

Wireless players also have a pragmatic approach

toward outsourcing and are open to it. They do not

have represented-workforce issues or cultural and phil-

osophical obstacles. Yet they are wary of introducing

a represented workforce into their current organization

and are likely to a take toe-in-the-water approach,experimenting with focused out-tasking before engaging

in large-scale outsourcing.

Small Players

Small players are most open to outsourcing network-

related activities. Many smaller players lack the cul-

tural obstacles that contribute to the hesitancy on the

part of the larger established wireless and wireline

Providers. Smaller players do not possess the scale

and technical expertise to maximize the benefits of a

smaller network and believe that outsourcing theseactivities to large vendors allows them to create a level

playing field, capturing economies of scale with the

larger players.

Overall, the key concerns raised around outsourcing are

focused on quality of service, potential loss of flexibility,

and labor issues. Several large companies mentioned

past outsourcing experiences that resulted in loss of

flexibility and internal skill base as other obstacles.

Key Aspects of Outsourcing Arrangements

Once the decision to outsource is made, Service

Providers deploy specific contractual arrangements to

maximize benefits and minimize risks (see Exhibit 7,

page 6). For many participants, the most important

elements of an outsourcing deal are the financial ben-

efit and the duration of the contract. Wireline and wire-

less providers alike want to see a value proposition

that implies a clear and proven path to achieve 10% to

20% savings.

Exhibit 6Which Network Activities Would You Outsource?



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In fact, this level of savings is a necessary condition for

an activity to be considered for an outsourcing arrange-

ment. There is also a clear preference for shorter-dura-

tion deals (up to three years) for multiple reasons:

Uncertainty around vendor capabilitiesPast bad experiences with five-year or longer con-

tracts (e.g., lack of flexibility)

Shorter contracts drive greater vendor accountabilityOutsourcing Decision Making

Key outsourcing decisions for large-scale deals are typi-

cally strategic decisions made by CXOs, with planning

and implementation then passed down to the function-al units. Often, smaller deals within established operat-

ing guidelines can be finalized by the regional or func-

tional unit heads, usually at the VP levele.g., local

field maintenance. Another key player in this process

is the procurement organization that usually supports

finalization and execution of outsourcing decisions.

Key Criteria for Outsourcers

One area where there is consensus involves the crite-

ria used for choosing outsourcers. The technical exper-

tise and financial stability of the vendor are at the top

of the list. Given that the quality of the network and

issues around the skill base are the key concerns for

Service Providers, it is no surprise that need for techni-

cal expertise emerges as the most important criteria.

In fact, almost 75% of the interviewees rank technical

expertise as their number one criterion. As one execu-

tive said, nobody wants to pay an outsourcer to learn

from us.

The second area of focus is the financial stability of

the outsourcer. Financial stability is usually associatedwith vendor size rather than profitability in spite of the

fact that profitability is the key enabler for ensuring

that a vendor meets its obligations in an outsourcing

arrangement.

While Service Providers are looking at a large range of

players, there appears to be an overwhelming prefer-

Exhibit 7Key Aspects of Outsourcing Arrangements Deployed



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ence for functional experts (such as equipment ven-

dors) over generalist outsourcers.

Conclusion

Service Providers share a clear set of strategic priori-ties in response to an increasingly challenging market

and see outsourcing as a key business lever. While

Service Providers do most outsourcing in HR- and IT-

related activities, they are already involved in, or con-

sidering, the outsourcing of network-related activities

considered the key core competency of a Service

Provider. Increasingly, everything is on the table.

These trends have clear implications for Service Providers

wanting to maximize their outsourcing opportunity:

Identify current and future core and noncore compe-tencies

Develop a focused strategy to build best-in-classcapabilities in core areas

Challenge in-house performance for noncore activitiesand leverage outsourcing

As companies continue to reevaluate business models

in the face of a tough economic environment, outsourc-

ing will become an increasingly important competitive

lever for Service Providers in North America.


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Outsourcing Trends in the North American Telecommunications Market

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