With the recession perhaps petering out, it’s back to business as usual for OSS. However, if operators want to avoid becoming a dumb pipe, usual won’t be enough, writes Keith Willetts

Willetts: change in focus from network-centric
strategies to customer-centric strategies

So its good news then - the recession is over. That’s alright then - phew! Reading the press in the last few weeks has been a bit like reading the script from Independence Day where the good guys save the planet from extinction.

Not that our industry seems to have done too badly in the recession - most people seem to have taken the view that their phone and their broadband connection are vital ingredients of modern life and have cut back elsewhere. Indeed, that trend seems to have accelerated in the recession - smartphones are rapidly educating people that their mobile phone is the centre of their universe and becoming an indispensible way of not just communicating, but getting information, having fun and doing work.

With 1.5 billion application downloads on iPhones, service providers everywhere have finally got it that there is a huge market for mobile content and applications. We’re finally getting to the position that we were promised in the great 3G hype that accompanied the now utterly ludicrous spectrum auctions of nearly a decade ago. 3G promised us the mobile internet but hype got ahead of reality, and now that we have it, its speeds are rather pedestrian hence the spurt in looking to a 4G world for a truly global, mobile internet with access speeds capable of supporting the kinds of applications and services that the iPhone is letting us glimpse.

But in this emerging market of ubiquitous content, information and communications available anywhere, anytime, who will be making the money and who will be driving the market? Communications service providers today enjoy a vast $1.4 trillion market but that is growing very slowly as markets saturate. The buzz and excitement is mainly happening over-the-top driven from the handset and applications players with service providers largely getting cut out of the deal.

So if we are beginning to see cracks in traditional business models, where does that lead us? Do we see a separation between companies that operate networks and players that operate services and market those to end customers? How will value chains evolve? Even the model of who pays for services may change – already we are seeing more and more free applications and content on the iPhone supported by advertising.

As Darwin so ably demonstrated exactly 150 years ago, species either change to suit the changing world they live in or they die out. If the environment about you is changing but you aren’t, you’re vulnerable to extinction. And not only do you need to evolve to survive but to thrive in existing and future environments.

It’s the thriving bit that concerns me. The innovation driver doesn’t seem be with the communications providers and the nightmare dumb pipe scenario seems a real possibility. Some governments around the world appear to be reinforcing this role for service providers with government funding - and bureaucratic constraints - to subsidise fibre rollouts. In the 25 years since the US and the UK liberalised the communications industry, it has been transformed out of all recognition but that transformation process needs to continue, unfettered by the long hand of governments, into the 4G world of the personal internet.

Transformation waves – more to be done

Transformation of the communications industry has not been a smooth, linear process – it tends to run in fits and starts. As market liberalisation has moved eastward across the world, different waves of transformation have been noticeable. However, these waves are getting shorter tending to break over the top of each other presenting both management teams and market watchers with a confusing and chaotic picture.

The first wave of transformation is invariably aimed at squeezing costs out of current operating models. Very frequently, this approach leads to problems with customer service, which then causes customers to churn—it’s noticeable that customer service surveys around the world invariably put phone companies near the bottom of the pack. There is only so far any company can go with cost optimisation of its current working methodology: once the organisation goes beyond a certain tipping point, the operation falls apart and people that were just fired or re-trained have to be brought back to where they were before.

The second wave of transformation focuses on a more fundamental transformation of changing the operating model—broadly speaking, to simplify the complexity of multiple networks and operational stacks for multiple services. The consequent fragmented and stove-piped set of operational processes and systems creates what Hossein Eslambolchi, former CTO of AT&T, describes as “Eslambolchi’s Law of Complexity,” where the more complex the structure you are managing, the more costly and difficult it is to do so. That’s why fixed-line incumbents, as well as longer-established mobile players tend to be more sclerotic - operational complexity is more acute in long-established companies. But even newly established providers are not immune from the problem, as every short-term decision taken to cut corners can be a step toward creating spaghetti-like infrastructure—and its cost—the likes of which incumbents so desperately want to escape.

But even before many of these second wave programmes are even half completed, new drivers for change are breaking creating a third transformation wave. Paradoxically, the third wave is in part created by delivering fixed and mobile broadband services at ever-greater speeds creating an explosion of new services and new players and an enormous opportunity for marketing and tailoring services and products to people as they wear and shed their many personae throughout their personal and business lives. Because each persona represents yet another niche to which content and services can be sold and delivered, service providers should look at the many ways in which they can facilitate the bundling and packaging of new services.

In the face of this third wave, many service providers seem to be all at sea. Many have assumed that avoiding being reduced to a dumb-pipe provider means protecting their retail service businesses at all costs and regarding the over the top providers as the enemy.

That’s now beginning to change with a growing view that being a service enabler or smart pipe to third party services could be a very interesting role for service providers. A good example of this is Amazon, which has transformed itself from an online bookstore, to an online retailer, to an online retail enabler by opening up its platform to third parties and charging for the privilege.

They provide an array of additional services to these other retailers and in the process produce a substantial slice of their profits but at the same time, they have grown their core business substantially as many more customers to look first at Amazon because it has such a wide portfolio. They are now embarking on yet another step in their evolution – to provide cloud based services such as their Elastic Compute Cloud virtual platform.

The third wave of transformation is all about the virtualisation and digitalisation of services that were previously bought through other means such music, movies, books and so on. It’s really a wave dominated by rethinking business models and the service provider’s business models are not immune. Invariably new services involve partners in their delivery and thus a new competency of working in value chains is essential. Many communications players are inexperienced in this and the emergence of significant market power players in the value chain, such as Apple being able to drive hard bargains over iPhone distribution, has been revealing. Developing strong commercial partnerships with third parties will be an inevitable cultural and operational change.

Just as important is developing the competency to deliver a positive customer experience across services created by multiple parties at an acceptable price and at acceptable profit margins. Early examples of value chains, such as those somewhat artificially created by regulators, for example structural separation between access providers and broadband service provision, have not been exemplary, often subjecting the customer to a miserable experience of finger pointing and shoulder shrugging that simply doesn’t work. Neither does an operational model where the hand-off between players in a chain is manual or heavily customised – the operational costs of working in a multitude of different ways using people to resolve issues simply kills the margins of services like mobile TV.

So transformation can affect many things ranging from business models, to business culture, to business processes, systems and infrastructure and not every service provider will succeed in managing major change programmes. This is not only an issue of competency but of leadership - transformations often take much longer to execute than the market window available.

Just shaking off the habits of a lifetime is very hard- often because you are so imbued in that way of doing something that you don’t know it’s something you have to change – i.e. you don’t know what you don’t know! That’s why getting out, observing what others are doing and translating that into action is so important.

These cultural changes also become very apparent with the change in focus in the market from network-centric approaches to customer-centric strategies combined with a much increased level of innovation producing services that make customers feel some level of personalisation.

So, what does the future hold for the communications industry? Who knows but the effects of the changes in the market will be much more important in its future than merely surviving the recession. Cutting costs and reshaping businesses are important but ultimately they are only stakes to play at the table for being the providers of the growing digital economy.

And that will require the biggest challenge of the third transformation wave – turning the world’s service providers into highly innovative, fleet of foot, risk takers. GTB

Keith Willetts is chairman and CEO of the TM Forum