The convergence of IT services, telecommunications, products and other business services is leading to a shift in the models adopted by many established service(s) providers, and the entry of new service providers from outside the IT business. Both telecommunications providers and traditional external service(s) providers (ESPs) are battling for market share and seeking growth areas in an increasingly competitive environment.
Acquisitions of ESPs are emerging as strategy in the Asia-Pacific region.
Traditional telco revenue based on carriage services continues to erode. As a result higher-margin IT services markets look decidedly attractive. On the other hand, many IT services providers want to expand beyond their traditional space by bundling communications as part of IT outsourcing to increase recurrent revenue and gain access to telco customers. The battle lines between these two different types of service providers are now being drawn, with the first volleys being launched by telcos in Asia, Australia and New Zealand.
In Asia-Pacific a recent trend for telcos to totally acquire IT services organizations has emerged. Within the past 12 months a number of large telcos have acquired IT services companies, or significantly leveraged existing acquisitions to enter new markets, including:
- Telecom New Zealand (TNZ) - acquired NZ IT services Company Gen-I and also Computerland.
- Telstra, acquired home-grown IT services provider KAZ.
- Optus (majority owned by Singtel) announced that NCS (Singapore's second largest IT services provider, and also owned by Singtel) would take over provision of a substantial part of Optus' IT in Australia. This is an example of a telco leveraging its acquired ESP capability to enter new markets.
Why are telcos entering the IT services market?
There are many factors that are forcing telecommunications providers to take a fresh look at IT services.
The primary driver of course is that traditional telco revenue is based on the sale of bandwidth and connectivity as these are both mostly commodity services. Most customers know what they need, are technology literate, know the speeds, lines and routes they need, and how to negotiate for a good deal. A connectivity sale mostly revolves around price, so competition is extremely cut throat. In addition, pressure on margins is increasing, even though overall bandwidth usage is increasing. As an example, Gartner is aware of at least one managed service provider which will go as low as a 3 percent margin in Asia-Pacific to lock-in a very large, low-risk deal for three to five years, with operation for the first year at a loss. The same provider indicated that at least 50 percent of deals generate less than 10 percent margin, with another 20 percent of deals generating a 15 percent margin, but with a much higher risk weighting.
Apart from negative drivers forcing action, for telcos it also seems that there are inherent synergies that make the acquisition of an ESP desirable:
- Utility computing and shared services are seen as the future in the IT services world. Telecomms carriers have always operated well in the shared services and utility-based services world at a telco level
- Telcos also have strong core strengths in managing an asset-intensive, one-to-many service model, so moving up the IT services value chain may enable them to become part of the IT utility world. This would leverage the genuine advantages that a telco can bring to bear on the IT services business.
Cultural clashes are key contributors to failure
Along with the synergies potentially generated by direct acquisition, come inherent risks. Over the years, across the globe, many telcos have attempted to develop IT services capabilities using a variety of methods including: outsourcing, opportunistic partnerships, capability extension, joint delivery and even acquisitions.
In the past many mergers and acquisitions between IT services companies and carriers have been failures, or far less successful than envisaged, as the value of the acquisition has never been realised.
The major reason for failure in general is a clash of cultural and business models between the telco and the newly acquired ESP.
On the surface, based on the drivers and potential synergies to be gained, the use of acquisitions or mergers for a telco to enter the IT services market appears to be a valid strategy. On a global basis however, examples of long-term success for this kind of strategy are few and far between.
Time will tell if newer practitioners of this strategy will be successful in managing the risks, and overcoming the significant cultural and business model conflicts that generally plague such marriages.
Craig Baty, group VP, Gartner Research, will be presenting this research in detail at Gartner's 'Outsourcing and IT Services Summit on June 7 and 8 in Sydney. Information: www.gartner.com/ap/outsourcing