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Time to outsource?

Our expert deliberate.

Communication News' N + I roudtable, held in September, began with a presentation from our cosponsor, Communications Industry Reseachers (CIR) of Charlottesville, Va. Cynthia Gasman, reseach director for CIR, briefed group on the results of a survey of Communications News' readers on the issue of outsourcing WAN services (see sidebar for survey results). What surprised the group was the fact that, despite all the hype, most of those surveyed are exceedingly wary of outsourcing. The discussion then turned to what would encourage outsourcing and what the problems were to be overcome--from technology to the politics of access.

Seminerio: Ten years ago, everybody was talking about outsourcing, and what it meant was, basically, I'd sell my IT department to somebody else, and then they would charge me back. It's like a lease arrangement for capital equipment. I think the difference today is that network infrastructure has changed radically. We're now able to provide services through a network and buy services that are no longer managed by one particular entity. As a business consumer enterprise, I can go out and consume services from a multitude of ASPs through potentially a multitude of networks. Now you see Qwest doing a deal with SAP, and you can buy and consume the SAP application through the Qwest network. If you have an infrastructure where any application service provider can offer his wares through any network, and I, as a consumer, can go to any network and consume that service, then the free-market system kicks in. The natural forces in the economy will make that type of scenario or that solution very successful. What do we need to make that happen is the $18 billion question.

Hudson: In WAN outsourcing, you typically get three or four carriers that provide most of the services. Unfortunately, or fortunately for them, they also sell managed services to go along with that. The only problem is, it's typically not end-to-end management. It's only managing what they're leasing to you. Therefore, adding some charge on top of the lease line to guarantee some level of service--well, gee, shouldn't I have gotten that service anyway? WAN outsourcing is driven by the fact most carriers typically do not provide the best service, and there's a lot of finger-pointing going on. Usually, they ask for a third party to get involved and manage the carrier, and even the third-party maintenance vendors take away a big headache. If you just focus on WAN outsourcing, it's a really small wedge of the pie. Most customers are looking for end-to-end solutions, where WAN services or WAN outsourcing is bundled in a bigger picture. To package that all together and give it to a vendor seems much more realistic than just saying, "Okay, I'm going to carve out my WAN and outsource that."

Wharton: Depends if you're a small company or a big company. A small company doesn't necessarily need EDS to come in. They can choose Digex for Web hosting, another one for e-mail, another one for the WAN, and so on.

Seminerio: Let's define what we're talking about. Forrester says it's a $21 billion business of application outsourcing by the year 2001. Simi Corp. says it's a $300 billion business worldwide over the next seven years. Instead of talking about Layer 2 connectivity and technology as a service, I think what Forrester and Simi are getting at is that services are the next layer above that. The data warehousing, the MRP that you're outsourcing, the software rental that you're outsourcing, these are services that are applications riding on top of the infrastructure.

Wharton: That's what it seems people want. They say they want some lower-cost solution, better mousetrap, but it seems that cost is not the major issue. Strategically, they not only don't want to do it, but they want to get something more from people who are going to focus on the skills of understanding what goes on in a network and what the next technologies are. But they don't understand or don't have the mindshare to focus on these things.

Sawyer: The trend is dramatic and, in some ways, very practical. If I go to the home, which everybody should relate to, nobody has a phone machine any more, right? The majority of us hopefully don't. It's better to let the phone company take care of it. It's easier. It's the way they're trying to make more money. It's a service that's valuable to us, and it's worth it. I'm tired of dealing with the phone machine because it fails on me more often than not. It's a natural trend. It's the same thing in business. Once you're natural with your service or an application or whatever you might call it, once it's basic, it's going to move out.

Wharton: Actually, it's a funny point, because when you think about the cost issue, you couldn't go to someone and say, "Outsource your answering machine because I'm going to save you five bucks every two years." It won't do it for people. You're not going to do it to save $10. It's the manageability.

Seminerio: You don't buy 64K from the phone company and then they just happen to throw a voice layer on it. You buy voice services. You don't go to the cable company and say, "Give me a coax cable because I want a bunch of bandwidth in my house." No, you buy channels. The telecom network should stop selling bandwidth. Let's sell service channels to corporate America. The challenge for us in the industry is, can we build that network? Can we build that network in the telecommunications business the way they have built it in the cable business?

Wharton: Like Forrester, where they said, by 2003, it will be a ton.

