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  Intercomms Issue 18
Issue 18 Articles

Delivering Cloud Services –
Positioning and Execution Issues

By Rob Rich, Managing Director, TM Forum’s Insights Group

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Rob Rich, Managing Director, TM Forum’s Insights Group
Rob Rich, Managing Director
TM Forum’s Insights Group

Rob Rich is Managing Director, TM Forum’s Insights Group. He has nearly 20 years’ experience in market research and consulting.

To be successful in an emerging market, service providers (and others) need to position themselves for success. Regardless of what strengths an enterprise might have, if they are not brought to bear in an appropriate and timely fashion, the enterprise is, at best, unlikely to reach its potential. At worst it will probably fail.

So beyond understanding market demand, Service providers need to evaluate all aspects of the value chain, understand their strengths, weaknesses, opportunities and threats, and position themselves for success. In this section, we’ll look at how participants in Innovative Service Provider executive roundtable at TM Forum’s Management World 2011 in Dublin, Ireland, view the view the nature of the value chain and the strengths and weaknesses of service providers as players in it, as well as the role(s) they should play.

New business models or new services?

One of the key questions in delivery is defining what is needed to be successful. Fundamentally, this means understanding the relationship between business models, operational models and the services that those models deliver. For example, if we delivered the same services (say phone calls or messages) as today, but paid for them with advertising dollars, there would be very small changes to products and operational models, but the business model would change radically.

If we delivered the same services as today using a cloud infrastructure, but paid for the same way, that would require primarily a new operational model, and so forth. So one fundamental question is what is the introduction of cloud services really about? Clearly the operational model changes – after all, it’s a new architecture – but what else changes?

In this case, participants were largely in agreement. Almost 80 percent of participants felt it is about new services and new business models. Part of this rationale comes from recognition that service providers will not be able to compete in some instances if they rely on traditional approaches like end-to-end ownership and vertical integration. To be successful, they will need to understand not only the market, but the complete ecosystem, and the positioning of the various players relative to the market.

They will also need to set realistic goals, position themselves to achieve those goals and seek partnerships with appropriate players. Finally, they will need to learn to manage those relationships to sustain them, and to look for opportunities and strategies to gain strength in the ecosystem as it evolves.

How are service providers positioned to play in this market?

The following is an outline of the most commonly cited strengths and weaknesses of service providers as providers of cloud services. Interestingly, sometimes the same attribute is seen as both a strength and a weakness.

Financial strength – some suggested that service providers were among the strongest companies from a financial perspective in their countries, and exhibited very positive cashflow. Also, because of their relative size, many felt they were in a position to acquire companies to bring new skills and capabilities.

Others argued that despite their large size, profitability was at best slowing or shrinking due to the maturity of core services, while the need to build new networks means discretionary capital budgets are largely exhausted. Also, flattening profit growth has brought lower equity valuations, leaving many service providers at a big disadvantage relative to the share price and market power of web companies like Google or Amazon.

Customer relationships – some suggested that service providers have long-time relationships with customers across the spectrum, are ‘trusted partners’ of their customers, and have the ability to monetize those relationships through their longstanding billing infrastructures and billing relationships. Others argued that while those relationships have existed for a long time, many customers view the service providers as having a relatively narrow portfolio of important but not necessarily strategic or unique services.

In addition, especially in the enterprise market, service provider relationships tend to fall short of C-level decision makers, while other technology companies may have these relationships, or be thought of more readily when customers think about services like PaaS, SaaS or business process services.

Finally, while service providers are clearly capable of operating massive and complex revenue management systems, they are not alone. Web companies like Amazon, Google and Apple all have billing capabilities and sophisticated third-party applications are available on the open market to other players. In fact several participants felt that service providers had no particular advantage over other members of the value chain.

Ability to operate at scale – service providers have certainly shown themselves capable of operating very large networks with extremely large numbers of elements, sessions and transactions. So do many of the cloud providers, especially Amazon and Google, who handle extremely large numbers of transactions as well, and have learned to design their infrastructure to handle these.

In fact, Amazon keeps a separate ‘test’ facility mirroring itself, where it models the performance of the infrastructure under peak traffic loads, such as so-called Black Friday in the U.S., which is the first Friday after Thanksgiving, generally regarded by retailers as the all-important, very busy, first day of Christmas shopping. Service providers can deal with scale, they are not alone nor necessarily better at it than others.

