TeBIT 2014 Executive Report: Paving the Paths to New Revenue

TeBIT 2014 Executive Report: Paving the Paths to New Revenue

          
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TeBIT 2014 Executive Report: Paving the Paths to New Revenue

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    Prescription for Outsourcing: Get the Dosage Right

    Outsourcing continues to expand its role within telco IT departments: on average, it accounted for 26 percent of total IT spending, up from 23 percent in our 2013 survey. While outsourcing can be a lever for many different things—accessing new skills, reducing speed to market, and decreasing head count were all cited as reasons for its use—cost reduction, once again, topped the list. More than a third of participants (36 percent) said that savings was their prime impetus for outsourcing.

    Past TeBIT surveys had thrown some water on the idea that outsourcing means lower costs. In fact, analysis of the data suggested just the opposite. For several years running, we found a direct linear correlation between a high degree of outsourcing and high IT spending (measured as a percentage of revenue). This year, however, the correlation was noticeably weaker. (See Exhibit 3.)

    exhibit

    Does that mean the trend is, at long last, reversing? It is too early to be sure, but there are signs that telcos are, perhaps, gaining a better understanding of how to leverage outsourcing.

    For example, most telcos currently follow a “partial outsourcing” model—keeping some tasks related to a function in-house while delegating others to providers. This mixed approach, it turns out, is not the most cost-effective model. But telcos do seem, at least, to be stressing outsourcing in the right areas. For example, the highest degree of outsourcing was found in application maintenance; on average, participants outsourced 52 percent of this function. (See Exhibit 4.) This is an area in which vendors can both provide skills and capabilities that a telco may not have in sufficient supply and ramp resources up and down as necessary. Meanwhile, the lowest degree of outsourcing (at just 34 percent, on average) was for IT infrastructure. This makes sense, too: Many telcos offer these same services to their own customers and can readily handle the tasks themselves. Moreover, they may be running older infrastructure and software, in which case it may be more cost effective to operate it themselves than to bring in someone who has to learn and master the environment from scratch. (See “Building Blocks for the Future: An Interview with Helene Graham of eircom.”)

    exhibit

    It is likely, too, that as telcos rack up experience with outsourcing, they are simply getting a better handle on which processes work best when handed over to a provider, and which work better when kept in-house. (See “In the Thick of the Transformation: An Interview with Paolo Valvassori of Fastweb.”)

    Meanwhile, COTS software is also seeing its traction vary from one IT process to another. For supplier/partner and enterprise (including enterprise resource planning, or ERP) as well as billing and revenue management, COTS usage accounts, on average, for approximately 50 percent of the work. For fulfillment, on the other hand, the figure is closer to 20 percent. The data also confirmed that in some areas—like ERP, CRM, and product management—two or three COTS vendors dominate. For instance, more than 60 percent of participants use SAP or Oracle for ERP. Other areas, such as billing and revenue management, assurance, and operations support and readiness, were far more fragmented. (See Exhibit 5.)

    exhibit

    Overall, COTS seems to have reached a relatively high level of maturity. When participating telcos were asked about their satisfaction with COTS in each process area, only 10 to 15 percent of responses indicated room for improvement. But the analysis of COTS did reveal a potential bump in the road: its use drives costs. That might seem counterintuitive; after all, COTS should be less complex than something built from scratch. Yet the data—and the link it revealed—was quite clear: a high degree of COTS use correlated to higher IT spending.

    What is going on? Several things. For one, these packages often require customization to meet an operator’s specific needs, and those costs, telcos are finding, can be hard to keep down. Moreover, there are annual maintenance fees to pay—fees that do not exist for proprietary software developed in-house. Finally, the market environment for certain processes—namely, those with just a couple of dominant players—means that providers can ask for, and get, high prices for (effectively) “market standard” software. As with outsourcing, telcos need to consider their goals for COTS carefully and ensure that it is being used where—and how—it has the best chance of meeting them.