by Stephanie Overby

Outsourcing: Telecom Providers Give Their Networks the Boot

Jul 27, 20095 mins

Plans from Sprint, BT, China Mobile and others to farm out network management may seem counterintuitive. If the network isn't a core competency for a telecom provider, what is? But market forces are moving many providers in Asia, Europe--and now the U.S.--to relinquish control of their networks, and that could affect customers for better and for worse. Here's what it means for you.

When Sprint Nextel announced its plans to outsource network services to Ericsson earlier this month, the statement was notable for a number of reasons. Most significantly, by signing the seven-year, $5 billion deal, Sprint became the first U.S. telecom provider to contract with a third party for network management. The move was an about-face for Sprint, which is known for its tight-fisted control of its networks.

Yet the announcement didn’t surprise anyone. Rumors of an agreement between U.S.-based Sprint and Swedish telecom equipment provider Ericsson had been circulating throughout the industry. And this transaction came on the heels of similar deals inked by BT, Deutsche Telekom, Vodafone and China Mobile.

Telecom operators worldwide are increasingly considering outsourcing the management of their networks to companies like Nokia, Alcatel-Lucent and Ericsson in order to lower costs, increase capabilities and/or focus on other strategic imperatives, says Mark Mayo, partner and president of global resources management for outsourcing consultancy TPI. In fact, network services contracts accounted for half of all the megadeals (contracts with values of $1 billion-plus) signed in the first half of this year, according to market analysis released by TPI last week.

“Operators are increasingly shifting their emphasis from the engineering-centric stuff like running networks to customer-centric stuff like marketing, segmentation and customer service,” says Jan Dawson, practice leader for operations, wholesale and regulatory at consultancy Ovum. “They see networks as a necessary asset that allows them to do what they do, but running those networks is not necessarily a core competency anymore.”

Network services outsourcing has taken off among wireless providers in Europe and Asia, where all providers operate using common GSM technology. “In [those] countries, regulators force large operators to open up their networks to competitors at very low rates, and that creates incentives to make running the network as efficient as possible to maximize margins,” Dawson explains.

Sprint, thus far, is the lone American carrier letting go of the network management reins. “It’s been losing subscribers hand-over-fist and struggling financially, so it really needed to do something to improve its financial situation and improve its operating metrics to try to dig out of the hole it’s in,” says Dawson. (The company, which is the third largest telecom provider in the U.S., will still own all three of its networks—wireline, CDMA and Nextel/iDEN.)

Sprint’s deal with Ericsson could be a case study for future efforts stateside—for better or worse. The deal provides a short-term financial boost for the struggling Sprint. The company will get 6,000 employees off the books—and quick (during the third quarter of this year), which seemingly will provide immediate cost savings. And long term, it “should take headaches away from Sprint,” says Dawson, “as Ericsson finds ways to do the same things Sprint used to do for less.”

Ericsson has its work cut out for it. The company will have to create a new entity to serve its first major American customer. In addition, the vendor will be taking on three networks with multiple technologies, including iDEN, with which it has little experience, says Dawson.

The rapid transition will be tricky. “[It] will be difficult to manage, with employees’ contracts moving over to Ericsson, the appropriate ‘Chinese walls’ created between the new Ericsson employees and the rest of Sprint,” Dawson says. “With all that going on, it will be difficult for those employees to continue doing their day-to-day jobs without distraction and at the same [productivity] level.”

In other words, an increase in employee turnover is likely.

Other telecom companies that have signed network services outsourcing deals face similar obstacles. But Sprint has hit snags with outsourcing in the past.

“Sprint also had a bad experience with its previous large outsourcing contract ,” notes Dawson—a $400 million outsourcing deal with IBM to overhaul its call centers. “That didn’t really pan out the way the [two] companies planned, and Sprint ended up bringing a lot of that activity back in-house.”

What does this deal mean for customers of Sprint—or others who have announced (or will announce) similar outsourcing pacts? Potential service disruption is possible in the short term. Long term, however, there could be an upside.

“Since Sprint is planning to reinvest the savings in the network and in other areas rather than simply profit taking,” says Dawson, “customers may notice indirect improvements which result from the deal.”

Improved service would be a welcome change for those who’ve complained about Sprint’s poor customer service and network coverage in the past.

What U.S. carrier is next in line to outsource its network is unclear. Number-three Sprint was the ideal candidate for such a deal because it had been suffering from a lack of network scale against its major competitors, needed to cut costs, and maintained a complex set of three networks, says Dawson. Qwest operates at a similar scale and could be eyeing a network services contract, she notes.

For most other big American telecom providers, “network quality is a key differentiator in U.S. market positioning,” says TPI’s Mayo. But in an increasingly competitive operating environment, even those who say network management is core could consider sending that work out the door in the future.