FRAMINGHAM, 27 JULY 2009 - When Sprint Nextel announced its plans to outsource network services to Ericsson earlier this month, the statement was notable for a number of reasons. Most significantly, by signing the seven-year, US$5 billion deal, Sprint became the first U.S. telecom provider to contract with a third party for network management. The move was an about-face for Sprint, which is known for its tight-fisted control of its networks.
Yet the announcement didn't surprise anyone. Rumors of an agreement between U.S.-based Sprint and Swedish telecom equipment provider Ericsson had been circulating throughout the industry. And this transaction came on the heels of similar deals inked by BT, Deutsche Telekom, Vodafone and China Mobile.
Telecom operators worldwide are increasingly considering outsourcing the management of their networks to companies like Nokia, Alcatel-Lucent and Ericsson in order to lower costs, increase capabilities and/or focus on other strategic imperatives, says Mark Mayo, partner and president of global resources management for outsourcing consultancy TPI. In fact, network services contracts accounted for half of all the megadeals (contracts with values of $1 billion-plus) signed in the first half of this year, according to market analysis released by TPI last week.
"Operators are increasingly shifting their emphasis from the engineering-centric stuff like running networks to customer-centric stuff like marketing, segmentation and customer service," says Jan Dawson, practice leader for operations, wholesale and regulatory at consultancy Ovum. "They see networks as a necessary asset that allows them to do what they do, but running those networks is not necessarily a core competency anymore."
Network services outsourcing has taken off among wireless providers in Europe and Asia, where all providers operate using common GSM technology. "In [those] countries, regulators force large operators to open up their networks to competitors at very low rates, and that creates incentives to make running the network as efficient as possible to maximize margins," Dawson explains.
Sprint, thus far, is the lone American carrier letting go of the network management reins. "It's been losing subscribers hand-over-fist and struggling financially, so it really needed to do something to improve its financial situation and improve its operating metrics to try to dig out of the hole it's in," says Dawson. (The company, which is the third largest telecom provider in the U.S., will still own all three of its networks-wireline, CDMA and Nextel/iDEN.)
Sprint's deal with Ericsson could be a case study for future efforts stateside-for better or worse. The deal provides a short-term financial boost for the struggling Sprint. The company will get 6,000 employees off the books-and quick (during the third quarter of this year), which seemingly will provide immediate cost savings. And long term, it "should take headaches away from Sprint," says Dawson, "as Ericsson finds ways to do the same things Sprint used to do for less."
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