Network Outsourcing – A Case Study
When pushed to the wall due to competitive pressures from the CDMA players in 2003, Bharti Airtel decided to focus on cost reduction as well as prepare itself for explosive growth. More than the cost reduction, Bharti wanted to ensure that it builds a world class network and still able to focus on the core, i.e. the customers. In the last post, I had discussed the framework for deciding on outsourcing of different functions of an operator. In this post, I would focus on the outsourcing of networks – the benefits of network outsourcing and how should it be managed. In order to illustrate my point, I would use Bharti as a case study as it was one of the first few operators to outsource and is still ahead of others in terms of its thinking in this area.
What were the reasons for outsourcing of network by Bharti?
Bharti realized pretty early that network is not the core for the company and needs to focus on customers by providing them a reliable, affordable and best in class service experience. To be able to do this, it needed more resources and was unsure of the results due to lack of expertise in this area. Bharti was in no position to manage the network better then Ericsson or Nokia or Siemens (now Nokia Siemens). It was facing competitive pressures from CDMA players (Reliance and Tata) and need to have a single minded focus on cost reduction (refer – How can carriers make 40% EBIDTA margin at 2 cents/min tariff?). They embarked on the outsourcing journey with the following objectives in mind:
- Focus on the core and outsource the context
- Faster time to market as well as build scalable networks
- Enhanced customer experience through better quality of service
- Get the best people/company across the globe to manage network
- Predictable total cost of ownership (TCO)
- Convert CAPEX to growth based OPEX
- Controlled spending due to optimal capacity planning
- Get access to latest technology, expertise and processes leading to improved productivity
Accenture’s report on network outsourcing points towards huge cost advantages -
The potential benefits of a broader use of network outsourcing are considerable. Based on our experience,clients can generate cost savings of up to 40 percent, achieved through lower-cost sourcing of high-quality talent, consolidation of fragmented operations and the synergies of leveraging resources across companies and geographies.
However, we should look beyond cost advantages to the other benefits that I have listed above.
What are the different Levels of Network Outsourcing?
1. Build and manage capacity:
Normally most of the carriers start with outsourcing the designing and deployments of the networks. This is most simple form of outsourcing with relatively low risk. The risk is low and so is the value to the operator. This helps the operator in reducing its total cost of ownership of the network and can get the capacity deployed as and when required.
2. Managed Operations or Services:
In this case, the equipment vendor takes full responsibility for network and service operation activities. Activities can cover planning and design, as well as the establishment and deployment of the operator’s network and management of the day-to-day activities, including field operations. In this case, the real synergies start to emerge and can add immense value to the operator.
3. Hosting Services:
In this form of outsourcing, the vendor takes responsibility for management and integration of the hosted solution and facilitates content distribution as well as content life cycle management. The typical offering includes entertainment and media services (music, TV, downloads etc), messaging and communication services (MMS, voice SMS, video mail and push email etc) and charging and management services (prepaid and automatic device configuration etc). Hosting enables faster launch and integration with cost efficient service. This is the most mature form of outsourcing and brings maximum value to the operators. With the increasing number of VAS offerings, the management of Value Added Services (VAS) is becoming increasingly difficult leading to many operators looking at option of hosting services from the equipment vendors.
What has ensured the success of network outsourcing for Bharti?
Traditionally, the operators have been responsible for building and management of the network including billing (refer the telecom value chain in the figure below).
Bharti decided to outsource the management, design, development and deployment of network including capacity and coverage to players like Nokia Siemens and Ericsson. The ownership of the assets rested with Bharti while the management and maintenance of the equipment became the responsibility of the service providers (equipment vendors). To ensure predictability of the costs, the payment was based on the peak hour capacity used by Bharti and excluded the unused capacity (capacity is measured in terms of Erlangs; An Erlang is a unit of telecommunications traffic measurement. Strictly speaking, an Erlang represents the continuous use of one voice path. In practice, it is used to describe the total traffic volume of one hour).
To ensure the success of network outsourcing, Bharti prepared a detailed business case detailing its cost structure and the expected cost structure post outsourcing. It also prepared the detailed performance indices and incorporated them in the service level agreements (SLAs). The most important aspect of the contract was clear definition of the roles and responsibilities of Bharti and the service provider. On its part, it developed an efficient governance mechanism that ensured its close control on the network operations. Bharti’s employees in the network function were transferred to the roles of the service provider.
Key lessons from Bharti’s case study are -
- Do not outsource a few tasks in the network operations but outsourced the entire process.
- Do not base outsourcing decision on only the cost considerations but also on the larger value proposition of being able to provide subscribers a world class experience.
- Do not focus on only outsourcing the current process and doing the “same thing for less” but also look for opportunities to consolidate and transform the entire function. In case of Bharti, the service providers were able to provide greater value as they eliminated the manual work and implemented best practices that they followed across the world.
Initially the contract was for three years but it was extended again given the benefits it was able to give to the operators.
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