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sdn & nfv world

It stands to reason that the Digital lifestyle of consumers will dramatically impact how operators generate revenues over the next 10-15 years. Transformations are taking place that will move activities, entertainment, commerce, healthcare, transportation, and most other aspects of our lives into Digital modalities. This has invited thousands of micro-providers of applications and networks into the mix, quickly marginalizing the value of the operator to merely an “enabling pipe.” This puts the operator into a competitive situation, ultimately impacting margins. But that’s only on the revenue side of the equation… the story could become far more complex.

For an operator, the days of 25%-40% EBIDTA are waning, if not almost gone (in many regions). Pressures on pricing remain downward, with new product offers being the primary method to sustain acceptable revenues and margins. This has opened the door for some impressive creativity by many operators, especially in developing markets. In many cases no market appears off limits, as seen by the offerings by progressive organizations like MTN in Africa: Who would have anticipated an operator would offer personal transportation services rivaling Uber?

These seemingly odd moves are, in fact, brilliant moves by operators to seek new sources of revenues as their businesses are being redefined by the digital services we are quickly becoming reliant on. The impacts on revenue models due to this change in the business are stunning: Traditional billed services like voice, and even data, are fading in importance. Revenue models are instead focusing more on casual services, pay-per-use services, marketplace services, etc. Put more simply, the “pipe” is no longer where the earning potential lies for the operator.

So now a previously non-agile, large operator business is finding itself competing with, and in many cases partnering with, literally thousands of aggressive, hungry micro-entities that provide products and services accessed by the networks. There is less reliance on monthly guaranteed revenue; the battle for revenue very often resides in millions of micro-transactions.

All of the discussion cannot focus entirely on revenues, however. Margins are also sustained by costs. Agility, therefore, must exist on the cost side of the operator business. In the old world of monthly recurring and predictable revenues, costs could be managed and allocated more confidently. Opex and Capex planning and forecasting practices were based on budgeting with a high degree of certainty. But as revenues models are changing, so must cost models. Where possible, operators will need to employ similar creativity to curbing costs, as they are with earning revenues.

How can operators, therefore, modify cost models in the business to be as aggressive and variable as the revenue models they rely upon? This is where the opportunities for SDN/NFV networks can shave significant costs, while changing operator cost models in ways that were not previously achievable.

Software-Defined Networks (SDN) and Network Function Virtualization (NFV) will allow operators to provide Network-on-Demand and Service-on-Demand models to consumers, while effectively minimizing, if not eliminating the need for human intervention. The costs associated with truck rolls, call centers, and expensive specialized network equipment will be dramatically reduced, resulting in decreased Opex and Capex burdens on the business. The savings need to expand further, however.

In current cost models, operators must deploy and maintain network services around the clock, which consumes significant and ongoing expenses. However, if a network is based on SDN/NFV architectures, the deployed services are no longer in a fixed position in the network, simply because they are now software-defined and/or virtualized. This means an intelligent network can move assets where needed, and when needed. These assets are capitalized as licensed instances; so now an operator can have a pool of 1,000 licenses for a virtual service, and deploy them only as necessary.

This type of dynamic deployment model should allow operators to negotiate dynamic cost models as well; imagine only paying for a license when you have it deployed (and it is generating revenue). While this idea may seem far-fetched, consider that now the network functions we are discussing are no longer controlled by a few network equipment and function providers; micro-entities (application developers) can now produce those functions, often at far less expensive price points.

The business transformations taking place in operators globally are forcing entirely new ways of addressing margin pressures, as the revenue and cost variables operators have historically used are no longer the same. Looking beyond margins in consumer-facing products and services, new network cost models must be explored, especially since those models were based on what is now an outdated means to earn revenues.

