Sourcing 5G: The Why, When, and How - Part 2

How to prepare for the 5G rollout and engineer a robust business case

With initial commercial deployments of 5G now underway in some markets, telecoms operators across the world face a quandary. Very different from 4G, 5G is a highly capable groundbreaking technology. But it is also multifaceted and highly complex, and the business case for many 5G-enabled services is still uncertain. Still, many operators are pushing ahead, pursuing the potential benefits associated with an early 5G launch, such as creating marketing buzz, boosting network capacity, laying the foundation for new revenue streams, and taking advantage of network equipment vendors’ eagerness to gain early 5G wins.

However, 5G brings a completely new set of challenges to manage the long-term total cost of ownership (TCO) and return on investment (ROI). To be successful, holistic planning and strategic sourcing are needed. This involves a tightly coordinated cross-functional effort, granular understanding of the new technology interdependencies that 5G is bringing, negotiating a much larger scope across both network and IT categories in parallel, and incorporating mechanisms to manage the long-term evolution of cost throughout the 5G rollout.

In our first article, published a few weeks ago, we outlined three new challenges that operators will face as they plan and pursue sourcing of 5G – and that we believe will be critical to manage the return on investment during the 5G era. In this second article, we continue with our recommendation on how to holistically address these challenges as part of an integrated 5G sourcing approach.

3    How to Approach 5G Sourcing

Overcoming the three key challenges associated with deploying 5G requires a carefully considered 5G sourcing strategy. In fact, we argue that operators’ return on any 5G investment will primarily depend on their ability to address these challenges in the planning and strategizing phase of the 5G sourcing process (see figure 3). 

3.1  Optimizing the commercial and technical roadmaps

The primary tool to optimize the scope and pace of the 5G rollout, and thereby maximize the return on investments, is a carefully planned commercial roadmap of services. Based on a strategic decision on whether to be a first mover or a rapid follower, such a roadmap needs to draw on the 3GPP standardization process, vendors’ roadmap, technology evolution risks, availability of spectrum, market demand, and the time it will take to earn a return on the required investment.

In combination, these factors create a difficult set of commercial, technological and financial considerations, and constraints against which the operator needs to shape its plan. In our previous and ongoing engagements, we have found that the key to solve this complex puzzle is to, early in the process, establish truly cross-functional teaming across the Commercial, Technology, Finance, and Procurement organizations. Rather than a plan developed by Commercial dictating the Technology plan, or vice-versa, a cross-functional 5G “task force” allows an agile approach to find the trade-offs and set the priorities that will maximize the return for the operator throughout the 5G era.

3.2  Managing the interdependencies

To best manage the increasing interdependencies between the network equipment categories and between network and IT categories, we argue that operators should develop and apply what A.T. Kearney calls a “mega-vendor” approach, in which the scope of network and IT categories are bundled into one overarching negotiation process. The purpose of this approach is twofold. First, it mitigates unintended vendor lock-in effects that can occur when awarding categories sequentially. Second, it increases the operator’s buying power due to the combined value of the categories being negotiated, which becomes increasingly important as the vendor market consolidates and supply power increases.

Although the concept is easy to understand, the complexity in the execution is significant. Through our engagements we have identified three components that help manage this complexity in a practical manner. As a first step there needs to be a strong alignment across the C-level team and technology departments to challenge existing supplier relationships to ensure that “all options are on the table.” This enables award scenarios that represent significant up- and downside (carrots and sticks) for all involved vendors. Secondly, great care is required in the design of the award scenarios across the categories being negotiated. This includes considering cross-vendor interoperability across categories and understanding and leveraging the strategic priorities of the vendors to unlock value in other areas, where the operator’s purchasing power is lower (see figure 4 for key considerations in award scenario design). Thirdly, operators should plan vendor interactions in a gradually escalating level of seniority on both sides. Driving the last stretch of negotiations at C-level will emphasize the long-term strategic value of the negotiations.

