New Alliances with Telecom Technology Vendors

Data Communications coupled with the emergence of IP as a system standard will enable a new paradigm for business that will facilitate global reach for suppliers and customers coupled with productivity and time to market improvements that will re-invent major corporate and governmental processes.

The ubiquity of the Internet, the acceptance of computer literacy as a business requirement, the focusing on quantifiable business applications, and the interdependence of businesses in the global economy all are contributing to the new wave of convergence between IT processing, data communications, and business processes. The technological advances in communications and processing will redefine basic corporate structures and will require service providers whether they are telecom, computing, or software vendors, to examine their strategies and offerings in this new evolution.

Computer processing vendors and software developers are already making bold moves to position themselves for this new convergence. Telecom service providers need to quickly assess their strategy or be relegated to a role of providing commodity services such as bandwidth and dial tone; services that are vulnerable to newer entrants building parallel routes with more cost effective technologies and picking off the highly desirable business customers. High margin services will be clearly retained by those service providers who deal directly with corporate customers and offer turnkey business process services assuming end-to-end responsibility and offering encompassing Service Level Assurances.

Telecom service providers have certain business processes and strong assets such as network engineering design and implementation, large-scale maintenance and operations, secure facilities with back-up power generation, significant revenue generation and positive cash flow - these can serve as a foundation for this new wave, but access to the US and European markets, strategic business guidance, partnerships with appropriate processing, hosting, and software vendors, availability of media, content, and e-business goods and services, and guidance on technological, business, and educational trends are essential to assure leadership and success. These service providers have to make a choice – to remain as a traditional telcos and see its prime revenue base eroded as deregulation allows for new entrants or to become a leader in offering business process solutions.

Telecom technology and service providers have had a roller coaster ride over the last few years. The impact of overbuilding in the long distance and international sub-sea arena has had disastrous results for those companies engaged in global networks; today there are no true global players for Concert, Global One, World Partners, and Global Crossing have all collapsed or exist only as a shell of their former selves. The price of international bandwidth has been drastically reduced but the problems of provisioning and end-to-end management still exist. In fact, due to cutbacks in the service operations of the remaining providers, provisioning intervals and levels or service have only deteriorated.

New network architectures and technologies such as ATM, mesh networks, and IP MPLS have been implemented in mature markets and frame relay has been re-invented to be no longer viewed as just a cheap replacement for private lines but as a cost effective manageable extension for MPLS into emerging markets. Local loop technologies such as CDMA, FSO (Free Space Optics), spot beam microwave, IP over fiber, and 802.11 are poised for near term significant enhancements and cost reductions. Unfortunately the financial experts who control the capital funding of service providers will no longer support the business model of “build it and they will come because customers need bandwidth for as yet undefined applications.” Telecom service providers have a dilemma. Without modern data communications, the economy will not develop rapidly; until the economy develops, there are not sufficient customers to justify the new investment required. Telecom by itself as a service offering to business is stuck.

On the other hand, the .com and ASP business and the co-location/hosting business collapsed years ago, but software developers and Internet proponents re-evaluated their situation and developed new bottom line business strategies. Likewise computer processing hardware vendors have seen processing power grow exponentially and prices plummet. They too have re-evaluated their industry and charted new strategic directions. An examination of the new directions for market leaders in these industries holds vital clues for substantial revenue opportunities for dynamic telecom service providers.

Recently announced strategies:

1. Cable & Wireless has recently acquired Exodus Communications, Digital Island, PSINet Japan, and StorageWay Inc. to provide high availability, redundant data storage services including backup services and network attached storage services through its hosting data centers as an extension to its managed network services. By serving multiple customers on the same storage devices, higher utilization can be achieved which results in lower prices for customers than could be achieved by the customers purchasing the equipment directly by themselves.

2. Verizon just announced Enterprise Advantage, which includes network management and data storage, business recovery, security, remote access, voice and data networking services. Verizon will leverage its existing facilities and purchase connectivity between major U.S. cites which is now quite inexpensive.

3. Starhub in conjunction with its partner has launched network–based data storage services for Singapore businesses that require fast, reliable and secure remote data storage solutions. Customers are offered high-speed scaleable bandwidth with multiple categories of managed data storage services with charges for the storage service on monthly, per-gigabyte basis, which means that the price they pay is based purely on the amount of storage capacity they use to meet the needs of their business.

4. Microsoft is shifting its emphasis to address business processes. Products aim not only to connect employees and companywide operations but also to improve collaboration and even reinvent processes. New XML-based products will address collaboration, business-process management, and real-time visibility of data. In Microsoft’s future architecture, companies will use Web services to simplify workflows, let employees sift through business data using familiar desktop applications, and establish business-to-business hookups. One such customer, Solutia Inc., a $2.8 billion a year manufacturer of carper fiber and chemicals is testing Microsoft’s new tools as a way of extending the benefits of XML to their own smaller suppliers who can not justify this investment by themselves.