Customer information – one area where service providers appear to have a big advantage is the amount of data they have about customers. In addition to detailed billing information about companies and consumers, they can look at customers’ utilization and traffic patterns, as well as historical information on their preferences and locations. Competitors like Google also have a large amount of information, but most other potential rivals haven’t.

The key question is how will the use of this information be regulated in future? Several participants felt strongly that it was illegal or would become illegal for companies to use information they had collected on purpose to accomplish other things. In addition, transfer of this information across borders is illegal in some countries and becoming an increasingly serious issue in many others.

It is possible that ultimately senior management of companies would be held responsible for abuse of personal data, with the likelihood of serious punishment (possibly including imprisonment) for major violations. In this scenario, the advantages for service providers retaining customers’ data remain a big advantage, but perhaps not as large as it might be in a less regulated environment.

The perceived weaknesses of operators as cloud service providers were seen as being the following:

Speed – the cloud services market is very young and changing rapidly, populated with fast growing, agile companies. Many questioned service providers’ ability to move quickly enough with decision-making and/or deployments to keep with these smaller more nimble companies.

Service providers could deal with this through acquisition and by keeping the acquired companies relatively autonomous from the parent’s operations, but the industry has little or no track record in this style of management.

Competing on cost – service providers are not necessarily known for their low-cost facilities, infrastructure or workforce, yet many of the other members of the value chain, especially the hosters, are very lean. Again, perhaps this could be addressed by keeping acquired cloud activities separate from the rest.

Skills – some argued that service providers have a large skills base, especially in the network organization, but also in IT, that could be deployed to implement cloud services. Others argued that many of those skills are currently supplied to service providers by vendors. This is especially true for those service providers that have outsourced all or part of their network and/or IT infrastructure.

Ability to partner – again the industry does not have a track record in forging partnerships and need to learn to partner in many areas, not just cloud, to improve their business performance. While there is no guarantee of success, it is a very important area for many service providers.

Customers’ perception – this topic was also mentioned under strengths, yet service providers do not readily come to mind as IT solution providers for many customers, and changing customers’ perception does not happen overnight. Service providers will need strong partners and/or sustained marketing efforts to effect a change in perception.

Core competencies – in general, service providers’ core competency is largely limited to providing network services: applications, platform and computer services are not really their main activities. Also, much of the technical side of these functions has been outsourced as part of IT and network infrastructure initiatives.

Experience with new business models – almost all agreed that service providers have little experience with new business models, and few have strategists experienced in the design and implementation of these models. This combined with the issues already mentioned around speed/agility, brought real concern to a number of the participants.

A recurring theme in debates about how operators are going to move forward is that the industry is too hard on itself, and that its huge achievements are all too often ignored or under-stated, as is the fact that other players in the value chain also have their own issues to deal with. Still it is difficult to quantify or compare service providers’ issues with those of others with any precision for many reasons, including different levels of maturity and business models are involved.

Disaster or a ‘bump in the road’?

Speaking of shortcomings, the recent difficulties experienced by both Google and Amazon in their cloud implementations, as well as sensitivity to natural disasters, like Japan’s earthquake and tsunami, have had a big effect on how people think about cloud.

As for the bump in the road versus disaster argument, the answer probably lies somewhere in the middle, and is perceived very differently by various parties, depending on the type of customer and the application. At one end of the spectrum, an enterprise executing time-dependent, high-value financial transactions likely feels more concerned about the reliability of cloud services. At the other end, a consumer storing non-critical personal data for little or no cost is probably more worried about the privacy and security aspects of cloud than outages.

In retrospect, the important thing is that the industry learns from this, and that customers make intelligent, informed choices and take appropriate measures to protect themselves. Perhaps like all things that are cloud-related, this is easier said than done.

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This article is taken from TM Forum’s Quick Insights Report, “Approaching Cloud Services, Markets, Positioning and Execution.” TM Forum research and publications help the communications and associated industries with every aspect of their on-going transformation and business evolution. TM Forum research and publications are available at no charge to TM Forum members. Non-members may purchase TM Forum’s research and publications through TM Forum’s website at www.tmforum.org.

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