The telecommunications industry has loudly debated the economics of access—how to compete with cable operators, how far to carry fiber into businesses and neighborhoods, and how to spread maintenance costs among users. Yet an equally weighty problem is receiving less analysis: how can telcos make the most of the historic shift from legacy networks to platforms based on Internet Protocol (IP)?¹

Telecom companies have been investing in these networks for several years, making this change the largest and most significant transformation of their network platforms since they switched from analog to digital systems, in the 1980s. So far, the economics of IP have been less than reassuring: many incumbents are spending billions to adopt this new technology, but to date few of them have shown how to make IP profitable in serving their enterprise customers. Even so, most telcos not only feel pressured by the threat that their competitors will undercut their profitability with competing offerings but also are tempted by the opportunity to deliver a new array of services. Consequently, they are undertaking the IP transformation in the hope they will find the payoff somewhere along the way.

Insights into the factors that allow some companies to benefit from the IP transformation while others flounder come from our work with carriers around the globe and from analyses of leading-edge efforts. Most important, the companies that frame the transition to IP as a significant business transformation tend to perform better on the capital markets than companies that see it as a network upgrade (exhibit).

Companies that proceed with this business-minded approach view the shift to IP as a much-needed opportunity to revisit their operating models, simplify their networks, and transfer some of the customization burden to enterprise customers. In doing so, however, they must carefully plan how they will move those customers from one platform to another or the transformation may slow down or make customers defect to competitors. Such planning includes the management of talent issues—most notably, retraining the sales force to understand and convey the value of the new offerings, as well as efforts to update the technical skills of network administrators.

Rethinking the operating model

When a telco deploys IP technologies broadly, it has a chance to rethink operations, make processes more efficient, and empower customers to tailor their own services. This customer focus means that the transformation can’t be the sole purview of the chief technology officer and the network organization. It demands involvement from customer service, sales, marketing, and other units and functions that need a say in how new services are sold and maintained.

As teams plan and execute the migration, they need to emphasize three critical themes for improving operational effectiveness: reducing complexity, standardizing offerings, and enabling customers to service their own accounts.

Reduce complexity through end-to-end redesign

Historically, telcos have created products and services by deploying new technologies while leaving the old ones in place—an accretive process that makes networks more complex. Some telcos have created modular building blocks within their networks, making it easier to add and subtract new technologies, but this forward-thinking practice isn’t yet widespread.²

Decommissioning old products on legacy platforms is tricky, since it requires moving all customers to the new platform—in this case, to IP solutions. This process may take several years, but in the meantime companies can begin to reduce the complexity by redesigning their processes, building in more automation and self-service, simplifying and consolidating IT platforms, and standardizing and rationalizing the products and features in their portfolios. Carriers face a significant hurdle if they have not yet reorganized their IT architecture around domains (that is, logical groupings of functionality, systems, and people with consistent business drivers). But the payoff will be a model that can reduce the cost of support and maintenance while facilitating the adoption of better customer lifetime management applications and of combined customer relationship management (CRM) and billing solutions. The new model can also speed time to market for new products and cut IT spending, leading directly to improved earnings.

While redesigning processes during an IP transformation, for example, one carrier reduced the number of steps in its process for installing a new private line on a client’s network to 20 steps, from 100. The new IP approach allowed the telco to simplify its front-office processes (including CRM, contract negotiations, and order entry), middle-office processes (network design), and back-office processes (network monitoring and problem resolution). Before the simplification, setting up the line would have taken 20 to 30 days, but the telco managed to reduce this to a few days for orders requiring a network redesign and site visits—and to provide immediate service for simple orders, such as adding bandwidth to an existing line.

Equally important is the design of a robust exception process to handle customer requirements that standard products cannot support—a process often overlooked in traditional process redesigns. However, exceptions can account for more than 40 percent of nonrevenue-generating costs if the process is designed poorly.

Standardize products and services

Few carriers understand the true cost of customizing products and services for their IP customers. Often, carriers don’t realize that most of the customization—as much as 80 percent, by our reckoning—is self-imposed. Although standard products might fulfill a customer’s requirements, telcos routinely customize to replicate the features of legacy platforms (for example, customer-specific reports or the use of nonstandard hardware). Customization is not all bad if carriers can capture additional margins from it. Unfortu-nately, they frequently cannot, and thus customization merely drives up costs and complicates the network, making maintenance and repairs more difficult. To minimize these costs, carriers should standardize their offers on a few combinations of hardware, connectivity, and service agreements, as well as try to limit customization to software configurations, where it is easier and less expensive and can often be handled by the customer. Service customization should be performed only at the network’s periphery, such as software in customer equipment. One carrier concluded that it could meet the needs of most of its top 1,000 business customers by offering only three different types of virtual private networks (VPNs), with preconfigured connectivity and service-management capabilities. Telcos will need to make their sales and service personnel aware of the total cost of customization and to offer appropriate incentives that minimize the number of unique agreements. Customers insisting on customized hardware or services must realize that they will need to pay the full cost not just at the beginning but throughout the product’s maintenance lifetime.