5. PeopleSoft, a $2 billion company is the world's leading provider of application software for the real-time enterprise where companies move their business processes on-line and extend them directly to their customers, suppliers, partners and employees in real time. PeopleSoft’s strategy is to devote their resources—$500 million and 2,000 developers into pure Internet platforms with more than 150 applications. PeopleSoft's integrated, best-in-class applications include Customer Relationship Management, Supply Chain Management, Human Capital Management and Financial Management. More than 4,700 organizations in 140 countries run on PeopleSoft software.

6. IBM in probably the most significant strategic shift of any corporation has committed $10 billion to enhance its on-demand technologies such as grid computing, storage virtualization, and services in support of its strategy called “On-Demand Business.” This “On Demand Business” is composed of utility computing: scable, open-source, self-healing resources available to companies on an as-needed basis, often in a hosted environment. The next phase of E-business; the on-demand phase will be real-time collaborative business enabled by redesigning processes and creating adaptable models based on utility-computing infrastructures. "You'll get computing power and storage capacity -- not from your own computer but over the Internet on demand," IBM (NYSE: IBM)

7. Cisco is basing its strategy on a uniform architecture called AVVID (Architecture for Voice, Video and Integrated Data), which provides a flexible, reliable, intelligent, standards-based infrastructure. Voice and video solutions support scalable call processing, IP-based business applications, instant videoconferencing, online directory services, and devices such as IP phones. In short, convergence of multi-media applications utilizing an IP structure.
   By employing IP telephony, companies can integrate their voice applications with their data applications so they can handle a phone call and access data from accounting and customer-service applications to deliver improved customer service and better decision support over a single process. They can even add video applications and, eventually, storage access. VPNs are particularly suited to global operations to connect corporate sites, remote sites, and teleworkers and even extend to suppliers, business partners, and other users across the Internet while providing the security needed. Successful e-business strategies depend on the strength and flexibility of the underlying e-business infrastructure—hardware, middleware, and services that work together seamlessly to support a network as a whole.

The commitments of these leading edge suppliers will steer business enterprises to new ways of managing their core businesses. The trends contain several critical themes for the future of Data Communications, among them:

1. Enterprise customers will look for comprehensive solutions and not components. The cutbacks in personnel and need to be bottom line focused will cause enterprise management to turn to partners that will handle non-core activities and will no longer tolerate “building their own internal support empires and custom solutions”. The enterprise customers will turn to partners who can offer truly managed business process systems. If telecom service providers don’t offer these business process solutions, then their customer base will erode and they will be dependent on serving systems integrators. The telecom service providers will be forced to compete primarily on price and availability of bandwidth and dial-tone, will see its Brand deteriorate, and will find it difficult to bundle products and offer incremental new services, since they will be shielded from the enterprise customers by the system integrators.

2. These managed business process systems will not be developed and offered by single suppliers but will be the result of a consortium of subject matter experts; one of the consortium members will take on the overall system responsibility and handle the customer interface including sales and support. Service providers needs to carefully consider what role it wishes to assume and how it can attract the strongest partners to its consortium.

3. The economics of shared infrastructure of telecom converged networks, co-location and hosting facilities, computer processing power, software applications, and data storage will be the order of the day. No longer will corporations need to or want to commit the capital dollars and support staff to have proprietary networks and systems for non-core activities. Pricing schemes based on usage will be the norm, turning one-time capital costs into recurring revenues.

4. Globalization of markets, suppliers, and components of the business for enterprises is no longer an exception but rather a norm and enterprises need to have all of these participants linked with common systems and processes. Due to the demise of the aforementioned global telecom providers, most telecom service providers would considerably enhance their position by having a physical presence in the established developed business centers in the US, Europe, and Asia. Not only would they then be better able to capture more customers by interfacing in the developed market regions, but also by providing their own multiple customer shared infrastructure, could enjoy greater economies of scale and cut out the middleman global carrier and enjoy that margin for itself.

5. Media, content, and products and services will be drawn to the lowest cost most ubiquitous e-commerce distribution channel. Those who develop such information and products no longer desire nor can afford dedicated distribution networks. They desire a hosted logistics capability for which they will pay monthly subscription fees based on usage, particularly if the provider of this channel is neutral to the products offered and allows the vendors of the goods to market under their own brand and identity.

6. An important trend will be that large businesses will require their smaller suppliers to be linked to their on-line systems or else risk not doing business with them. Conversely, this providing of systems to other companies will also be offered as a free service to customers, as is already being practiced by some large financial firms and banks to boutique fund mangers, to attract and hold preferred customers. The new productivity of such tools will not only reduce operating costs within firms but will strengthen the relationships between suppliers and customers. Any new ways to reduce the development and operating costs by shared overheads of these new systems will be highly welcomed by enterprise customers.

It is one thing to look at the vendors and their strategies, but it is equally important to look at the commitments already being made to this new Data Networking and IT strategy by early adapter enterprise customers. Here are just a few examples by industry sectors.