Seminerio: Today, if I' m an IT manager, I have to capitalize this stuff. I was speaking to an IT manager of a Fortune 500 company who told me 30% of her budget is capital depreciation every year. Think about that: 30%. If I can get rid of that stuff--and she doesn't have to buy a videoconferencing bridge and she doesn't have to punch holes through the firewall just so you can talk to me, and we can solve all those problems simply by using an application service provider through some kind of a dynamic network--and I don't have to capitalize this expense, then, instead of a capital purchase, it's a $20 expense.

Sawyer: Those services are not well defined. I think that's part of the challenge for us here around this table. You've got to be in a position to grow, evolve with whatever those services might be.

Denney: You outsource when there's no longer a compelling reason to do it yourself. If it's that critical to you as a business, that what you're doing is so unique or so far beyond the state of the art you have to do it in house, you do it in house. My very first job was working for a chemicals company, ICI. At the time, it was famous for having developed its own modems--because it had to communicate data over the phone lines, and modems didn't exist--so it designed and built its own modem. Obviously, nobody even contemplates doing that nowadays. Outsourcing is purely a make/ buy decision. I don't see any sort of religious debate about whether or not added-value applications are a good thing. The question is what's going to encourage them to buy [applications] outside? Which to my mind is ubiquity, cheapness, a belief that the basic quality is there, and they don't have to do it in house.

Wharton: It may not even be about costs. It's like people outsource mowing their lawns. You don't do it because it's probably cheaper to do it yourself, but because you just don't want to do it--because you want to focus on what's important.

Hudson: Everybody goes after convenience, whatever that happens to be. In this case, WAN outsourcing is a convenience for them. Forget the costs, because the cost is going to be dealt with on an RFP filed with the vendors. That will take care of cost. Service-level agreements will be battled out on the contract. So it's convenience, maybe staffing, as the survey implied, and staffing's always going to be a problem.

Denney: But I don't think that's true, Tim. Sticking on the narrow levels of cost and service-level agreements and wide area networks, and picking up on Cynthia's numbers, it's only a minority of firms that outsource. If cost and service level aren't an issue, you'd expect to see a majority. And, of those that aren't currently outsourcing, only a very small minority are even willing to consider doing so. When I look at the experience of my clients, who tend to be Fortune 100, those that outsourced are very unhappy. Why are they unhappy? Cost, service levels, flexibility.

Gasman: We got very detailed replies from disgruntled employees that were outsourcing and didn't like it much at all.

Seminerio: But let's go back 20 years. Huge data centers, right? People would basically outsource. You bought some processing power, you bought a piece of a mainframe processor for an hour a day or whatever.

Denney: Time-sharing.

Seminerio: Time-sharing, right. That was the model 20 years ago. Then everybody brought it in house as processing power became cheap, as it became a small footprint, as it became somewhat easy to manage, and now it's moving back the other way. The reason it came in house, in my opinion, in the first place, is because, A) it was cheap, and B) as the explosion in data communications grew, access to the network became more difficult. The access pipe became more and more congested. What's happening now is access technologies have moved a fair bit in the past 20 years, so now you get some pretty fast access pipes. And you've got centralized processing happening all over again.

Sharma: Having the technology is one thing, but deploying it is a whole new issue. DSL technology came out of Bell Labs 10 years ago. It has taken us almost 10 years just to deploy, and this is just at the brink right now. In most parts of the U.S., which has the most advanced communications in the world, we still don't have more than 2% of the businesses wired for DSL. It's what is deployed at a commercial scale that matters. You open that flood gate today, I' m pretty sure that more than a dozen companies have the DSL equipment ready to go.

Denney: The question is do the local loops really support it? What are the wide scalability issues of deploying DSL in the local loop? It is, of course, tempting for a cynic like me to note that DSL deployment tends to be rapid and widespread when cable modems move into the area.

Sharma: Here, the fundamental difference is the cable company. In one area, there's one cable company.

Denney: And there's one RBOC.

Sharma: No, there are multiple. In 1996, with the Telecommunications Reform Act, local access was open to any company. It's a nightmare in one sense, because now when you go and select through the RBOCs to get a co-location facility, there's this thick pile of paperwork that you have to go through, so basically they discourage you. They don't say "no," but they discourage you. That is a fundamental problem we're facing as equipment suppliers, because the RBOCs' cycle is about two years just for product qualifications. You have to go through a whole lot of testing. CLECs, on the other hand, are ready to deploy it, but they don't have access. If a new plant is more than 12,000 people, there's nothing they can do. They can't have access to it, so there's no solution for that. It's only in the hands of the RBOCs. And the RBOCs are simply delaying it, because they get a lot of revenues from that. When they open it up to the CLECs, they're going to lose the revenue, but, on the other hand, they also have to realize the market becomes much bigger.

