Today’s new subscription economy allows both business and consumer customers to pay as they go, which is great for them, but the impacts for the service provider are both obvious and seismic. This fundamental change in revenue and operating models means that Communications Service Providers (CSPs) now look and behave very differently from only five years ago.
Software-defined Networking (SDN) and Network Functions Virtualization (NFV) are primary drivers of this on-demand approach to core infrastructure. Leading CSPs are collaborating with their technology vendors, looking closely at their offerings to realign their services and more firmly secure their relationships with business customers. In doing so, CSPs become more valued as strategic go-to partners to their customers, delivering capabilities that make agility and innovation possible.
If CSPs are being forced to rethink their revenue models in response to evolving customer demands, then it’s only natural that they’ll be reviewing their commercial relationships with technology vendors. I believe that to meet the demands of the customer, a new perspective on the commercial model between the vendor and the CSP is needed. It’s time to move the conversation on and start looking at the options.
The investment challenge of the modern network
CSPs are shifting away from traditional CAPEX infrastructure renewal projects; because they can. One leading analyst firm reports that CSPs anticipate CAPEX reductions of 40% and also expect OPEX reductions to be in the region of 60%.
A downward spiraling equation seems to be in play. As CSP revenue streams reduce, market demand for new services, delivered to and paid for by their customers in new ways, is escalating. To optimize the commercial opportunities CSPs need to invest relatively heavily in infrastructure. Spending more and making less in the short term, against the expectation of greater long term gains, is a tenuously sustainable business model. Something has to give. So, what is it?
A recent IHS Markit report lists a number of common consumption model approaches. These include the stalwarts such as term and perpetual licensing, and SaaS, but also two particular models that promote relationships far more intertwined than age-old seller/buyer arrangements. These are:
- Risk and Revenue Sharing: Where vendors assume the risk and expense of integrating hardware and software for a specific service in return for pay-back in revenue sharing.
- Co-Development projects: An approach which is beginning to characterize the development of SDN and NFV orchestration in a style not dissimilar to DevOps.
These two models are of interest as CSPs increasingly look to vendors to share the risk involved in delivering a modernized infrastructure while responding to the natural laws of the new subscription-based world. The time has come to drop the supplier/customer confines and stuffiness of traditional vendor/CSP relationships and look to capture the spirit and practice of mutuality, creating a vibrant commercial model that turns on the light at the end of the tunnel for all involved.
Paving the way for a new commercial relationship
In my conversations with our CSP customers I often encounter a focus on the use of technical criteria to justify investment in network modernization. I suggest that the commercial business case is as, if not more important, where decisions are driven by the desired business outcomes, rather than simply the perceived requirement to update technology.
One way around dealing with initially unquantifiable factors is to move an existing service over to the NFV approach and compare the associated P&L to that which would apply with traditional networking.
To pave the way for mutually beneficial partnerships a number of changes need to take place, not least the creation of a commercial agreement for a new type of relationship that will in many cases contradict pre-existing contracts. Of interest here is that 96% of virtualization contracts are managed by the IT team – which could be a challenge when NFV contract owners will sit across IT, Network and Data teams
Many vendors who are prepared to take on this partnership role will also require a higher level of transparency into CSP revenues and it is not unreasonable for any organization to be hesitant about opening the books to a third party. It’s not an insurmountable hurdle but it is a high one to jump especially when opening negotiations with the procurement teams.
Many hands, light work
To allay fears and also to bring in the skills and contributions, not just from vendors but also the diversity of internal specialists, the most instantly workable and amicable scenario lies in the area of co-development. This is an approach that allows vendors to identify projects that they could co-develop with CSPs that can showcase the potential for innovative revenue generating services that help CSPs fast-track NFV implementation.
CSPs prefer the freedom and flexibility of an ‘a la carte’ menu – what they want, when they want it. Vendors need the security of revenue potential. Co-development seems to address everybody’s strategic goals.
At VMware, we are working with CSPs proactively and collaboratively to reach outcomes that work well for both parties. When they do, the relationship gets stronger as it becomes mutually beneficial. Together with many of our customers we are getting creative about commercial models, sharing risks and anticipating shared rewards for effort. This approach is based on respect between partners and will, I believe, deliver solutions that work for all.
What do you think? Is a new era of working together going to work for all of us? I’d welcome your views about new styles of relationships and whether or not they’re the way forward.