Getting to the outsource: by contracting out its network ops, a carrier is tied in with a vendor partner who is going to cut costs while it delivers a next-gen network. Or is it limiting its future to a single supplier with its own agenda? The industry outsourcing debate has just begun

Telecom Asia, August, 2003 by Robert Clark

For all the market shocks, deregulation and wild swings of the past years in telecoms, some things have remained pretty constant. The industry still breaks down into carriers, vendors and customers. Carriers provide services to end-users. Vendors provide gear to carriers so they can build out networks that deliver services.

But the combined impact of cost-cutting and competition is driving carriers to look at new ways of placing themselves in the value chain.

And that includes getting out of running networks altogether. Which is what Telecom Corp of New Zealand (TCNZ) did last month when it handed over its fixed line network management and operations to French vendor Alcatel.

It's not the first network outsourcing deal, and certainly not the first by TCNZ--over the past three years the telco has contracted out management of its TDMA and CDMA networks to Ericsson and Lucent, respectively.

But this is the first time an incumbent anywhere has actually let go of its core network assets. If nothing else, the $106 million, five-year deal suggests that the planets are beginning to align themselves for the 21st century business of network outsourcing.

Under the arrangement, Alcatel will run the operations, maintenance and much of the design and planning of the TCNZ's access and transport networks in New Zealand and for its Australia subsidiary AAPT.

Rhoda Holmes, general manager for network services at AAPT, and who helped negotiate the deal for the carrier, admits it was a big cultural change.

"Oh yes," she says, "And there's phrase we use--'a leap of faith', that says your engineering future is safer in the hands of an Alcatel where you have to whittle away your cost-savings year after year just because of the sheer number of people it takes to maintain your network.

"When you're a telecommunications company at the edge of the world with a relatively small customer base, you have to come up with a different model."

The deal has been a long time coming, though, being based on a framework agreement signed in June 2002 that took 18 months to negotiate.

That initial deal was effectively a trial in which some 20 TCNZ staff were transferred to Alcatel. It worked well enough that TCNZ decided to bring it forward. On 1 July, another 300 networking ops, design and maintenance employees began work as Alcatel staff.

"In the first year of the partnership we've experienced the business case," says Holmes.

One big advantage was the simplification of tendering through the single-supplier relationship. Traditionally, tendering out a new platform of any kind is a time-consuming series of increments.

Says Holmes: "First the requirement spec is sent to many vendors. There's many lunches and dinners and meetings with all the vendors in a single room. Then they come back with their proposals, you change your specs in response, then you put in the costs, there's a shortlist, and then you start building and it's not quite the same as what you expected."

The new arrangements circumvent all of that. But more important, says Holmes, is that "your objectives from day one are shared." Instead of the customary adversarial relationship between a carrier and preferred vendors, the outsourcing deal is structured so risks and rewards are shared.

Next-gen transition

Alcatel has set a "balanced scorecard", with benchmarked targets around time to market, getting customers signed up and quality of service, and it shares in profits from beating these targets.

Says Holmes: "If you don't trust them you end up layering in masses of costs to double-check that they're doing what you think they should be doing in the first place. We want to build positive incentives rather than negative."

It is a classic formulation of the single-customer approach advocated by the total quality management (TQM) movement which was popular in the 1980s and early 90s. TQM encouraged trusted single-vendor relationships to allow customer and supplier to focus on joint outcomes.

But for Telecom New Zealand, a much larger objective looms--the next generation network (NGN). The transition to NGN is starting to exercise CTOs and network planners at carriers worldwide.

"We could send our CTO around the world continuously trying to spot the best trends and pick the best technology. By the time he's got back somebody else is doing something else somewhere," says Holmes. "We felt that by being in partnership with a global organization we have the chance to stay at the forefront. We have 5,000 brains in New Zealand. Alcatel has 60,000 brains globally who specialize in the technology."

The NGN transition is a demanding and expensive process involving technology choices, raising and carrying out the capital spending, upgrading staff skillsets and implementing the new network alongside the current digital platforms.

It's a particular problem for the smaller telcos, agrees Alcatel Asia-Pacific chief Ron Spithill.

"Many, many operators are reducing their costs. There must be a number of them now that must be struggling to make the next step."