Industry
Communications, Media and Information Services
Connect. Curate. Comprehend: Unlocking Value Beyond Boundaries
Highlights
- Digital-native companies have posed a significant threat to the incumbents in the telecom industry, and the latter are fighting back.
- Several telcos are now opting to separate their business into two independent entities – NetCo, InfraCo, TowerCo, or FiberCo, which looks after network operations, and ServCo, which tends to customers.
- Of course, the separation comes with an array of challenges and is considerably time-consuming, but it does help unlock greater value for the business.
- Disintegration of IT systems, as part of this structural separation, is particularly complex. We outline a roadmap for a successful split.
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Staying relevant
Telecom is traditionally a CAPEX-intensive industry.
Communications service providers (CSPs) must invest heavily in 5G and full-fiber networks to capitalize on the data boom and stay relevant. However, CSPs today face the squeeze from weakening economies, competition from new entrants, rising consumer expectations, and mounting debt. Hence, CSPs need to think of ways to secure more investment. Unlocking the value locked within a vertically integrated business model is one such way that CSPs are increasingly exploring. This means splitting the business into two independent entities - NetCo, InfraCo, TowerCo, or FiberCo, which looks after network operations, and ServCo, which tends to customers. Such a structural separation, if done right, can potentially give huge returns. During such a separation, two of the most critical focus areas are process redesign, and data and IT systems separation.
We shed some light on how CSPs should approach the critical challenges posed by structural separation and the strategy they should embrace to maximize their chances of success, thereby unlocking value for both businesses and customers.
The current state
Structural separation has become a common phenomenon in the telecom industry.
It involves splitting an integrated CSP business into two separate business units: the customer-facing entity called the ServCo, and the other that operates the backend infrastructure and network called the NetCo. Earlier, governments and regulatory bodies dictated such separations. But lately, CSPs have chosen to go down that road to ensure profitable sustenance. We list some examples below.
The voluntary separation of the O2 Czech Republic in 2014 generated superior returns for the brand while significantly improving the country’s infrastructure. In 2019, Denmark’s TDC split into two companies, TDC NET and Nuuday. TDC NET, the InfraCo, is Denmark’s largest mobile network and broadband provider, focusing on building the country’s digital infrastructure. Nuuday is Denmark’s largest digital provider of broadband, communications, and entertainment services. In New Zealand, a similar split resulted in Chorus (fixed network company) demerging from Telecom New Zealand’s retail business. In 2017, BT agreed to legally separate its fixed network asset Openreach, having been functionally separated since 2006. Telstra Australia, in June 2018, announced that it would establish a standalone infrastructure business unit, namely, Telstra InfraCo.
Analysts have a broad consensus that 5G will drive up the total cost of network ownership. Blame it on the increasing density of people living in urban areas and the resulting requirements on capillarity of fiber deployment. A strong NetCo augurs better to support a region’s need for fiber or 5G rollout than an integrated CSP. However, the separation could be costly and time-consuming. Historic cases indicate that the process can take between two to five years.
The structural split
Going through a structural separation is one of the most complex and challenging journeys for CXOs.
Yet, it can potentially deliver huge returns, if successfully executed. While there are several critical success factors, we discuss two pressing concerns: business process redesign and data and IT systems separation. In this context, a company’s chief operations officer should ask:
- How do I ensure that my IT solutions optimally manage the two organizations’ potentially conflicting needs after the split?
- How do I manage the business as usual during the long transition phase?
- How can I reduce the cost of separation and operation?
The separation results in two business entities; the NetCo, which focuses on building and operating infrastructure and morphs into the cost optimization engine, and the ServCo, taking on the mantle of building digital products and services and becoming the primary engine for growth and transformation. When driven by the regulatory mandate, a critical objective of such a split is to facilitate non-discrimination and equality of access to wholesale telecom markets and to enforce equivalence of inputs (EOI). Even if not stipulated by regulations, CSPs should aim to achieve this level of maturity for business processes, data, and IT system capabilities as it brings additional cost optimization benefits from harmonized business processes and operations.
New processes
Structural separation can result in significant changes in the business model.
CSPs should take the separation as an opportunity to optimize business processes and align those to future vision and strategy. A business process reengineering (BPR) exercise is recommended for both NetCo and ServCo despite their different focus areas and objectives.
Before separation, agents access network resources to diagnose and address customer problems. This process needs to be redrawn post the separation to optimize the customer handling time, lower service response time, and address overall customer dissatisfaction. Companies should therefore focus on process reengineering in order to elevate customer experience and drive service assurance despite the handovers between the two separate entities.
We illustrate the typical degree of the impact of separation through a simplified process map (see Figure 1).
Impact of CSPs implementing structural separation
IT reconstructing
While splitting, it is imperative to separate technology, but it must be done right.
IT separation is complex but essential for companies to operate independently. CSPs have certain levels of separation already established between wholesale and retail businesses. This separation reflects the natural market split between retail (customer-facing) and wholesale (network-facing) activities. Indeed, this also reflects in the systems architecture typically used in the telecom industry: BSS (Business support systems) for customer-supporting systems and OSS (Operational support systems) for network-supporting systems. However, considering the restructuring as just a BSS and OSS separation will be a mistake.
Figure 2 is a simplified application map that illustrates the separation’s typical degree of impact on various application domains.
Impact of a structural separation on application domains
Here are some capabilities critical for a successful structural separation:
Product lifecycle management: ServCos will need a strong product lifecycle management capability to experiment and continually innovate new products and services rapidly.
B2B gateway or wholesale API: These interfaces must be in place for capabilities like ordering, raising faults, or viewing reports to be made available by NetCos to service providers or ServCos.
Inventory management: Significant redesign and integration are required to support EOI standards. One tricky legacy issue that an integrated CSP faces is data replication between BSS and OSS systems. This restructuring gives a window of opportunity to let the network data sit close to the network finally. This will enable services to be truly network-agnostic and allow the network to determine the best way to implement the ordered services.
The other capabilities that would also need a significant redesign to support EOI standards are customer information management, sales and service order management, revenue management, workforce management, and business intelligence and reporting.
We propose an IT architecture transformation roadmap to execute the split as seamlessly as possible.
Starting with typical IT applications, the IT architecture needs to transform gradually to an end state where both units have their own independent IT landscape. The ServCo should be able to service its customers independently, while the NetCo side should be able to serve every customer similar to the ServCos, irrespective of its pre-association.
The disintegration of IT systems is a complex exercise. CSPs should take it as an opportunity to future-proof the IT foundation for the two business entities. It will require changes even to the applications retained on the corresponding NetCo–ServCo side.
Figure 3 depicts a typical end-state architecture and a roadmap to reach there gradually.
Roadmap for IT system separation
As CSPs seek to reimagine their business models and become the custodian of digital experience, structural separation can play a vital role in facilitating increased agility, cost optimization, rapid product innovation, and unlocking exponential value. However, success is going to take a lot of work, and following a well-defined strategy and a clear roadmap of gradual transformation is where the road begins. We recommend a three-stage approach, as illustrated in Figure 3:
Stage 1: Implementation of Chinese walls – The start could be a simple Chinese wall to separate access to processes and data, stabilize the businesses, and gain the users’ confidence to transform gradually.
Stage 2: Multitenant architecture: Separate the middleware and orchestration components to prepare the foundation for independent setup.
Stage 3: Equivalence of inputs: Go in for a clear-cut division that resulting in completely independent IT stacks for each unit.
