For telecom service providers, outsourcing has always been a tough decision.  In the past, the most common processes that have been outsourced fall into three broad categories:

  • Call centre / contact centre / CRM
  • IT services, whether relating to the enterprise internal needs (e.g. desktop services, Data Centre Services, ERP) or to end-user applications (VAS, application hosting)
  • Network operations: plan, build, operate, maintain

Other areas of service providers business have long been outsourced, including fulfilment logistics and in most countries distribution and sales – retailers Points of Sales to complement the service provider’s own direct sales force and PoS.

But let us step back.  From a big-picture perspective, the key issue is: when does it make sense to outsource a particular activity?

Outsourcing makes sense when the following conditions are met:

  • on the demand side: the activity is not strategic to the service provider any longer
  • on the supply side: there are capable players on the market who can provide the service at least as well (or better), and at a lower cost.

Now you wonder: what’s an activity that is not strategic any more? It is an activity that is not a source of competitive advantage i.e. it is not possible to differentiate from the competition on that basis.  This happens when all service providers on the market broadly provide similar level of service.  Or if they don’t, those that provide better services are not capable to extract additional revenues from end-users that compensate for the extra cost of providing better services.  Put it another way: the marginal cost of improving the quality of service is higher than end-users readiness to pay.  Either way, the activity is not a source of additional value creation compared to what competitors have to offer.

In many cases, this could mean that the activity is commodity.  But it does not have to be.  Some activities that are candidate for outsourcing are complex in themselves and complex to manage, however the end-users’ readiness-to-pay-more is close to zero.  End-users simply expect the process to be working well.  They take it for granted.  Under-performance is not accepted, but end-users do not care so much about over-performance either.

On the supply side, outsourcing only makes sense when there is a pool of potential suppliers and partners who are ready to provide the service at a lower cost while maintaining or increasing the quality of service.   In terms of industry structure and industry evolution, this kind of players appears on a market when there are economies of scale and scope in the activity in question.   In that case, rather then each service provider keeping the activity internal, it is better and cheaper to source it from a partner that can perform the activity for multiple customers.  Some of those economies of scale and scope can be passed on to customers, while the outsourcer retains the rest and makes a profit.  This way, what used to be a cost centre is turned into a profit centre.

So what are the implications for telecom service providers?

  1. As outsourcing projects are usually very complex, involving HR issues and a scope that is changing over time, telecom service providers should start with the low hanging fruits, where the largest impact can be reached while the risks are minimised.
  2. Outsourcing should be seen as a business transformation exercise that not only allow service providers to save costs and improve quality, but also help management re-focus on its core activities and source of value creation.  In particular understanding end-users needs in a better manner, and cater for those needs.  It is hard to put a value on that, but it is real.
  3. In particularly complex areas like network operations outsourcing, telecom service providers need to put themselves in the shoes of their outsourcing partner, and develop the confidence that the partner can make a business out of it in a long-term relationship and ‘win-win’ approach.

Prerequisite is that the partner can exploit economies of scale/scope, mostly by serving multiple operators in the same country.  Alternatively, the partner needs to have access to significantly better skills so that it can provide more with less human resources.

If this is not the case, then the partner will only struggle to make a profit on the project, is unlikely to over-perform or deliver on what it promised.  Then the outsourcing project will remain a pain for the outsourcing partner and the long-term relationship will be compromised from the start.

In that case, service providers had better not outsource the activity!  The market is not ready for it yet.