1. Financial Services – as the dividing line between banking, brokerage, and insurance blurs, companies are striving to offer multi-channel services to their customers in an improved fashion and with reduced back-office costs. Such firms as Bank of America, Citibank, Wells Fargo, Fidelity, Merrill Lynch, Morgan Stanley, MetLife Insurance and Royal & Sun of the United Kingdom are already deploying new such systems. Recent significant announcements include that J.P. Morgan Chase & Co (JPM.N) has chosen to negotiate exclusively with IBM for a sweeping technology contract worth over $5 billion Under the terms of the seven-year, global deal, International Business Machines Corp. (IBM.N) would take over the global computing operations for J.P Morgan in a wide range of areas including retail banking, trading and securities processing, offering the bank an opportunity to cut its own spending on technology. At the same time, the deal offers J.P. Morgan the chance to buy its technology services, much like industries that pay for utility services, such as electricity. The result is that the bank should be able to both cut costs and react more quickly to market changes, ramping up quickly on computing power, for example, without having to invest its own capital in massive computer systems. IBM has promoted that model to banks, long seen as more reluctant than other industries to outsource key technology operations. Last February, IBM clinched a $4 billion, seven-year technology services agreement with American Express Co.

2. Manufacturing – using internet services to connect all parties involved in product creation is called collaborative product development and has been embraced by the automobile manufacturing industry which estimates that it has saved $250 per vehicle and savings could reach $1600 per vehicle according to AMR Research. According to studies by Giga Information Group, Collaborative Product Development software can reduce global product-development–related travel expenses by 50% to 80%; reduce document production and shipping costs by as much as 90%; reduce errors in the product-development and manufacturing processes by about 50%; and speed engineering processing time by up to 85%. Caterpillar, a manufacturer of earthmovers and other heavy equipment has streamlined its supply chain to its 220 dealers and as a result order processing and fulfillment times have dropped by 90 days. Nissan is employing an integrated customer database to discover high-potential prospects. Nissan also integrates Web-based orders directly into production planning for some models resulting in the manufacture of a custom configured car in six days. When Sony Electronics implemented an e-learning and collaboration initiative for thousands of repair technicians, the program was so successful that the consumer electronics company was able to cut global program-training costs by two-thirds and reduce its training staff by 60%. Today Sony Electronics Service Company delivers 100% of its eight courses electronically to 1,800 repair locations around the world.

3. Public Sector (Governments) – to cut costs, government agencies are adopting the private sector’s best practices. According to the U.S. Office of Management and Budget, more than 60% of Internet users interact with government Web sites. President Bush’s new federal budget for 2003 includes $52 billion in IT investments to raise productivity, eliminate redundancy, and improve service. Singapore pioneered the idea of moving government services away from the difficult-to-use bureaucratic structure and encouraging e-government. Canada is also a leader in this field. The Vietnam State Treasury (VST) is planning a $40 million project to provide a homogenous IT environment to allow VST to interface with relevant government agencies and enterprises electronically. VST also anticipates that with this new architecture that Vietnam’s banking and financial infrastructure will operate more effectively on an international basis, which will in turn allow Vietnam to participate and compete more aggressively in international trade and investment and result in enhanced financial, economic, and social development for Vietnam and its people.

4. Retail – with intensive competition and the rise of huge, price-focused store chains, success in the retail industry increasingly depends on the smart use of IT and the Internet to control costs and expand markets. Wal-Mart is renowned for its networked supply chain, which aggregates merchandising data and inventory forecasts from 4,000 stores. The system centralizes sourcing for the retailer’s 10,000 suppliers and optimizes the product mix in each store. Wal-Mart’s distribution costs are a full 30% lower than its competition. The company also offers Web-based business applications to its 950,000 associates. Philip Morris has introduced its own IT company store to make its products available o its employees at a discount. Philip Morris utilizes portals, self-service applications, business-to-business initiatives, and voice and video over IP. Philip Morris expects to process several billion dollars in online orders within a year.

5. Travel & Hospitality – this industry segment is a leader in using the Internet to reduce distribution costs while increasing their reach. Marriott and Starwood Hotels not only use web sites for reservations but are working to bring high-speed Internet access and long distance calls for a fixed price to promote using hotel rooms as private business offices. Lufthansa is installing Internet access and wireless LANs in 80 of its long-haul aircraft.

6. Telemedicine – healthcare providers are providing consumers the ability to find health and medical information on Web sites and portals. More importantly the industry is starting to face the tremendous task of sharing information and the need for secure storage. Electronic claims management is viewed as a vital survival strategy for the Health-Care industry. UnitedHealth Group has invested $600 million over the last two years to create Web solutions built over a central data repository, databases and transaction systems, all designed to streamline eligibility management, billing, and reporting. Some facilities are using videoconferencing to provide consultations and examinations while others conduct remote monitoring and analysis of patients. Georgetown University Medical Center developed a web-based system with which patients plug a blood-glucose monitor into their home computers and transmit the data to their physician on-line. At the Golisano Children’s Hospital at the University of Rochester Medical Center, pediatricians monitor children from a remote day-care center using video, heart monitoring, and other tools to make diagnoses.

Who will be the successful leaders of this migration to integration of IT and networking is not yet clear. Equally unclear as is whether the telecom service providers will play a pivotal role or will allow themselves to become commodity bit providers. What is clear is that the enterprise community will welcome the convergence of IT and telecom and will reward those vendors who truly offer solutions that align with their business goals, their financial structure, and their desired service levels.