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    More than just a pipe

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    Next Generation Networks

    A total business transformation is what’s needed to maximise the benefits from an NGN, say PA Consulting group’s Mark Neild and Alan Young.

    The introduction of Next Generation Networks (NGNs) seems to be inevitable, but major new revenue streams are not obvious and business cases based on network operating cost savings alone show long paybacks.  Certainly operators must concentrate hard on achieving  the operating cost savings but the full benefits come from the opportunity to transform the whole business organisation around a single network. Business transformation will further reduce costs, improve the customer experience and lead to new revenue opportunities.
    In the last few years there has been  considerable interest both in the press and  the telecommunications industry around NGNs. The technology for these networks is not particularly new. They carry both voice and  data using Internet Protocol (IP), which has  been around for decades.
    However, whereas previous networks layered IP on top of existing technologies, NGNs are fundamentally built around IP; as a result  they are considerably cheaper to operate. Furthermore, they separate the processing of information – i.e. the applications from the  network, which in effect becomes a series of big, fat, dumb, pipes.
    Arguments in favour of NGNs are interesting. Costs of new equipment have fallen dramatically in the last five years. For established operators, especially, the idea of replacing the current spaghetti of different infrastructures, built to support different services, is an attractive one. The old generation of switches are becoming increasingly expensive and difficult to support, and the NGNs are cheaper to operate.
    In addition, the separation of network and intelligence provides more sophistication and flexibility in offering new services, which should lead to new revenues. Such arguments have led the OECD, for example, to conclude that traditional networks will disappear entirely within the next ten years. It really is only a question of time until they need to be replaced.

    The question of time
    Even with capital costs declining rapidly, the business case for most Next Generation Networks is still, on the surface, less than compelling.
    Firstly, most of the operators that we have spoken to believe that there are little or no new revenues from NGNs themselves. Whatever new services are being launched can be launched on existing networks, at least for the next few years. In fact, rather than increasing revenues, NGNs could have the opposite effect. For the incumbent fixed line operators in particular, NGNs will lower one important barrier to market entry by lowering the cost of connection to the network.
    Secondly, the operating cost savings that are obvious in theory are less obvious in practice. When operators come to detailed business planning, they find they need to take account of:
    • The life left in the current equipment and service contracts
    • Implementation and transition costs, which can be significant
    • The timing of savings, which can only be realised when all customers have been switched off the legacy networks.
    Once all these factors are taken into account, the business case starts to look wobbly. As a result many operators and investors are wondering whether the time to invest in a Next Generation Network really is now.

    The Next Generation Telco
    The fact is that business plans focused on network savings don’t do a good job of making the case for Next Generation Networks. To get the benefits from such an investment, there is a lot more to do than simply replacing the equipment. NGNs provide the basis for a much wider and more exciting transformation than merely saving some operating costs. They enable operators to be much more agile, faster to market and more responsive to changing customer needs – which we refer to as the Next Generation Telco.
    PA Consulting Group (PA) has been working with telecoms operators on the issues of implementing Next Generation Networks for over three years. Our observation is that success comes from a wider transformation than rolling out a new network. It is this transformation that underpins the case for the investment and comes in three steps:
    1. Driving through tangible network operating costs savings
    2. Wider organisational transformation as the network is being implemented
    3. Making the most of leaner service delivery to open new revenue opportunities.
    This article describes these steps, how they affect the timing and, drawing from a number of examples, how operators are implementing NGNs.

