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The return of big outsourcing deals

22 June 2016 Stephane Teral

A bit more than one month after we shipped our annual Service Provider Outsourcing to Vendors Market Tracker(5/02/16) in which we forecast moderate growth due to the absence of a major multi-billion dollar deal, Ericsson manages to bag one from Vimpelcom-of just $1 billion though!

Here is what we said: "As market fundamentals remain intact, and despite the drought of multi-billion dollar contracts, we expect the market to reach $70.5 billion by year-end, achieving 2.7% year-over-year growth. In the long run, we expect the market to hit $76.1 billion by 2020, growing at a compound annual growth rate (CAGR) of 2.1% and driven by mobile network outsourcing deals as more and more mobile operators try to keep their opex under control by removing non-core task and focusing on customers' experience and ICT business and network transformation that require a merger of IT and telecom network teams."

On June 13, 2016, Vimpelcom selected Ericsson for a $1 billion IT transformation project that will completely overhaul its IT infrastructure. The project spans Vimpelcom's operations in 11 countries, and will see the telco upgrade its business support systems (BSS) to a digital stack in a bid to accelerate product and service development. Vimpelcom will also deploy real-time analytics in order to offer personalized services to end users. The project is expected to generate significant opex savings too.

Here is what matters and why this deal meets our market expectations

There are four important aspects of this $1 billion IT transformation project:

  • The size and the nature of the deal: as reported in our annual Service Provider Outsourcing to Vendors Market Tracker(5/02/16), we did not see a deal of this size last year, despite unabated demand from telcos seeking to outsource non-core tasks. From 2005 to 2014, we were used to $3- to $5-billion dollar 3- to 5-year managed services deals but what sets this one apart is that it's solely focused on IT transformation. Over the past 5 years or so, we have seen more and more managed services deals that include an IT component but rarely a pure IT one awarded to a traditional telecom equipment vendor. However, we can argue that operational support systems (OSS) and business support systems (BSS) are telecom functions that happen to run on IT. But overall, OSS/BSS transformation is a big non-IT deal for all operators, as they have been telling us in our global software-defined networking (SDN) and network functions virtualization (NFV) surveys for the past three years. This year, OSS/BSS is the number-one (tie) SDN deployment barrier by 68% of respondents in our fourth annual SDN Strategies Global Service Provider Survey (respondents control 53% of telecom capex, July 2016 publish date soon). In addition, the other number-one tie was "immature technologies and products," a problem that can only efficiently and quickly be solved by outsourcing.
  • The span of the deal: this project spans across Vimpelcom's operations in 11 countries. Typically, the parent company will issue a list of preferred vendors and the regional subsidiaries make their own procurement decisions. The value of centralization is clear with economies of scale as the chief driver, plus a more consistent customer experience across the entire brand. Now the question is how the other major multinationals follow suit as they embark on their transformation projects.
  • The mobile operator accelerating product and service development and achieving opex saving: despite the shift in the rhetoric from opex savings to customer-centric as the chief outsourcing driver that has been happening over the past five years, opex saving continues to be the never ending story. At this point, mobile markets are saturated in every corner of the globe and mobile operators need to at least preserve their revenue stream if it's not declining while continuously lowering their cost structure. Here, it's about upgrading back office systems across an entire multinational footprint in order to improve agility and lower costs. Many large operators have many acquisitions/subsidiary properties that each typically have a hodge-podge of OSS/BSS systems. These operators, as we learned from a meeting with Telefónica CEO Enrique Blanco who presented his plan in February 2016, plan a major efficiency by having a single OSS/BSS across all properties, which will free up lots of staff to allocate for the many other parts of the carrier operations/network/customer relations transformation.
  • The proof that Ericsson has succeeded to transform itself into a credible IT player: on this deal, Ericsson and Huawei were likely shortlisted along with Amdocs, the strongest OSS/BSS pure play. But both Ericsson and Huawei have come a long way to engineer a serious foray in this complex IT domain. In 2012, under Hans Vestberg's leadership, Ericsson reset its strategy by announcing an ICT repositioning to create new revenue streams. In January the same year, the vendor completed the acquisition of Telcordia that cemented its OSS/BSS established position in the OSS/BSS space. This was exactly seven years after Carl-Henric Svanberg, who was CEO from April 2003 to December 2009, set a new course for the company with a strategic move into outsourcing and managed services. In 2005, Ericsson won its first $5-billion deal with Indian telco Bharti Airtel along with IBM, which was in charge of business processing and some IT components. This deal propelled Ericsson into the outsourcing leadership board along with IBM and HPE and marked the beginning of a very long journey. Since 2012, Ericsson has been amassing a flurry of outsourcing deals that include some level of OSS/BSS and IT, sometimes winning some business directly from verticals (e.g., offshore oil platforms). It's worth mentioning that to further accelerate its move to ICT, Ericsson developed a DC-in-a-rack system of server/storage/switch hyperscale Datacenter System HDS 8000. And finally, a critical piece of the Cisco partnership is to have extensive IT equipment available for customer engagements like this big one.

What all this means

First, this deal alone will have no significant impact on our forecast; it would take at least four more to really go back and raise our $70 billion forecast.

Second, we get a fresh, clear message that large telcos are seriously looking at their back office systems and this deal confirms that we are well into this era of IT transformation that includes big data analytics. All large and even medium-sized telcos are working on OSS/BSS cleanup of some sort. For instance, when AT&T announced its Domain 2.0 project, the company said it had over 1,000 back office systems that it is in process of moving to a few. CenturyLink has over 1,000 and is working on them. Telefónica has over 1,000 and is working on them. Verizon says the same but did not give any specifics. In Canada, TELUS is doing the same. These are just a few examples that illustrate that all these telcos see that the OSS/BSS as a critical part of automating their networks, epitomized by SDN/NFV. To achieve on-demand services, or at least customer portal instigated services, the OSS/BSS is key and SDN and NFV are involved.

Third, all of this raises an interesting question: Is this the beginning of a new outsourced IT era? As mentioned above, vendors like Amdocs, Ericsson, HPE, IBM and Huawei spotted this trend a few years ago and did not stand on their laurels to articulate a strategy that would eventually position them as credible players in the telco space. As a result, the disruption has started: Ericsson and Huawei have grown fast at the expense of IBM and HPE. The reality is: managed IT isn't necessarily anything new; it's a big business for Amdocs and CSG in the cable space, NetCracker with the Convergys assets, etc. This is no doubt a big blow to those guys, particularly Amdocs given the scale of this deal, which is more than just managed billing services.

Finally, where are we in the telecom network infrastructure transformation? OSS/BSS was identified as a big impediment three years ago - it's just such a big complex problem that it is slow. This contract just happens to be bigger and more noticeable since it is IT and OSS/BSS at hits the $1 billion mark, at least at Vimpelcom. But we also know that most telcos worldwide have embarked on a long SDN and NFV journey aimed at making them more agile and competitive against over-the-top (OTT) providers. Of course, as part of our Service Provider Economics Market Intelligence Service, we'll keep a close eye on any developments that pertain to outsourced network and IT transformation.

Stéphane Téral is a Sr. research director, mobile infrastructure & carrier economics for IHS
Posted on 22 June 2016