“A lot of people have been talking about how capex is going to come down with SDN and I’ve said, ‘No, it’s going to stay the same for Verizon’  – Fran Shammo, CFO, Verizon. May 2016

This comment right from the head honcho of one of the largest Telcos in US cannot be taken lightly. Despite lot of talk in the industry about SDN / NFV CAPEX reduction benefits, we’re seeing skeptical questions around smooth transition to virtualization. But I will keep SDN /NFV discussion for some other day. Let us focus on the topic – CAPEX spends. Verizon’s CFO has confirmed its CAPEX spend going to stay, despite network virtualization!

The CAPEX focus could be different for different Telcos. For some Telcos like Verizon, their CAPEX spend mainly focused on future technologies, leading the market, greater customer experience etc. For some other Telcos, their budget constraints force them to think hard and do delicate trade-off between strategical “revenue-growth” projects and tactical maintenance projects to keep up with network growth, retain customers, improve quality of experience etc. With this hard balancing at hand, what if Telcos are equipped with smart tools & methodologies that could help in optimizing their on-going CAPEX? But, is such thing exist? I will get there in a moment. Please bear with me.

First, let us go through few industry trends.  In our recent study from Gartner, we got few interesting insights.

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Here is short summary on the insights:

  • On an average Telco spends 15% – 20% of annual revenue on yearly Capital Expenditure
  • Increase in Capex spends w.r.t revenue (CAPEX Intensity = Capex / Revenue) is not translating into equivalent increase in revenue growth
  • Correlation between CAPEX Intensity and Revenue growth is a weak factor for Telcos mentioned in the regions. This means revenue growth is not linearly correlated with CAPEX spends
  • 5-year flat growth in revenues across geographies is not encouraging. Max 20% 5-year top-line growth in North America region and deep negative for Europe region (-11%)
  • Cost of capital over last decade is higher than RoI on an average across the industry
  • Notable positive point is the margins are maintained in 25 – 35% range across geographies. And it is imperative to maintain this margins to generate free cash to fund next CAPEX cycle but if not completely.

The above stats where CAPEX spends are not reaping substantial revenue growth indicates two major viewpoints:

  1. Strategic capital investments have a slightly long gestation period but not comparable to capital cycles of traditional industries like manufacturing industry.
  2. Bulk of CAPEX go into maintenance projects. That is, to keep-up with current network demand juggernaut, customer retention, quality of service etc.

For instance, a good chunk of leading Tier 1 North American operator’s CAPEX goes into wireless network for densification and getting future ready for 5G deployments. This could be a case for many big Telcos – investing on future technologies. On the contrary, we have also seen majority of Telcos’ CAPEX going in for second type of investment – meeting current network data growth. This is nothing wrong as such and very much required to keep customers happy.

However, if one looks at this fact in light of recent market research findings from one of the big four audit firms, it gives a different perspective. The research reveals that majority of the Telcos not equipped with enough tools or industry best practices to assess the CAPEX spends on projects, evaluate ROI for each such investment and perform sustainable capital allocation. This is a surprising revelation. It simply means that many Telcos are servicing on-going CAPEX without rigorous assessment on actual RoI vs planned RoI, are not taking forward lessons learned from previous CAPEX cycle. Even the Telcos who do have rigorous processes, right incentive structure, accountability of results etc. actually misses a critical point.

What Telcos underestimate?

The critical point is – generally the assets, especially the network assets are viewed from monetary value perspective only in this whole CAPEX scheme of things. The value that can be derived from un-lit or under-used network asset capacities for the CAPEX planned is not given deserved thought or action. This is because of the fundamental reason that financial and network data of assets are lying in silos. This data is never used together to gather useful insights to put the network assets to sweat to furthest possible aligning with ever growing network demand and broader strategic CAPEX – RoI goals. Telcos can do more with their data. It would require collaborative efforts with right partner to unleash the power residing underneath the siloed systems.

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Natural human tendency is to focus more on things that affects our present rather than the future. Coming to things that affect us for which there is a lack of awareness about the “extent” of issue caused, there would be little or no attention from us to resolve them.

