Cut telecoms investment by moving to central production

Bill Boyle
Published on:

Norbert Schenkel (VP Deutsche Telekom Europe & Technology) and Philippe Tambourgi (Managing Partner and Expert for Telco Transformation at Detecon International) look at how to avoid excessive parallel investment by moving to a scaled, central production.

For the first time in history new technologies enable a centralised and integrated production of core telecommunication services like voice or TV. However, producing only once centrally means shutting down former production facilities and subsequently altering the way investments of large telco groups are spent and managed.

Compare the automotive industry: a global giant like Toyota sets up a production factory in one country to serve many others. But the products and services of the telecoms industry can be only be used in the country of origin – until now. 

Virtualisation enables telcos to produce products and services once for all subsidiaries across countries. This directly translates in a big cost reduction, enabling large-scale benefits. On the other hand, after the centralisation of production, telcos will provide their services using a similar structure to over-the-top (OTT) players such as WhatsApp. 

The subsidiaries of a telecoms group will obtain the services and products they provide to their customers just as consumers download apps, photos or music from the cloud. This production structure is the common thread of many success stories such as Google, Facebook, WhatsApp, Instagram, Twitter or Netflix. 

Thanks to network functionsvirtualisation (NFV) telcos can also produce all their products and services on standard hardware. If they want to serve more customers they increase data centre capacity. If they want to provide a different service, they change the software. 

• New services can be introduced at low cost. If the service fails commercially, licences are cancelled and the hardware can be used for other services. 

• Thanks to common hardware basis, use of resources can be optimised across all services. At midnight on New Year’s Eve, resources that were used a few hours before for TV can now be used for messages.

• Using the same resources, data centres can be over-dimensioned. In case of hardware failure, components are simply deactivated and replaced in later maintenance cycles.

• Standardised hardware means computation power can be purchased at significantly lower cost.

• Building service as software lowers the market entry barriers for new vendors. This reduces production costs, enables new licensing models as well as innovative services.

This could solve many problems telcos are facing today, especially in the competition with OTTs. Time to market and cost for new products would be reduced significantly. Easier integration of services makes automation of multiple processes possible. The cost for failure is smaller, making innovation easier.

Centralised production will cut production costs in half – thanks to a reduction of many production facilities to one and the technological advantages of unified production.  

It is estimated that the transformation will take at least a decade to be executed. The new central production facility has to be built, and the services and customers migrated from the legacy platforms. Different points in the production platform’s lifetime cycle make this challenge a particularly delicate one.

Secondly, the cost development of the transformation phase affects the profitability of the entire project.

Be a brave leader. Telcos are typically steered with plans, often reflecting timespans of four or five years. It is important to set a top-down ambition level instead of arguing on a platform basis with single group subsidiaries about possible cost savings. Subsidiaries must cut planned re-investments that are no longer necessary in the light of the imminent shut down of their production platforms. 

To keep legacy costs low and to reduce them steadily, it is important to shut down old platforms quickly. This will generate savings that can be used to absorb the additional spending for new infrastructure and transformation to some degree. 

The most challenging part is getting the commitment of all stakeholders. For the management in the local entities this change means taking a hit for the team. 

It’s a chance finally to escape the gridlock of falling revenues, increasing costs of complexity and rising substitutes. A chance to unleash synergies and to live up to one’s true potential. A chance to finally meet OTTs at eye level – or even above. And it is a way out of the threatening scenario of turning into a dumb bit-pipe. []