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Who Will Manage the Telecom Network?
Mercer Research Forecasts the Market for Managed and Advisory Services

NEW YORK, May 18, 2006 – Consolidations of big telecom firms are generating headlines these days. But another notion will have a much greater impact on the sector: The traditional, vertically integrated operator model is giving way to one where network operations and maintenance – the traditional source of differentiation for operators – is being handled by third-party vendors.

New research by Mercer Management Consulting concludes that the $26 billion managed and advisory services market, which already composes one-fifth of the overall telecom infrastructure solutions market, will nearly double by 2010. The Mercer forecast is based on recent interviews with more than 100 senior telecom executives and industry observers.

Historically, vendors such as Ericsson, Lucent, and Cisco have provided equipment and services to operators such as AT&T, British Telecom, and NTT. The vendors provided mainly maintenance, installation, and training services to the operator, who then ran all other aspects of the network.

Over the past few years, things have changed. Operators face greater pressure to streamline their cost structure, improve service levels, and manage a bewildering array of technologies (one operator in Mercer’s research had more than 6,000 technology vendors represented in their network). “As a result, more operators have asked vendors for comprehensive, long-term assistance in running their networks,” says Reuben Chaudhury, a director at Mercer.

This support is taking two forms. First, advisory services help the operator to develop service roadmaps, decide on future network technology architecture, and optimize and integrate the networks. Growth in this sector, which currently has revenues of $18 billion, will be led by vendors with consulting and integration skills.

The second type of support is the $8 billion managed services market. Operators used to be comfortable outsourcing only basic installation tasks. Now they are willing to consider outsourcing core maintenance and operations functions. “The most eager firms in this regard are wireless providers, particularly in emerging economies, which often need help with complex technical networks and don’t have the resources of their larger counterparts,” says Dave Sovie, a director at Mercer.

One flavor of large-scale network outsourcing is the recent adoption of the “managed capacity” model, in which the operator avoids the initial CapEx investment in favor of a “pay per use” approach, thereby sharing the market risk with the vendor. The recent Bharti-Ericsson and Bharti-Nokia agreements reflect this trend.

Over the next five years, Mercer estimates, 60% of the world’s wireless operators will have some form of managed services. On the heels of the new 3G network will come the inherently more complex 4G wireless broadband networks, with its multitude of access technologies. Operators are unlikely to have time to understand and efficiently manage a 4G network, particularly if it is rolled out rapidly, and this could accelerate demand for managed services.

“The strongest growth will likely be among second- and third-tier operators, especially in developing markets,” says Chaudhury. “We estimate that within five years, roughly 80% of such operators will have some form of managed service contracts and 20% of them will fully outsource their networks.”

Securing contracts will not be a cinch, however. Mercer finds that operators express strong dissatisfaction with the level of vendors’ understanding of network operations and with their capabilities managing a multi-vendor network. For vendors, the Mercer research has several implications:

• Selling large-scale managed services is different than selling equipment, and requires equipment makers to develop new services-related business designs. These vendors must develop new capabilities, craft replicable services and solutions, and create scalable delivery “factories” and supporting processes.
• Managed services contracts often require the transfer of personnel from the operator, which most vendors find difficult to accommodate. Collaborations between traditional telecom vendors and IT outsourcers such as IBM and EDS are likely as telecom vendors seek to acquire these skills.
• Profitability in this market depends in part on scale. This trend should further accelerate consolidation among telecom vendors.

For operators, the Mercer research suggests a shift in priorities. As more of the network operations are outsourced, the basis of competition will shift to marketing and services innovation. This shift will require operators to develop a deeper understanding of shifting customer priorities and adapt their offerings and business designs accordingly. Chaudhury and Sovie expect to see accelerated introduction of new services, better quality of service, and a growth in specialized products and offers for niche markets.

Managed and advisory services growth

About Mercer Management Consulting

As one of the world’s premier corporate strategy and operations firms, Mercer Management Consulting helps leading enterprises develop, build, and operate strong businesses that deliver sustained shareholder value growth. Mercer’s proprietary business design techniques, combined with its specialized industry knowledge and global reach, enable companies to anticipate changes in customer priorities and the competitive environment, and then design their businesses and improve operations to seize opportunities created by those changes. The firm serves clients from 25 offices in the Americas, Europe, Asia, and The Middle East.

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