Wharton: If you look at what data CLECs are doing, they're making money in data, but the real value is in voice. What if they can say, instead of the $100 you would spend per user per month on Centrex services, you can have a CLEC offering a DSL service, run voice off that, do Centrex but cheaper and better, and run things you can do with IP that you can't do on TDM?

Denney: It's less sweeping. A lot of what I see comes in one little technology or one service at a time. It's not that long ago everyone was busy deploying Shiva as an access service. Big banks of dial-up modems supporting telecommuters and people dialing in for e-mail. If you were setting up from scratch now, it wouldn't occur to you to do this. Let them come in over the Internet. Give them an ISP account, 20 bucks a month, problem solved. Is it outsourced now? Arguably, it is. But it wasn't outsourced in the sense of somebody bought the Shivas and put them in a data center and you dial into a data center and it comes back in. Technology came in, and you're buying a service.

Seminerio: When Scott was talking, I was thinking of some interesting numbers. We've seen some reports that say that large incoming carriers get anywhere from 80% to 88% of their revenues from the voice side of the business, so anywhere from 12% to 20% from data. Another statistic says that 50% of the bandwidth in the network is carrying data. Another statistic says that that 50% has almost no margin. If I'm an incoming carrier, I'm chewing up my network and I'm not making any money. They all talk about getting into the applications game, because people have caught on to these numbers. If there's any truth to any of these numbers, and if there's any truth to the fact that people want to change their economic model so they can survive in the future, if I am a large carrier, then I am by definition going to be driven towards somehow delivering some services, which means by definition I must be stealing. It's the same basket. The IT manager is now spending that money in house, and I have to convince him to spend it with me. Instead of buying equipment for an in-house solution, he'll buy outsource solutions from me. That's the game.

Sawyer: To back you up there, in Cynthia's presentation, she basically said, once they buy into it, cost isn't so much the issue, right? It seems like it's service, the value of the service.

Denney: I think it's closer in the smaller companies than the big ones. I think when you're looking at the really big companies, Fortune 500, they have separate departments for network, for data center, for service, for the applications, and there it's very hard to get that value-add message spread across groups. They've all got their own budgets. But when you're talking to a smaller company where you may just be dealing with one guy, the CIO, he can't be an expert in all these fields. He doesn't have the staff to be expert in all these fields. He'll buy into the benefits. He can understand, but he can't get knowledgeable staff in all these areas. He doesn't have enough work for them to do to have at least one time-equivalent LAN guy, WAN guy, NT guy, Unix guy, and mainframe. Can he free up his staff to focus on stuff that adds value? It you can buy it as a regular service, sure, he'll go for that. I see a lot of potential. I think that's really the driving force behind these application hosters. It's enterprise resource planning for the smaller guys.

Wharton: A lot of it is a question of size of the organization.

Hudson: They'll do it as soon as they get a network large enough to cause them a headache, which could be a $1 million company.

Sawyer: It probably will be the money to create their own infrastructure, because they just won't trust it, so it's a good point.

Seminerio: Just like we sometimes argue RBOCs are slower to move and the smaller carriers are faster to move, it's the same thing with business. Smaller businesses are quicker to move than bigger businesses are, because they have less infrastructure to move around. Then eventually, if it becomes ubiquitous, if it becomes so common sense, like voice is today, then the big guy will say, "Yes, I, too, will subscribe to this service, because it's now providing all those characteristics we take for granted."

Denney: I think we saw that back in the' 80s with voice networks. It was the Fortune 500 who put in the Ts, bought the time flex, built the private voice networks, their own dial plant. The only thing I would take exception to is, it's not so much that the large guys are slow to move, it's more that they move first. They're the guys who deployed IP. They have mission-critical apps. The small guys tend to be slower at adopting technology.

Wharton: Do you think that's because the smaller guys can't do things in house, so the bigger guys have the resources to do things in house? Maybe the landscape is changing, so now you don't have as much of an economy of scale; a smaller company can actually be a first mover or even a consumer because the technology is so granular that you can move fast, whereas in the past, you needed a lot of money and resources.

Sharma: Eighty-eight percent of the revenues, like John said earlier, are from the voice networks. That's why you see lots of data companies, like Cisco, pushing into the voice networks now. Other voice companies, like the RBOCs, are being forced to provide data services, because they want to be a one-stop shopping center for their customers. They don't want their customers to go anywhere, but they're not interested in data only. They would go, out of business tomorrow. It's important to look at what services a small office or midsized office needs, and then provide one solution for that.

