Communication network infrastructure vendors like Ericsson, Huawei and Nokia have pursued professional and managed services opportunities with communication service providers (CSP) for as long as they have provided infrastructure. These range from basic network deployment and after-sales support services, to more complicated multi-year managed services contracts, which were pioneered by companies like Ericsson in the early years of this millennium.
As the communications industry has matured, professional and managed services have become increasing strategic for network infrastructure vendors. For example, in 2002 Ericsson reported annual Professional Service revenues that were 17.8 percent of total Systems revenues. By comparison, Ericsson’s Global Services revenues were 30 percent of total revenues in 2005 and 44 percent in 2015. Similarly, Nokia’s Global Service revenues increased from 30 percent in 2005 to 47 percent of its total Network revenues in 2015. Traditionally Huawei has not been particularly strong in professional and managed services, but has ramped its efforts and expanded it services revenues, particularly in the last 24 months. While the percentage increase in service revenues is largely a consequence of declining unit prices for infrastructure equipment, it is a clear reflection of the strategic importance that network equipment vendors must place on professional and managed service opportunities.
Some managed service contracts, particularly those inked in the early days, have languished under the shroud of misaligned expectations and shifting operational priorities. However, more recent contracts have succeeded in addressing many of these short-comings and are generally focused on cost savings, CSP re-skilling, support for network sharing and technology migration initiatives.
Today, as network infrastructure vendors pursue professional and managed services opportunities with CSPs, they are confronted with an industry that is transforming itself. This transformation is widely documented and necessary for CSPs to cope with unprecedented customer demands and competition from existing and emergent players. It is also driven by the saturation of traditional markets, the digitization of consumer and enterprise services and growing interest in disruptive technologies like the Internet-of-Things (IoT). As CSPs transform their operational models, traditional professional and managed services are disrupted and must also transform. This is further complicated by the need for network infrastructure vendors to simultaneously support operations that are at varied stages of transformation. As a consequence, there is a risk that service contracts will languish as CSPs transform; in many respects paralleling the challenges observed in the early years of managed services.
The rate at which CSPs transform depend on a variety of factors, including customer demand, new market initiatives, competitive threats and organizational change management. However transformation is inevitable and necessary, particularly as market opportunities challenge traditional business models. For example, until recently most CSPs have paid little attention to the Internet-of-Things (IoT), primarily because it is largely uneconomic and overly complicated when implemented using existing operational models. However more recently the IoT market has captured the attention of CSPs and is on a growth trajectory which we believe will see network subscriptions increase from 289 million to 4.6 billion between 2015 and 2025, see Exhibit 1. To succeed in the IoT market, CSPs must have operational models that can achieve profitability from monthly service revenues in the order of one US dollar (or less) per connection, and with sufficient service agility to support a diverse range of IoT use-cases.
Exhibit 1: Forecast for IoT based network subscriptions
Source: Tolaga Research 2016
For many CSPs, the operational models of over-the-top (OTT) players like Google, Facebook and Amazon, and the new and innovative technology architectures and services that they are enabling, provide transformation blueprints. And for good reason. Exhibit 2 compares the service agility and operational efficiency of typical CSP and OTT players. Traditionally CSPs take six or seven months to launch a new service, whereas a company like Amazon launches a new service feature every eleven seconds on average. A typical CSP has approximately 100 servers per unit head-count, which pales in comparison to Google which has 15,000 servers per head-count. While we do not expect CSPs to achieve the operational efficiencies and agility of OTT players, the virtualized technologies and agile operational models that have been pioneered by OTT players offer tremendous benefit for CSPs.
Exhibit 2: OTT players differentiate with agility and automation
Source: Tolaga Research 2016
To capitalize on the operational models and technology innovations being spearheaded by OTT players, CSPs and their technology partners have trialed, and in some cases implemented, virtualized infrastructure and telecom cloud based solutions. Notable examples include, network function virtualization (NFV) and software defined networking (SDN). Some operators like AT&T, Telefonica, Telia Sonera and Telstra are aggressively pursuing cloud and virtualization initiatives. AT&T plans to have 75 percent of its network functions virtualized by 2020. Telefonica believes that it can achieve 30 percent operational expenditure (OPEX) savings with NFV (albeit with tremendous focus towards automation), and Telia is planning to have SDN and NFV underpin its future 5G deployments. Telstra has a relatively aggressive strategy towards virtualization and plans to launch a hybrid cloud service in 2016, which provides dedicated network resources to a variety of public and private cloud environments based on Microsoft Azure, Amazon AWS, VMWare, and IBM SoftLayer. In contrast, Orange France Telecom and Vodafone are taking more measured approaches, which question the financial gains that can be achieved with virtualization and seek targeted business cases for the services that are virtualized.
Irrespective of the rate at which CSPs evolve towards virtualized network environments, the evolution is inevitable. As this evolution occurs it will disrupt virtually every aspect of network operations, by driving the need for automation to orchestrate physical and virtual resources, increased attention towards security and network analytics, and agile architectures to enable nimble service delivery. In particular, when network functions are virtualized, they cannot be managed with conventional manual provisioning techniques, but rather depend on orchestration platforms which automate provisioning. Network slicing requires the service centric slicing of network resources, which also depend on automated processes and procedures. Furthermore, since service centric network architectures entwine network functionality and data directly into applications, traditional operational silos must be eliminated and security hardened. These architectures must also account for legacy infrastructure that will remain operational for the next decade or more. Professional and managed service providers are confronted with the same challenges, which are further complicated by multi-year service contracts, and the need to leverage economies of scale through synergies amongst CSPs.
As network infrastructure vendors confront the challenges in positioning their professional and managed services for the future, we believe they have several factors that bring them advantage. Most notably, we believe that network infrastructure vendors are better positioned than most CSPs with human capital alignment. This is illustrated in Exhibit 3, which summarizes several key drivers for operational transformation and their relevance to the Senior Executives and network operations employees of CSPs and managed service providers. It demonstrates that in some cases, such as in the areas of customer-centricity, competition and cost cutting, CSPs might have a better chance of success by opting for managed services – particularly when it is used as a vehicle to fuel operational transformation.
Exhibit 3: Assessing the Benefits of Operational Transformation
Source: Tolaga Research 2016
The digitization of consumer and enterprise services not only impacts CSPs, but it also impacts the broader community of enterprises that are delivering the digital services. As these CSPs and other enterprises transform to capitalize on opportunities for digital services, the professional and managed service requirements for their operations will converge and become increasingly synergistic. As a consequence, we believe that it will become increasingly important for network infrastructure vendors to strengthen their professional and managed services portfolios beyond the CSP community. This is particularly the case when enterprise services can be used as a means of reinforcing CSP opportunities and vice versa, albeit with strategies to effectively compete with competition from the plethora of IT services companies, including industry heavy-weights like IBM. Tolaga will be investigating this in an upcoming research study.
To succeed, network infrastructure vendors must position their professional and managed services to shepherd CSP transformation efforts, and capitalize on the broader market opportunities in other industries that are becoming digitized. While the long term requirements for professional and managed services are relatively well understood, network infrastructure vendors are challenged in the pace and prioritization of their services portfolios, particularly with the varied approaches that CSPs are taking with their transformation initiatives. Professional and managed service providers that efficiently the varied demands of CSPs and enterprises, and capitalize on synergies between them will ultimately succeed.
In its upcoming study, Tolaga will investigate the following with the support of a Decision Maker platform: