Editor’s Note: Welcome to our weekly Reality Check column where we let C-level executives and advisory firms from across the mobile industry to provide their unique insights into the marketplace.
As the landscape of communications and technology services continues to evolve, and over-the-top technology vendors acquire a growing share of customer spending, telcos’ revenues and profitability are coming under greater pressure than ever before. Cloud computing offers telcos the chance to compete with a wider, differentiated spectrum of service offerings, which can aid in restoring their returns to former levels. However, to achieve this they should consider doing much more than adopting cloud technology.
To take full advantage of what cloud can offer telcos should consider undertaking a rethink and reshaping of their business and operating models. Key elements of this transformation will likely include embracing a higher level of automation and leveraging their network management capabilities to support a more service-oriented offering to customers. By delivering these changes, telcos should evolve decisively beyond network connectivity, and provide distinctive offerings into the rapidly-growing technology services market.
From the telcos’ perspective, there’s little question that action is needed – or that many operators offering information and communications technology services are on a burning platform. According to Gartner, the percentage of worldwide ICT spending attributed to telecom services has been steadily decreasing – from 47% in 2011 to 46% in 2012 – and is projected to continue falling, to only 42% by 2017.
For incumbent operators, the challenge posed by shrinking market share for their core connectivity offerings has been compounded by their generally lackluster performance in trying to enter the adjacent business-to-business ICT sector. While telcos have successfully managed WAN solutions in the past, their advances into deeper outsourcing services or specific managed services have often led to “bespoke” features that were not part of the standard model and could be repeatedly delivered.
As a result, their profitability in the potentially lucrative B2B ICT segment has often been diluted across a portfolio that is too broad, too deep and too customized. Insufficient discipline in portfolio management has meant that as compared with the large IT services and managed hosting providers, telcos’ ICT offerings have often been costly and complex, and their customer service unpredictable.
Against this somber background, rising adoption of cloud solutions is likely offering operators a major source of renewed revenue growth. While telcos are not yet regarded as key players in any of the various cloud layers through their existing business, they have the assets and capabilities needed to offer a number of cloud services.
These opportunities include the potential to act as cloud brokers, by aggregating services from third-party cloud providers; platform enablers, by providing a surrounding ecosystem to leverage telco assets in the cloud; enterprise enablers, by optimizing secure networks through which cloud-based services are accessed; and business enablers, by providing industry-ready cloud solutions across the value chain.
At the same time, telcos’ unique combination of distribution networks, retail stores, established customer care relationships, billing capabilities and collaborative partnerships means they are also ideally positioned to develop an ecosystem that simplifies the selection, management and optimization of cloud services for business customers.
Telcos can harness these opportunities – and more – by creating a compelling end-to-end cloud proposition that integrates their network management capabilities, supported by an agile service-oriented operating model. Those that successfully build and deliver such a proposition will likely have a differentiated and attractive solution set to offer to small- and mid-size businesses and enterprises alike.
While the opportunities are substantial, so are the challenges involved in seizing them. Cloud delivery requires a fundamentally different business model from telcos’ current B2B managed service offerings – one characterized by a high degree of self-service, automation and repeatability in the end-to-end operating model.
These are all capability areas where telcos have traditionally been relatively weak, given their tendency to offer complex and bespoke services that are hard to standardize across the customer proposition. Furthermore, many telcos will likely find their efforts to migrate to a fit-for-purpose cloud operating model are hampered by a complex legacy of multiple networks, overly fragmented product sets, and disparate supporting tools and processes.
All of this means that telcos seeking to pursue the new revenue opportunities in cloud services should consider undertaking a transformation journey to build an appropriate operating model. A key question will be whether they can achieve this by continuing to evolve their existing operational model for serving B2B customers, or whether they should consider creating something entirely new.
Either way, navigating the transformation will likely require a number of specific changes. These include building – or acquiring access to – new capabilities in professional services, instilling a services-oriented culture across the organization, developing key performance indicators that focus on customer value rather than siloed product revenues, and putting in place an industrialized service creation and development process.
Some of these changes may involve mergers and acquisitions. In recent years, rapid growth in demand for cloud solutions has seen many telcos engage actively in M&A to gain the necessary capabilities, supplemented by organic investments to drive automation, repeatability and a stronger service focus. Forging collaborative partnerships with professional services firms can also help to accelerate and strengthen telcos’ cloud-enabling capabilities, by enabling the partners to jointly define, develop and market industry-tailored product and services.
As telcos plan out the journey to their new operating model for cloud services, it is clear that there is no easy or quick route to the destination. By putting the right building blocks in place, telcos should have the opportunity to develop a strong, differentiated cloud proposition that few competitors will likely be able to match.
For those that succeed, the likely result is the chance to lead the dramatic value shift toward cloud services now under way in enterprise ICT and reignite their revenue growth by winning share from other players in the cloud delivery ecosystem. However, for those telcos that fail to seize this opportunity, the uncomfortable reality will likely be ongoing relentless commoditization of the B2B communications business.