Denney: I think that's true. I'm working with our smaller clients, not telecom experts, completely at a loss to understand why they get all these bills for voice and data services. They get bills for cellular, bills for paging, bills for local phone service, bills from second-tier long-distance carriers you've never heard of, for goodness knows what. You get your primary bill from your long-distance voice carrier. You've got a data network bill. It's horrible. And, of course, [our clients] don't have the expertise or the staff or the time. It's not necessarily worth it to dig through each bill. You get a bill for 50 bucks from a particular carrier you've never heard of. Are you going to spend the time and effort to figure out what that 50 bucks is for or if you should be paying for it? No, you pay it and move on. I think there's an enormous potential for smaller companies, medium-sized companies, for somebody that's going to remove that complexity, somebody to say, "We sell communication. Here's the bill."

Wharton: The reaction I have from the data is, that if you want to make outsourcing occur, don't focus on the costs part of the solution but on what can you provide more than is being provided today. Because people are not going to take something that works inside a company, save 10%, and risk getting fired because it doesn't work. You need to provide something a lot more than that, so it has to be about something premium and services. And I think the message to all of us is to focus on what those applications are and what the value is that can be provided by someone who's an expert outside a company, rather than purely on a cost argument, because it seems like it won't work.

Seminerio: My comment is that, if the whole idea of application outsourcing is going to take off, what is going to drive that is economic value. Even though I know the data says people are not driven by economics, I think, based on what they're doing today, they're not driven by economics because they take that for granted. But I think decisions moving forward, people are driven by economics. I think you have to address whatever the natural force is in the economy that says you're going to move one way or the other.

Hudson: I think the bundled services or total solutions or, as we've coined it, applications services or solutions, are the key to outsourcing, whatever we call that down the road. And providing kind of a full-service umbrella, one-stop shop, is certainly the trend, and whether it be driven by application or whether it be driven by the need for service, cost-effective service is, you know, probably 50/50. The bottom line is: what does the customer expect? They always expect or assume it's cost-effective to do this. It's going to give them some value add, and they're going to get, hopefully, a full suite of services or a solution out there that they can purchase.

Sharma: I think the fastest-growing segment of the American market is the small office, home office. We have to look at the needs of all different types of services that we can integrate onto a single twisted wire, and the technology is here. We can deploy it. We should deploy it and just go on.

Sawyer: I think the challenge--at least, what I believe the challenge is--is making money off of moving data.

Hudson: Amen.

Sawyer: It's growing in size relative to voice, yet we keep talking about how profitable voice is.

Denney: Tonight, we've been focused on next-generation services, next-generation technologies, and if only we overcome this one particular barrier, utopia will follow. I think as long as the technology industry continues to focus upon its own preoccupations with technology and standards, platforms, and making money, effectively we're never going to really reach the stage of outsourcing. You outsource something when you believe there are benefits to do so. The benefits can be better, cheaper, faster, more reliable, whatever. It's rarely sort of a meaningless feature comparison between what I can do in house versus what I can do by buying it elsewhere. Pick up your example about your answering machine. You let your RBOC do it because it's more convenient for you. You don't know how they provide that service, and I imagine you don't care. There's no cassettes to deal with, so you're happy. I just don't see the data industry as reaching that level of maturity and ubiquity of the service offering.

As long as we focus upon technology and as long as we confuse the customer with the choices between flavors of DSL, T1, and that, yeah, you should outsource the wide area network but only if there's applications on top of it, you'll just have fear, uncertainty, and doubt--and the outsourcing industry won't take off. I pick up on Cynthia's point: most of these guys aren't outsourcing. Most of the people who don't outsource have got no intention of outsourcing. Who can blame them?

Our Experts:

Neil Denney is partner and co-founder of NetGain, a consultancy to Fortune 500 companies, helping their applications run better. Denney is responsible for managing consulting assignments for vendors, users, and regulators of global networking products and services.

Tim Hudson is senior vice president, e-Services Division, for SCB Computer Technology, Inc., a provider of information technology consulting, management, and technical services. Hudson is a 25-year veteran in the network consulting and services industry.

David Sawyer is president, CEO, and founder of Northchurch, a maker of intelligent edge devices for service providers, recently bought by Newbridge Networks.

John Seminerio is president of Abatis Systems Corp., developing intelligent IP networking solutions that enable service providers to market and distribute advanced services with performance and security guarantees. Seminerio brings to his position more than 15 years of experience in the telecommunications and networking industries.

Ramesh Sharma is president and CEO of DSL Communications, which he founded in 1998. He is also president and CEO of Digital-X Corp., a company that he founded in 1994. Digital-X has custom ASIC and software contracts with several key accounts like Cisco, HP, TRW, and NEC.

