The economics of the telecom infrastructure industry have evolved to the point where it makes financial and strategic sense for NEPs to source standards-based ATCA platforms from the ecosystem while focusing their in-house resources on application development.
Telecom infrastructure industry standards and our collective attitudes toward open systems have evolved to the point where it is no longer necessary for network equipment providers (NEPs) to design, build, or even integrate carrier-class systems in-house. With network element functionality progressing to the point of being innovative application software hosted on a standards-based, high availability platform, the strategic rationale for a NEP to build its own “plumbing” is actually declining by the quarter. Instead, NEPs should be focusing in-house resources on unique value add – in other words, on application development – and turn to the telecom ecosystem for complete, standards-based ATCA systems on which the applications are run. The first category includes security appliances the carriers need to protect their networks from attacks, control peer-to-peer traffic, and comply with legally-mandated capabilities such as lawful wiretapping and intercept systems.
WHY CHANGE?
Telecom infrastructure industry norms have evolved significantly over the past two decades. Back in the day, large Tier 1 NEPs developed proprietary systems completely in-house and had to recruit, train, manage, and retain hundreds of thousands of employees in order to do it all. Industry economics and the regulatory environment helped facilitate this business model of old, though, and the barriers to entry for a non-incumbent were nearly insurmountable. Life was pretty good for a NEP, but much has changed since then.
Technology, competition, and operator expectations today are such that it is no longer necessary, or even desirable, for NEPs to do everything in-house, regardless of whether they pursue proprietary or standards-based approaches. Market economics make it extremely difficult for a “do-it-all-yourself” NEP to compete with other NEPs that leverage an ecosystem supplying standards-based solutions. The financial and innovative advantages of tapping into the hyper-competitive supplier ecosystem with highly skilled development and manufacturing resources in the most cost-optimized areas of the world cannot be ignored. Designing, building, and owning the intellectual property of everything within a system is no longer feasible or profitable with open standards as part of the competitive equation – that’s a luxury that is now too expensive to afford.
As with the evolution of the personal computer (PC) industry, the way to succeed and make money in the business 10 or 20 years ago is clearly not profitable today. In the PC world, titans like IBM, HP, and Dell have had to reinvent (or sell off) their PC businesses because of shifting marketplace realities. Likewise, the telecom infrastructure industry also faces unstoppable forces that compel NEPs to evolve and adapt or else go the way of Commodore, Gateway, Wang, and dozens of other PC has-beens.
The choice is clear: old ways of doing business must give way to new. Change is rarely easy, smooth, or even welcome, but in the case of telecom infrastructure business models, it is absolutely necessary. For a NEP to resist or delay the inevitable path of change is to put the financial future of the firm at risk. If this sounds ominous and somewhat dramatic, it is! But just ask the former executives, product managers, engineers, and sales people of defunct PC companies Amiga, Kaypro, Osborne, Packard Bell, Tandy, and Zenith if they would have wanted the opportunity and foresight to transform their once high-flying businesses instead of becoming historical footnotes… There’s still time for the rest of us.
There is much more!
To read it all, click HERE!
WHY OUTSOURCE?
OK, so we’ve just convinced ourselves of the need for change. Now it’s time to make the case for a full step forward rather than just a quarter or half step. Knowing human nature and the corporate culture of large organizations, the tendency for NEPs will be to resist any more change than is absolutely necessary. In this case, however, it’s a matter of, “Do it now – or else leave it to luck to see if you will still have the chance to do something about it later.”
Our thesis for action is this: It makes financial and strategic sense for NEPs to outsource the entire standards-based system “below the application” and focus in-house resources on application development.
Such an approach requires two key changes by a NEP:
- Relinquishing a proprietary design bias in favor of open standards
- Abandoning a “do it yourself” bias in favor of outsourcing complete systems
It is natural for NEPs to assume that buying a telecom system is more expensive than developing one in-house; however, this is not necessarily the case. In fact, the Make vs. Buy decision is not just about purchase price and operating expense, but also about profitability over the entire product lifecycle and long-term strategic advantage.
Continuous Computing’s market research indicates that it takes about three years for a NEP to build a complete system in-house, two years to integrate Commercial Off-the-Shelf (COTS) building blocks, and only one year to create and deploy an application on a pre-integrated platform like FlexTCA (or much less time if the application already exists). These are big differences that impact product profitability and success, and could easily influence one’s career potential if the competition ends up running circles around you in the marketplace!
Figure 1. Pre-integrated systems deliver the fastest time-to-market (1 Year) vs. integrating COTS building blocks (2) or developing everything in-house (3)
WHY SYSTEMS?
