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Focus turns to outsourcing as networking grows up

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<div align="justify">Good news for telecoms operators: these are bad times. The economic recession is lingering, which presents a big opportunity for the BTs and AT&Ts of the world. Why? Because as the early 1990s demonstrated, when industries are down on their luck they invest heavily in technology services and outsourcing to help them out of their financial rut. Businesses handed over entire computer operations, networks and data centres in outsourcing deals to the likes of IBM, EDS and CSC. Outsourcing is now back in vogue, and the practice of handing out technology operations to specialists goes by other names as well, such as 'managed services'. In the past few months alone, CSC has signed a £1.5bn 10-year deal with Royal Mail and a £1bn contract with Motorola. Last year, IBM announced a £3bn, seven-year deal with JP Morgan Chase. And in November BT and Unilever committed to a £1bn, seven-year deal, the cornerstone of a BT outsourcing business that has reached more than £1.5bn in contracts in the past six months. In fact, BT is playing a key networking role in CSC's Royal Mail deal. What is striking about these contracts is that they all come with a significant networking component. Since the last outsourcing boom, the network has grown up. The arrival of the internet into the commercial world has underpinned an irreversible trend of companies relying on global fibre networks for sending everything from simple messages to timely one-to-one marketing information to video presentations. The chief objective of all these deals, and many smaller outsourcing and managed services contracts, is the operation and maintenance of voice and data networks. The idea is to bring applications, information and networks into one system providing workers around the world with access to information at any time, anywhere and in the form they require it. With the global economy now in full swing, the services emphasis has spread worldwide. In the US, corporate IT spending might not be at late 1990s levels but, according to market research firm In-Stat, it is rebounding slowly, partly driven by spending on telecom services. US IT purchases reached $225bn (£135bn) last year and are expected to rise to $256bn in 2006. In-Stat analyst Kneko Burney said that most of it will buy "connectivity, mobile client devices and expanded use of managed services". IP and outsourcing One of the main drivers is the move to networks based on internet protocol (IP), the foundation for the world's biggest network, the internet. Telcos and other service providers have realised that IP could be key to building private corporate networks as well. Whether it's the public internet, or newly built private networks erected on multi-protocol label switching (MPLS) building blocks, providers see gold in joining corporate workers and applications. Virtual private networks (VPNs) are replacing expensive leased lines. IP VPNs are taking over from old VPN technologies such as frame relay and ATM. IP-based VPNs was a €2bn industry last year, and researcher Frost & Sullivan is predicting steady 25 to 30 per cent year-on-year growth. Frost & Sullivan analyst Niamh Spillane predicts that IP VPNs will grow much faster than frame relay or ATM, which totalled €4.6bn and about €2.5bn respectively in Europe last year. Spillane added that IP technology is more flexible and doesn't rely on 'point-to-point' engineering. BT is bullish on the growth for the private, MPLS-based IP VPNs. Mark Logan, BT's head of VPNs, predicts a 100 per cent increase in MPLS sales this year for BT. By comparison, he forecasts double-digit growth in frame relay sales. He agrees with Spillane that ATM will slow to a trickle, with a single-digit growth rate. Recent BT contracts that call for IP VPN include multimillion pound deals with Honeywell, Visa and Abbey National, connecting hundreds of sites in each case. A new IP VPN network seems on the cards at Royal Mail, with BT handling the networking under contract to CSC. "We've told them we want to move off point-to-point networks onto universal IP networks to give us high-level connectivity," explained Royal Mail IT director David Burden. He claims that the contract does not prescribe an IP VPN network, although BT will almost certainly deploy IP VPN to connect the company's 1,500 locations. "We're trying to move away from being prescriptive," said Burden. "We try wherever possible to put our requirements in business terms, and then technology terms." Working across borders For BT and its competitors, the key to winning big deals will be to provide service across national borders. BT was meant to have gained international advantage through its former Concert partnership with US giant AT&T. But the two companies abandoned Concert a year and a half ago, leaving BT on its own competing against AT&T and European powerhouses Equant and Infonet. AT&T's own European and international wins have been impressive. Concert seems to have given it a strong entry into Europe, and its $5bn acquisition four years ago of IBM's Global Network business is paying dividends. The company might be US-based but, points out vice president of business development Jeff Ace, "we need to be able to treat any location like it's another state, whether it's Illinois or Albania". Spillane claims that AT&T has mustered more of the European IP VPN market (10 per cent) than BT (eight per cent). Antonio Lopez, marketing director of Spanish Railways, said that AT&T's "pan-European coverage" is one reason why European rail consortium HIT Rail chose AT&T for an IP VPN network, linking passenger and freight operations across the continent. Ace predicts that private IP VPN sales will be stronger in Europe than in the US, because firms have more trust in the public internet and are therefore more inclined to run their IP VPNs over it. Spillane believes that BT's marketing efforts should make it a bigger player. BT and AT&T both trail market leader Equant, which is controlled by France Telecom and Infonet, and owned in partnership by other European telcos including Spain's Telefonica, KPN and Swisscom. They're not the only ones chasing managed services business. The traditional IT-rooted IBM, CSC and EDS are all eyeing the same market, in which they both compete against and co-operate with telcos, as CSC and BT are doing at Royal Mail. Hardware for managed services The telcos' own hardware suppliers, Lucent and Alcatel, are also stepping up service operations