Carriers abroad increasingly are looking at managed service contracts as a way to reduce their network operating expenses, and large equipment vendors could reap the benefits over time, according to a new report by ABI Research.
Although the trend hasn’t yet caught on in the U.S., ABI research director Lance Wilson said that managed service revenue had increased this year as service providers face pressure to maximize profits and reduce costs, beyond their traditional focus of simply recruiting the maximum number of new subscribers.
Wilson said that when service providers examine their core business, running the network may not be as central as it used to be.
“It’s not just operating the network now,” he said. “In the past .the guys ran the network, they had people come and sign up, and they used the service. It’s much more complex now-marketing, customer retention, trying to get services to people that will compel them to use wireless data or MMS or some other revenue-generating service. And the service providers need to devote more time to those . than they have had to in the past.”
Wilson noted that infrastructure vendors have always provided some services to carriers, such as equipment maintenance and installation-which by themselves typically fall under the broader umbrella of professional services, rather than being considered a managed service. However, network equipment-related work can also be part of a larger managed service contract, to help service providers cut down on capital expenditures as well as operating expenditures. Common definitions of what constitutes a “managed service” are just now starting to coalesce, he added, and “most people look at the management and running of the service provider’s network.”
Carrier benefits
As for the benefits of turning over network management, Wilson said that “almost all of it’s money-based, let’s be frank about it. It’s to reduce opex and manage their capex.” A company typically needs to be able to save at least 15% of its operating costs-either overall or for the specific segment that will be managed-in order for the change to make sense, Wilson said. He added that he had heard of companies saving as much as 40% in rare cases, but that most fell somewhere in between.
Wilson said that the complex contracts typically run between three to seven years and are “based entirely on trust and entirely on performance.” Having another company manage the network also doesn’t mean that an operator can eliminate its own network experts entirely, Wilson, said, because the service provider still needs “a core technical staff that can evaluate if the terms of the contract are being met.”
While the service operator takes a risk in turning over the management of its network, he pointed out, the managed service provider also takes a risk because the contracts require initial investment on their part for employees and facilities and typically don’t begin to generate a profit until well into the contract’s term. However, he noted that large network providers that typically provide managed services are turning to them as a more reliable, long-running revenue stream-and that he expects managed services eventually to become a larger portion of their revenues.
“In my mind, the biggest [managed service] players, they’re all the big equipment vendors,” Wilson said. “They have the deep pockets that are required . they have decades of experience in working with the cellular network, and they already have existing relationships with many of these service providers.”
Euro-deals
Vodafone Group plc announced a multimillion-Euro deal with Ericsson in April that covered the supply and distribution of spare parts for its mobile networks in Germany, Spain and Portugal as part of an effort to cut costs. Ericsson is taking over responsibility for logistics, warehousing, repair and replacement of multi-vendor spare parts for those operating units, which used to each run their own spare parts operations.
“In general in the U.S., it’s been a little bit slower to take off,” said Wilson. “The tier-one players-the Sprints, the Verizons, the AT&Ts of the world-they still regard running their network as really still part of their core business, so they’ve been a little more reluctant to turn over control of their networks.”
But, he said, the movement toward managed services “will catch on as any individual customer decides it’s in their best interest to do.”