Scott Wharton is vice president of corporate marketing for Broadsoft, which makes service platforms for next-generation networks. Previously with VocalTec Communications as VP of marketing, Wharton spearheaded numerous groundbreaking initiatives, including the development of the first commercial IP telephony product the creation of the ITSP industry.

Outsourcing opportunities: strategic motivations are key

CIR's survey of Communications News' readers concluded that there is opportunity for competitive dominance and growth in WAN management outsourcing markets.

Its goals were to: 1) discover why firms decide to outsource their WAN management--are motivations strategic or tactical? 2) learn what outsourcing benefits influence potential customers' choice of a service provider, 3) construct segments of potential customers desiring similar benefits from outsourcing, 4) identify those benefit segments demographically, and 5) forecast potential customers' intentions to outsource in the future. The sample of 200 respondents included firms from all major industries and yields a 95% level of confidence that results are accurate within eight percentage points.

Thirty-seven percent of those surveyed outsource WAN managment. The length of experience with WAN outsourcing averages two to three years. Outsourcing is not very diversified, with only one to two suppliers typically provisioning services for each firm. Outsourcing customers are apparently risk-averse: most contracts are short-term--two or three years.

Four out of five top motivations for outsourcing are strategic:
1. Knowlegeable-staff shortage 59%

2. Free staff to focus on core
 strategic activities 59%

3. Increase network availability 58%

4. Facilitate technology upgrades 53%

5. Access to Web hosting 27%



Tactical motivations, such as expected cost reductions or access to ancillary applications, are not major motivations for outsourcing. Outsourcing is a strategic choice designed to build competitive advantage.

A majority (66%) is satisfied with its WAN outsourcing experience; fewer (58%) expect to continue. Future intentions are strongly linked to satisfaction with existing services. Curiously, only 15% of those not currently outsourcing WAN management expect to do so in the future.

Potential new outsourcing customers report unique motivations, and four out of the top five are strategic:
* Increase network availability 80%

* Knowledgeable-staff shortage 77%

* Remain competitive 64%

* Free capital 50%

* Enable virtual meetings/
 videoconferencing 43%



Tactical motivations, such as expected cost reductions, are not enticing potential adopters. Associated applications are not a major draw either.

What do firms want from a WAN management service? Five unique benefit segments were identified:

* Likely Outsources (51%) are most likely (61%) to outsources no matter what. Expected cost reductions, report frequency, downtime guarantees, and Web-related applications do not influence the decision to outsource nor choice of provider.

* Real-time Managers (12%) are also most likely outsource (52%). They base their supplier choice on report frequency and the ability to hold virtual meetings/videoconferencing.

* Web and Software (11%) are on the fence, somewhat likely to outsource (44%) and more likely if a supplier were to offer the features they want: Web hosting and shared mainframe software.

* Web and Virtual Meetings (12%) are not very likely (17%) to outsource unless offered the features they demand: Web hosting and virtual meetings/videoconferencing.

* In a Hurry and Hard to Get (7%) are unlikely to outsource (17%) unless they are offered real-time reporting.

Report frequency and additional Web-related applications and software matter to some potential customers. Tactical benefits, expected cost reduction and downtime guarantees, and added services do not matter.

Benefit segments are not identifiable demographically! Likely customers for outsourcing services are likely to be fund in any one of the major industries. Size of firm or reach of the firm's WAN similarly does not determine likelihood to outsource management.

The bottom line: outsourcers who specialize and recognize the strategic motivations of prospective customers are most likely to succeed. Interested in learning more about the survey, the market for outsourcing amanged WAN services, and marketing strategy? Contract: Robert Nolan, Communications Industry Reseachers, (808) 984-0245, Rob@cir-inc.com, or visit CIR's Web site: www.cir-inc.com.3
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Article Details
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Title Annotation:Industry Trend or Event; a roundtable discussion on WAN outsourcing services
Comment:Abatis Systems Pres John Seminerio, DSL Communications Pres and CEO Ramesh Sharma, Broadsoft VP of Corporate Marketing Scott Wharton, NetGain co-founder Neil Denney, SCB Computer Technology Sr VP Tim Hudson and Northchurch Pres and CEO David Sawyer participated in a roundtable discussion on outsourcing WAN services.
Author:Gasmna, Cynthia
Publication:Communications News
Article Type:Panel Discussion
Geographic Code:1USA
Date:Nov 1, 1999
Words:4757
Previous Article:IP telephony interoperability.
Next Article:Got the power to run 24x7?
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