Many NEPs miscalculate that it should be easy and fast to integrate COTS building blocks for their platform, but, time after time, the lesson is re-learned that integration of standards-based components is not simply a matter of “plug and play.” Far from it. The reality is that while each individual building block may conform to PICMG specifications for ATCA, AMCs, or MicroTCA, it’s extremely rare for separate building blocks to function fluently without some sort of integration, tweaking, or “shim” software in between, unless those building blocks were originally designed with the other(s) in mind or have already been integrated, tweaked, shimmed, etc.
And simply getting building blocks to interoperate isn’t really the point now, is it? It’s like the difference between grunting a few sounds and singing an aria, or knowing enough of a foreign language to order some food and being fluent enough to discuss an important topic with insight, depth, and conviction. So too are the differences of acquiring a collection of building blocks from disparate suppliers and making the pieces recognize and acknowledge one another, versus sourcing a fully-integrated system that has been pre-configured, pre-tested, and pre-certified. In other words, integration makes all the difference, and integration takes time, money, and expertise – things that NEPs no longer have on their side.
Figure 2: Development and integration is hard! Even with COTS building blocks, it takes significantly longer than assumed to weave everything together into a unified whole
WHY HURRY?
Time has value, and experience shows that getting to market 6, 12, 18, or 24 months sooner generates tremendous strategic and financial advantage, especially for Tier 2 and Tier 3 NEPs competing with (or planning to get acquired by) Tier 1 NEPs. These days victory goes to the swift, and our detailed financial modeling shows that NEPs can cut product delivery timeframes in half while achieving up to a 50 percent increase in product lifetime Return on Investment (ROI).
How? A NEP that delivers a solution to the market first gets to establish the value proposition for that set of features and benefits, and then defend it as new entrants try to claw their way to the top of the hill. In other words, the first-mover earns the benefit of setting market expectations and forcing competitors to react. The advantage is being on the offensive and setting the terms of engagement, whether in terms of price, performance benchmarking, service levels, goodwill, etc. Everybody loves a winner, and success tends to beget more success; playing catch-up-and-take-over is very hard to do (at least profitably) for the second, third, and fourth entrants. It pays to be first.
Besides getting the revenue clock ticking, another perk of being first to market is that the volume clock starts ticking too. This means that manufacturing costs start coming down sooner than if market entry was delayed. So, not only is there the market perception advantage, but also the benefit of increasing the gap of cost of goods sold (COGS). In other words, the COGS of the first-mover will be less than the COGS of the second-mover (and all others who follow), which is a competitive advantage that can be harvested by the leader in terms of higher margins, lower prices, or both.
WHY FOCUS?
Besides time and money, there are other good reasons for NEPs to buy what they can and make what they must: organizational clarity and lower overhead. The customer who focuses solely on application development while outsourcing the rest of the system needs far fewer in-house resources for platform R&D, supply chain management, interoperability and regression testing, etc. Since the human resources necessary for these tasks cost money and their financial burden is spread across all projects, product profitability and operating margin can be higher with system sourcing. It’s basically a matter of shifting investment from R&D to COGS, which is more efficient financially over the life of the product.
It is also a matter of organizational effectiveness. Just as a successful product needs to target a well-defined market segment and deliver tailored benefits rather than employ a broad shotgun approach, a successful organization is one that concentrates on those attributes in which it possesses unique competencies and can deliver true (and strategic) value-add. With standards-based ATCA platforms, there is no compelling reason why a NEP needs to have R&D resources developing products and capabilities that already exist in the ecosystem. Instead, the smart choice is for NEPs to focus R&D budgets on application development, which is the true source of value in a standards-based network element.
Figure 3: By sourcing fully-integrated ATCA systems, NEPs can focus on delivering unique application value and leave the rest of the “plumbing” to the ecosystem
WHAT ARE YOU WAITING FOR?
When factoring in direct and indirect costs, core competencies, organizational focus, and the value of delivering a product early in the available market window, one can see why sourcing an entire system is actually quite smart. Being first carries with it compelling advantages that outweigh former top priorities like proprietary design, platform specialization, and massive scale. Today being nimble, flexible, and focused is the way to get and stay ahead. Rather than end up in the same historical dustbin as the PC vendors of yore, today’s NEPs need to have the courage and conviction to do what is needed to transform their business models in order to remain relevant for tomorrow’s telecom infrastructure needs, and well into the future.
Systems Make Sense
Accelerated Time-to-Money
- Cut delivery timeframes by 50%
- Capture first-mover market advantage
- Establish and maintain leadership position
Reduced Cost & Complexity
- Lower R&D and SG&A allocations
- Increase cumulative project gross margins
- Increase lifecycle operating margins
Greater Organizational Clarity
- Focus resources on application development
- Develop expertise in critical new areas
- Outsource standards-based infrastructure