In addition to the mega-vendor approach, a parallel track to consider is that of network sharing, which can significantly strengthen the business case for 5G. Network sharing, in the markets where it is feasible, could reduce capital spending, optimize the network footprint, and curb operating costs. As operators deploy more small cells, sharing active network elements such as antennas, the upside potential significantly increases.

However, network sharing is associated with a wide range of challenges, and arguably even more so in a 5G context. Based on 5G network-sharing assessments that we conducted in Asia and Europe, we conclude that sharing options will primarily depend on whether individual operators have similar 5G strategies and timelines, as well as local regulations. 5G will first be deployed on very local levels, supplementing 4G, so alignment between operators on locations for sharing will be challenging, and with misalignment on 5G priorities, the potential for network sharing may be limited.

3.3  Containing long-term cost of ownership

Containing the long-term cost of ownership essentially comes down to assessing the value of pursuing long-term commitments early on (in exchange for lucrative discounts), versus assuming perceived higher costs up-front to maintain competition down the road—or, in some cases, striking a balance between the two. Two potential means to achieve this are to award vendors scope in a way that will maintain competitive dynamics over time, and to incorporate mechanisms in the contract that mitigate unexpected cost increases from, for example, feature licenses, upgrades, and maintenance.

The former is primarily relevant for mid-sized and large operators where a multi-vendor setup is meaningful in most categories. In these cases, it is critical to set up flexible contracts that leave it uncertain which vendor will be the long-term “winner,” whenever technically, geographically, and economically viable, thereby maintaining some degree of competition throughout the 5G era.

The latter applies to all vendors and often has a much larger impact on long-term TCO than what it is given credit for. Working with operators across the globe we have seen that, unless managed properly, recurring license fees and maintenance costs can completely offset any steep discounts that are achieved on hardware. Also, unless cost erosion mechanisms are put in place, an operator may end up paying more than what it should a few years down the line. In fact, based on our experience we have seen that some of the operators with the lowest TCO on 4G achieved this not through steep discounts on the equipment itself but rather by focusing on managing the evolution of the cost for the equipment, features, and maintenance. Hence, besides negotiating on list and configuration price, we argue that more attention should be paid to the actual structure of the pricing.

4    Conclusions and Recommendations

For telecoms operators, sourcing 5G equipment and services presents new challenges and opportunities beyond those involved in the deployment of earlier generations of mobile networks. To overcome the challenges outlined in this paper and maximize their ultimate return on investment, operators will need to plan their 5G deployment and sourcing strategy very carefully. Many operators are active in 5G field trials and discussions with potential vendors. However, we do question whether they are considering the right balance between commercial, technical, and cost factors by leveraging should-cost models and integrated negotiation strategies.

An important first step is to assemble a cross-functional team to develop a commercial roadmap for 5G underpinned by a strategic decision on whether to be a first mover or a rapid follower. Ideally, the deployment plan will take into account many different interrelated factors, such as spectrum availability, vendor roadmap, technology evolution risks, and the potential for monetization of 5G services.

Once they move toward procuring 5G equipment and services, operators should identify and map the interdependencies among categories and the competitive dynamics in each of them. This analysis will enable a more holistic, “mega-vendor” approach in which spend across categories is bundled, and the areas where the operator has strong purchasing power are leveraged to achieve negotiation results in the areas where they have less purchasing power.

Furthermore, we believe it is possible to extract significant value in structuring the award so that there is a certain degree of vendor competition maintained in the following years, and by incorporating contract mechanisms that manage the cost evolution for equipment, licenses, and services throughout the 5G rollout.

Based on our observations and involvement in many of the ongoing 5G efforts across the globe, we know that operators applying the elements of this approach will see much better financial results.

Remko de Bruijn leads the Communication, Media and High-Tech activities for A.T. Kearney in the Netherlands and Belgium. He advises clients around the world on cost-reduction strategies (especially in procurement), operations & e2e process improvement, b2b sales excellence, and organizational design and transformation.

This article was co-authored by Jonas Johansson (Dubai), Nicolas Renault (Paris) and Jules Goffre (Munich)

For the full version of the article, click here