    Step 1: Concentrating on tangible operating costs savings
    Although it does not provide the full business case, there are still significant basic cost savings that can be attained through implementing an NGN. Our observation is that, in the first instance, operators need to design a programme that focuses hard on these savings before they move on to a wider transformation.
    To explain these savings we need to explain a little more about NGNs. In broad terms NGNs allow traditional circuit-switched voice traffic to be carried over packet switched data networks controlled by a far smaller number of intelligent ‘soft’ switches. These soft switches provide better network quality characteristics (QoS) allowing time-sensitive traffic – such as voice and video – to be split into packets and reassembled at their destination.
    With an NGN, the traditional methods of carrying packets, ATM and Frame Relay are replaced with a single converged network infrastructure capable of supporting virtually the entire range of telecommunications services. Typically, we have found that a single rack of NGN equipment provides 13 times as many lines as the equivalent circuit-switched gear and consumes proportionately less electricity.
    Furthermore the network can be far better utilised because packet switching removes the need for a dedicated circuit; the same bandwidth can carry around eight times as many calls. These savings grow with each successive network service that is integrated into the converged infrastructure, although in practice the voice network yields by far the largest single saving.
    As significant space savings are unlocked, equipment room running costs are reduced.  In addition, as each individual network service is superseded, their supporting infrastructures can be dismantled, maintenance contracts terminated and specialist technical resources consolidated. In some cases it is also possible to reduce the number of Network Management Centres and network support staff.
    The true challenge to releasing these costs comes from customer migration. A legacy network cannot be shut until the very last customer has been transitioned onto the NGN. At the same time customers typically don’t take just one service; they may have a complex portfolio that needs to  be migrated across with minimal interruption.
    This means that the business case, and hence the timing of a successful programme, needs to be designed around the migration. In theory, there are three broad approaches to migration:
    * Upgrade the current infrastructure with soft switches. This is fastest, and costs least, but produces the lowest operating cost savings
    * Replace the current infrastructure with new NGN components. This is ideal in theory but difficult to achieve where customers need migrating
    * Overlay the NGN onto the existing network replicating the necessary legacy functionality during the migration. This provides the highest overall ROI, but is the most expensive  and complex.
    In practice our experience suggests that the optimal approach is to overlay NGN onto the legacy networks, and incorporate aspects of the other approaches to increase its efficiency. Investment in detailed planning at the outset will pay handsome dividends but requires specific analysis to work through each case.
    One European incumbent with whom we have recently been working opted for the overlay approach. The learning from this approach was to challenge the need to replicate functionality with rigour. When faced with complex migration, the path of least resistance is to mimic all legacy features on the new network. This led to unnecessary capital expenditure and has delayed moving customers onto potentially more profitable new services.
    Step 2: Transforming the organisation
    Many overheads for telecoms operators stem from repeating broadly similar processes in different business units. As a result, there is great potential for rationalising processes from the bottom up and removing duplication from the network operations right up to the sales and marketing channels.
    However, telecoms operators have traditionally operated as a federation of independent and, sometimes, competing organisations, each with control of its own infrastructure. Consolidation of service provision around a single network has huge implications for these business units as they lose direct control of their own network assets. Typically this leads to a great deal of both passive and active resistance to any such changes.
    The NGN implementation provides a very valuable opportunity to refocus the organisation around  the core processes that actually deliver value  to customers. However, due to their complexity,  our view is that re-organisation and process redesign should follow the initial programme  of cost reduction and build on its momentum  and successes.
    A further early learning from our work with NGN clients is the need to support a senior sponsor, without allegiance to any of the legacy Business Units, who can evangelise the benefits of the transformation while controlling the flow of funds to ensure that individual parts of the organisation remain properly tied into the programme.
    So what does this transformation look like?  As NGNs develop there appears to be a consensus building around the basic operating structure of the business, which is set out in  Figure 1 above.
    This is based on a core network layer, where applications sit on top of the network. Operation of the network and customer support facilities is provided as a single set of capabilities using the service platform. Each customer channel retains independent sales and marketing functions. Freed from the distractions of running networks, the idea is that these channels are able to concentrate on maintaining a deep understanding of their customer needs and how best to serve them – which is where the competitive advantage of the new operators will lie.
    The channels then translate these needs into a set of requirements that can be satisfied by assembling solutions from the various capabilities provided by the engineers. The degree of commonality between customer requirements across channels is striking and we will explain  how we might capitalise on this in the next section.
    In order to achieve the buy-in from senior management that this arrangement will work, it will be necessary to put in place robust governance mechanisms. These replace the direct control they previously exercised over their means  of production.
    In many ways these governance arrangements  will closely resemble those put in place for outsourcing arrangements. Typically, such arrangements include a performance mechanism to govern multi-tiered service levels, and will need the governance and contract management skills that outsourced contracts
    require.

    Step 3: Making the most of leaner service delivery to open new revenue opportunities
    As we stated earlier, NGNs do not in themselves provide new revenue streams. This is because they do not service any customer need that cannot already be satisfied by previous generation technology. However, NGNs do make many services a lot cheaper. The most obvious example of this is Voice over IP – not inherently a new customer need but a far cheaper way of providing a service that has been available for 100 years.
    These cost differences are enough to create entirely new segments for existing services. Complex and expensive services that were previously the preserve of users in large corporate organisations will become accessible to consumers and small and medium sized businesses.
    To some extent this has already started. Who would have thought five years ago that 2Mbps would become the entry level consumer broadband service and that TV would be deliverable over IP? However, NGNs will accelerate this process, providing new opportunities. For example:
    • Large corporates are increasingly managing their burgeoning data storage requirements by using remote storage services. This type of service is  now starting to be offered to consumers to store music and pictures online. With low cost, ‘always on’ capacity, there is a great opportunity for far greater use of networked storage, from archived personal information to downloaded content.
    • The application hosting market for corporate customers has been growing for some years and cheap bandwidth enables consumers to benefit from renting rather than buying software. Softbank’s BBSoft service, for example, charges consumers a monthly fee from ¥115 (£0.75) for networked access, to applications oriented towards consumer interests – from graphic design to gaming, through studying to home health checks.
    The task of meeting and servicing the widest possible range of customer needs is made far simpler by sharing capabilities across market-facing segments: it enables cross fertilisation of service ideas which, in turn, spawn more innovative cross-selling opportunities. Operators often admit that they could make far better use of their existing capabilities but organisational barriers inhibit this.
    Research has shown that the majority of successful innovation comes from re-assembling existing components in novel ways rather than pure new technology. Next Generation Telcos should provide the environment for such product innovation. Sharing service development across the organisation will remove some of the barriers to innovation – although this will need to be a  wider transformation.
    Although NGNs do not promise major new revenue streams, the benefits go way beyond simple operating cost savings. The associated transformation programme will reduce operational complexity and change the way products and services are delivered. They will share support functions across the sales organisation for each customer segment. At the same time this will be the largest change to telecommunications since the arrival of mobile.
    Welcome to the Next Generation Telco.