Let us look at the priority with which investment decisions are made by telecom service provider on the software systems that they wish to have. Before a service provider can go live with a product offer for their end customers, they need to have the network in place to support the product. The priority for the software systems they should have to support their products are:

  • The first and most important is the billing software. They do not want go wrong in the billing as it would directly affect their revenues.
  • Second is the assurance software to make sure the network and the services are up and running.
  • The fulfillment software to automate as much as possible the order to activation process
  • A software which will help in strategic decision making like a planning software.

Above are the verticals, now let us look at the horizontals which are the domain.

  • The first and most important aspect that is recorded well is that of the end customer. The entire lifecycle of a customer, right from acquisition to end of service to the customer in most operator environments is maintained well.
  • The second would be product life cycle management. This is important to know what needs to be billed based on the product that the customer is using.
  • The next important aspect is the maintenance of service life cycle.
  • By the time Telecom service provider gets all of the above going and fully operational, it is already a mammoth task for them and they tend to lose focus on Resource lifecycle management.

A recent survey that was conducted by TMForum led by Subex revealed the following findings:

  • 1 in 3 operators do not measure returns on CAPEX investment
  • 77% of the respondents believed that inadequate asset utilization leads to increase in costs
  • 55% of the respondents believed that network planning is based on guesses
  • 64% believed that capex planning is driven by technology and not business objectives

From the above findings it is clear that getting the right business process and tools around resource life cycle management is extremely critical for the long term health and efficient operations of a telecom service provider.

In this blog, I would like to discuss about the exciting new world of SDN, NFV and cloud technologies and the relevance of resource lifecycle management in this new world. While a part of the telecom operator community is very aggressively embracing the concepts of SDN and NFV already into their network, there are others who are waiting and watching to see how things progress. I strongly believe, for the telecom industry to break the shackles of “reducing margins” and “increase in the need of CAPEX/OPEX investments” that it is currently facing, the key answers can be provided by SDN, NFV and cloud technologies.

It is obvious that maximum energy is spent by telecom service providers, vendor community and standards bodies like ONF, ETSI, IETF, OPNFV etc. on how the network will work in this new world. Also, what I observed is that a bulk of the energy is being spent on defining standards around next gen BSS and OSS by TMForum, ETSI and ONF are in the following areas:

  1. Orchestrator
  2. VNF Manager
  3. VI (Virtualized Infrastructure) Manager
  4. SDN controllers
  5. Network and Application adapters
  6. Protocols used for communication with the devices and applications
  7. Policy engine
  8. APIs etc.

As we go about defining the standards, let us look at covering the life cycles of all the domains starting from Customer life cycle, product life cycle, service life cycle all the way to resource life cycle. In this new world, resources can be physical compute, storage and network resources or virtual resources like software licenses. Let us not restrict ourselves in defining standards only on the operational aspects of resource life cycle management (OSS inventory) which was done in the eTOM model of TM Forum. Some work is being done by one group under the ZOOM initiate of TM Forum to define standards on onboarding of the software resource. This is definitely good, but we need to cover all aspects of the life cycle right from onboarding till end of life.

So what if we do not do it, the systems will work, be operational and deliver services to the end customer. But we will probably end up being in the same state that we are in today, i.e. not being able to monitor how the CAPEX decisions of the past have fared, optimize on the investments already made, learn and improve in order to make better CAPEX decisions going forward.

I would like to leave you with the following thought before I end my blog. If we ask any telecom service provider on the number of database or web server licenses they currently have deployed in their data centers, they may or may not have an answer. But if we go to the extent of asking how many of these licenses are in use and in how many cases we have a compliance issue, I am pretty certain that almost all of them will not have a precise answer to the question. Going forward, if all the network functions are going to be software running on COTs hardware, the need to have answers to the above questions will be even more important.

Join the webinar on ” Telecom Asset Management in SDN & NFV world” to discuss more.

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