to counteract depressed hardware sales. Lucent Worldwide Services even reached into the talent pool in March and hired EDS' president of information technology management services, John Meyer. Although Alcatel and Lucent insist that they will not compete against the telcos, but sell services to them, the lines seem likely to blur. After all, if they provide service to the service providers, that builds in an extra vendor layer that could well mean higher end-user prices. Alcatel chief executive Serge Tchuruk explained that his company will target vertical markets such as transportation with services, a move that will pit them directly against other service vendors. Tchuruk expects services to make up about a third of its revenue, up from 15 per cent at the end of 2002. Lucent vice president Paul Higgs claims that in Europe, Lucent receives 30 per cent of its income from services, and expects this to grow to about 40 per cent. While Lucent won't compete against telcos for end-user business, it will compete against telcos' own in-house staff. Higgs claims that telco vendors spent about $150bn deploying service last year, giving about $40bn of that to other vendors. Whether or not it takes their services directly to the end user, the likes of Alcatel are busy imagining new services that will take advantage of IP technology. Alcatel vice president Phil Tilley sees a potential market overhauling call centre economics. He believes that with improvements in voice-over IP technology, companies will be able to dismantle their centralised call centres instead using hundreds of representatives working from home using voice-over-IP applications. There is also demand for external data centres to take on the responsibility of housing and managing the infrastructure that links into a company's critical servers and back-office systems. Using external data centres to host critical systems, such as web servers, database servers and email, reduces the pressure on a company to invest in enhanced power and cooling equipment to safeguard against failure and outages. It also reduces the need to invest in furniture and other infrastructure to operate back-end systems on-site. Simon Neal, country manager for Redbus Interhouse, explained that external hosting and co-location can lift a lot of the logistical and financial burden from IT departments. "By outsourcing these areas of their systems infrastructure, our customers can now focus on their business and not worry about the technology," he said. "There is a real return on investment business case for customers to commit to a fully outsourced model, compared with an in-house solution which entails large amounts of capital expenditure. Savings of 50 to 70 per cent can be made over a three-year period." These service providers realise that SMEs are ripe for service contracts. Spillane suggested that BT is well-placed for this market, given that it is rapidly growing its DSL network. But it will not go unchallenged by rivals such as Thus, Energis and Colt, provided BT allows fair access to its national backbone. For example, Thus has won several contracts, including Capital Radio, British Gymnastics and Ordnance Survey. Contracts can be as simple as providing basic remote access through discounted fees to home workers. That's what Ordnance Survey ordered. Ed Parsons, chief technology officer at Ordnance Survey, said that before it signed with Thus "it had an ad-hoc network, with some ISDN, cable and dial-up. We're mopping it all up into one, so that all employees can have broadband." The connectivity will initially help home/office workers and field surveyors dispatch everything from emails to data about UK roads. High on Parsons's managed service wish list is an agreement that would give him a uniform Wi-Fi service from one vendor. He'll have to wait a while if he wants that from Thus, which does not yet offer a Wi-Fi service. However, chief operating officer Phil Male observed: "Wi-Fi is getting very interesting." For now, Thus is focusing on other areas, such as home connectivity, and extending the reach of high speed, Ethernet-based local area networks over wider geographies, creating 'wide area networks' out of Lans. With so many entrants in the managed services race, the offerings are becoming more bountiful by the day. Will it really benefit the end user? Time will tell. NEGOTIATING A MANAGED SERVICES CONTRACT Ordering a few billions worth of managed network and IT services, and negotiating these deals, is not for the faint-hearted. That's why Royal Mail hired David Burden as chief information officer last October. The postal giant was in the middle of what became in May a £1.5bn, 10-year networking and IT contract with CSC, BT and Xansa. It needed someone who knew the ins and outs of outsourcing. Burden is a decorated veteran. As chief information officer of Air Canada in 1994, he oversaw an outsourcing deal with IBM. As technology chief at Australian airline Qantas, he handed VPN operations to Telstra in 1999, and later negotiated a desktop outsourcing deal. Burden knows that you don't sign these deals overnight. He took six months finalising the CSC accord. "The contract itself must be 10in thick," he said. "It's full of service level specifications spelling out how much Royal Mail pays for services delivered. It's peppered with escape provisions and credit allowances should one of the vendors underperform." That's the easy part. "The biggest risk is that staff are not happy," he warned. Outsourcing companies typically acquire employees as well as equipment and property from their customers. This can spell job loss, relocation or simply pose an unsettling change. Burden said that a total of 1,735 Royal Mail employees are changing their employer, that none have lost their jobs, and all have been offered comparable terms and conditions. The stickiest wicket of all is pensions, he says. It's difficult enough to assuage employees worried that they will lose pension rights when forced to change employers. But it's particularly rough in today's volatile pension environment. Royal Mail faced the additional problem that UK regulations require government workers, such as Royal Mail, to receive a pension based on their final salary on retirement, whereas non-government employers such as CSC are under no such obligation. Throw in Royal Mail's own pension shortfall, and things get tricky. All things considered, is everyone pleased? "The majority are happy," claimed Burden. "I'd be astonished if, out of 1,735 people, absolutely everyone was delighted."</div>

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