Telecom’s Competitive Solution: Outsourcing?
Source: The Outsource Blog View: 535 Date: 2012-05-10

U.S. telecom carriers face daunting challenges from device makers, content providers, social networks, and an array of disruptive technologies. But the solutions may not be housed on their own soil.

The telecom industry has changed, and the industry dynamics will continue to shift under the pressure from social media and the power of the consumer. Already, the popularity of the iPhone app store and the iPhone device itself has given credence to a purchasing phenomenon and the clout a device company can have on a telecom carrier’s success. Several portal companies compete with carriers as they have acquired “voice-over-internet” capabilities. Skype, for example, competes with fixed-line carriers by offering free mobile Skype calls. Google has its own contender in the market, Google Voice.

The North American telecom carriers are also forced to make huge investments to upgrade their network to support more video and faster data services. For example, AT&T had to spend almost $18 billion in a single year to upgrade its wireless networks to handle the onslaught of new traffic. Due to huge capital requirements, these investments could exert considerable pressure on the working capital of the carrier company.

In a rapidly changing industry ecosystem, heavy investments in hard infrastructure can burden balance sheets and limit flexibility. But a solution could come by following the example of the lean, agile, and India-based company Bharti AirTel Limited.

Bharti is the largest telecommunications services provider in India. Bharti looks nothing like other telecoms. The company’s core competency is branding and identifying customer pain points. In the U.S., telecoms are classified as a high technology industry: “Network is their business.” Bharti, on the other hand, has little expertise in technology. In response, the management team made a counterintuitive move: It outsourced network installation, maintenance, and service to Ericsson, Nokia, and Siemens, and chose IBM to build and manage its IT systems.

“When the proposal to outsource technology was originally put on the table,” said Sunil Mittal, CEO of Bharti Airtel, “most of our board members’ jaws dropped, and they thought we had gone crazy.”

The vendors for telecom network management were paid only for the capacity utilized by Bharti Airtel, not for the equipment. Bharti’s innovative business model converted fixed costs in capital expenditure to a variable cost based on usage of capacity. Through the outsourcing arrangements, Bharti dramatically lowered its costs while ensuring high quality for customers, since vendors had world-class competencies in their domains.

The net result: The company can offer mobile telecom service at $0.01 to $0.005 per minute, perhaps the lowest rates in the world. Bharti has enjoyed compounded annual growth in sales revenues of 120% and growth in net profits of 282% per year between 2003 and 2010. Its market cap has steadily grown over the same period and stood at around US$30 billion as of 2010.

The trend is spreading. European wireless carriers are negotiating deals in growing numbers. And in the regions where such deals occur, there is a snowball effect that typically produces greater economies of scale for both clients and providers.

Steps like these can create intense competition within the industry, and U.S. telecom providers should take notice. In fact, one company has already has. Sprint Nextel recently inked a seven-year deal to outsource operation of its networks to Ericsson, a contract said to be worth $5 billion.

Unorthodox methods may be the key to unlocking great rewards in a competitive industry. While telecom propels forward at an unfathomable rate, U.S. companies should decide if doing it all is doing too much.

Devott Publications
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