Telecom New Zealand was voted Best Asian Carrier in the annual Telecom Asia Awards announced last month, beating previous award winners such as Singapore Telecom. Perhaps it was no coincidence that the award, which gives a 40 per cent weightage to financial performance, among other things, was bagged by the New Zealand carrier exactly a year after it awarded a NZ$200 million contract to Lucent Technologies to supply and manage its code division muliple access (CDMA) network.
In fact, part of the credit should go to Lucent, whose five-year managed services contract with Telecom New Zealand enabled the operator to bag its first ever award.
Experts say that Telecom New Zealand's performance in the past year reflects the gains from outsourcing its telecom operations to Lucent in what can be called one of the most extensive managed service contracts in the world among mobile network operators.
"Globally telcos want to lower costs, focus on core business and swiftly provide new, top quality services to customers. Our agreement with Lucent delivers all that," says Stephen Crombie, telecom general manager, Network Investment.
Managed services is the new mantra for telecom equipment vendors, most of which are grappling with declining revenues from equipment sales, slower-then-expected commercialisation of new technologies, increasing competition from low cost suppliers and lower expenditure by operators.
Carriers are outsourcing important network management operations so that they can focus better on customers and manage their growth better in the fast growing Asian telecom market.
Managed services at its most comprehensive includes planning, designing, managing and maintaining the network of a carrier such as Telecom New Zealand, including estimating future demand for the carrier. That leaves telecom carriers to focus on customer service and marketing, besides getting a handle on costs.
Companies such as Lucent, Ericsson, Nokia and Alcatel have signed contracts estimated at a combined $1 billion in the past year with Vodafone of the UK, Telecom New Zealand and most recently with India's Bharti Tele-Ventures.
No statistics are available on the potential of managed services, which experts say is currently a small but fast-growing segment of the $15 billion global telecom outsourcing market.
Soon after Telecom New Zealand awarded the first of the managed services contracts in Asia in June last year, Vodafone followed in May this year with a contract for its 3G networks in Australia and New Zealand.
Then came Bharti with a $400 million managed services contract with Ericsson and a US$275 million contract with Nokia to expand its global systems for mobile/general packet radio switching network for the next three years in five circles.
Chandan Chatterjee, who is responsible for Nokia's strategy in Asia, explains that managed services help operators to reduce costs, manage rapid changes in technology and focus on the basics such as customer service and marketing.
Paul Higgs, regional vice president for Lucent Worldwide Services, says that managed services reduce operational complexity, improve reliability and optimise and evolve networks.
Carriers agree. Akhil Gupta, joint managing director, Bharti, in a recent media interview said: "We are currently close to seven million mobile customers. Even if you look at 2006 we could end up with 25 million. It's a huge size. If we are to reach there with this kind of growth it's virtually impossible in a short time to go from 5,000 to 15,000 people. I think a combination of outsourcing and inhouse-expertise is a must."
Gupta says that the Bharti group is buying capacity from Ericsson and not boxes. "We pay them for the capacity which we actually utilise. So they do the network planning. Which means that the excess capacity which every network has to carry no longer is going to burden us in terms of cash flow. And we pay them when the service levels are met."
Ericsson's vice president for sales, Giles Vincent, says that Bharti's CFO can now get a snapshot of his capital expenditure and costs in a couple of hours. Bharti had earlier been finding it difficult to get a handle on costs.
Also, Bharti can now focus on its customers. In a recent survey of more than 6,700 mobile users in 12 Asia-Pacific markets by TNS Asia Telecoms Index , 17 per cent of Indian mobile users complained of bad customer service, the highest in the region with India's mobile operators being the biggest culprits.
In the Vodafone deal, Nokia will supply WCDMA 3G network infrastructure and manage network operations in Australia and New Zealand. Nokia officials point out that Vodafone's example of opting for managed services for a new technology reflects the fact that carriers do not wish to deal with changes in the technology universe.
Managed services evolved from the more traditional outsourcing arrangements prevalent in the late 1990s when governments handed out licences for mobile operations to new entrants in the telecom industry.
Vincent explains that some of the initial outsourcing contracts in Europe were from the second and third licencees, which wished to set up their networks fast. Ericcsson used a build, operate, transfer and maintain model, but the network was managed by the operator. "We were initially bidding for equipment sales. Now they want us to sell capacity," says Vincent.
When the telecom industry collapsed in 2000, equipment vendors repositioned themselves as services companies, akin to what IBM did when it refocused itself from being a box supplier to a solutions provider.
For instance, the value of the Indian infrastructure equipment market fell by 34 per cent in 2003-2004 to $2.1 billion from $3.2 billion in 2002-2003, according to the ninth Indian telecom industry report released by Voice & Data.
"We want to transform (ourselves) from being a company of engineers selling boxes to a company selling applications and integrations," Christian Reinaudo, Alcatel Asia Pacific president, said in Seoul recently. "What we saw in the marketplace made us take a strategic decision to focus on managed services," adds Lucent's Higgs.
Services contracts, which are forged for several years, also provide a continuous stream of cash flows to vendors, unlike equipment sales. "Services provide us with an annuity on equipment sales," says John Giamatteo, Nortel's Asia Pacific president.
Moreover, as seen in other industries such as autos and consumer goods, cheap equipment supply rivals such as China's Huawei Technologies and ZTE emerged, undercutting multinationals. Huawei, China's biggest telecom infrastructure supplier, said that 27 per cent of last year' $3.83 billion sales came from the international market.
"If Ericsson would use this price to sell their products, they could lose money," said Hu Yong, vice president of Huawei.
Higgs says that managed services will become big business as operators all over Asia outsource their operations. In small markets like Singapore, which has three mobile operators, vendors can aggregate services and provide these more cheaply to operators, says Chatterjee.
Ericsson launched a hosting centre in Singapore last month to host applications such as SMS, multi-media services or video gaming for operators across Asia.
Equipment vendors are now looking ahead in a bid to aggregate more services under a common platform and expand more aggressively into markets such as China. "Until now carriers have come to us for managed services. Soon we will be going to them," says Vincent.