Promote customer self-service

Business customers, whose expectations have been shaped by other services that moved to the Internet (travel, banking, media), generally expect more control over their phone service when it moves to an IP platform. Telcos should embrace this opportunity to offer self-service online, especially for procedures that are relatively straightforward and may offer little opportunity for service upgrades. AT&T’s business portal, for example, allows customers to manage their networks, review performance reports, check account status and bills, and report and monitor trouble tickets—all without having to get in touch with the call center.

More sophisticated self-service also should be encouraged. A telco could, for example, provide IT support personnel at its enterprise customers with training to add new lines or services on their own.

Migrating customers to IP

Many business customers are satisfied with their existing communications networks. Telcos will therefore face the challenge of articulating the benefits of an IP network. One North American carrier discovered midway through a pilot IP transition that its sales force did not understand the new IP products and could not explain the total cost of ownership to customers. Not surprisingly, it experienced little success in convincing them of the move’s value.

Telcos must not only show their customers a good reason to switch but also plan a schedule for migrating these customers (how many and how fast) and run pilot programs to apply lessons learned to their broader customer base.

Demonstrate a reason to switch

Telcos can learn some lessons from systems integrators and software providers. Both kinds of firms have become adept at describing industry- and company-specific value propositions grounded in a solid understanding of the way customers do business and how they might make better use of their communications and IT systems. But convincing enterprise customers that a telco understands their business may take some effort: in a 2005 survey of North American IT leaders,³ more than one-third of them said that telcos did not understand how they used their networks and what applications they ran on those networks. That finding represents a serious credibility gap, since more than 30 percent of all enterprise applications will need to be adapted before they can run on an IP network (see sidebar, “What CIOs should know”).

Cost savings are an important part of the value proposition—a part that is relatively easy to communicate to customers in all industries. By migrating from legacy platforms to IP-based solutions, customers can save up to 10 percent on the total cost of network ownership while gaining 30 percent more bandwidth. Setting up new lines and even new offices becomes faster and easier, and customers often can do so themselves. Switching from traditional voice communications to VoIP (Voice over Internet Protocol) further reduces costs. Telcos don’t always know the total cost of ownership of their clients’ networks. They may find that they increasingly need to learn or estimate these costs in order to make meaningful comparisons.

In addition to cost savings, sales teams must be able to define and describe valuable new business opportunities enabled by an IP network. Retailers, for example, can approve credit card purchases faster when a sales terminal is permanently connected over an IP network rather than having to dial up for every purchase. They could also control and update in-store displays from a central location and thus use inventory and sales data to move merchandise. IP connections among suppliers and purchasers can help companies manage their supply chains in a more finely tuned and sophisticated way.

Develop a migration plan

One of the thorniest transition problems telcos face is determining the order in which to migrate their customers. A major consideration is the geographic spread of an enterprise customer’s network. Carriers want to avoid the expense of upgrading every region in their networks at once, but they also want to offer comprehensive upgrade paths for large companies that might be scattered across many locations. A bank, for example, may wish to upgrade all of its branches around the country to an IP virtual private network (IP/VPN), but doing so would be expensive for the carrier, which would have to upgrade the equipment at many locations before seeing any revenues from the change. The larger the geographic footprint of the early customers, the more hardware will need to be upgraded. Of course, once the new hardware has been installed, the telco can more easily migrate other companies in the same locations at lower marginal cost.

Which customers are most suitable for early migration? That will depend not only on the geographical spread of each customer but also on its type of business and on the status of its contract, since companies facing renewal may be more receptive to a migration proposal. The type of business is important because the carrier must understand which applications customers use in order to determine how difficult it will be to migrate them to IP platforms. With this information (much of which can be gathered by the sales force), the telco can develop a migration model and run simulations to identify the best strategy given its customer, geography, and product portfolio. It can then plan its investments and guide the sales force toward the right clients and products for its early efforts.

Run pilot programs

Pilot programs, usually limited to a few clients, can provide useful feedback on the economics of migrating customers to IP (including how much it will cost to move services and how long it will be until planned benefits are captured). In addition, they help telcos identify operational bottlenecks. One carrier, upon learning that its salespeople were having difficulty selling the IP value proposition, decided that they needed better tools for calculating their customers’ cost savings. The carrier also identified equipment and applications that were likely to be obstacles to migration, such as sales terminals that would need physical or logical upgrades to run over an IP network. In addition, the pilot identified the ideal migration path for some of the carrier’s existing customers (specifically, those on T1 lines should migrate to IP/VPNs over DSL networks). It also revealed that some ISDN-based applications would be more difficult to migrate because IP networks were not, at this time, ready to deliver the service level required to run ISDN-supported applications.

Such pilots are most successful when one leader is responsible for end-to-end delivery, the process is systematic and repeatable, and a structure exists for feeding lessons back to operations personnel and salespeople who can benefit from them. Running IP migration pilots is not a part-time job, and some of them fail because of a lack of leadership and commitment. Selecting and prioritizing pilot customers is also very important, and lessons learned from clients must be captured accurately, with all the relevant leaders taking part in debriefings so that they understand what works and what does not. Some telcos overlook the opportunity to learn by first migrating their own businesses and networks to IP and thereby gaining valuable experience even before meeting with the earliest pilot customers.

Manage and upgrade talent

While staff throughout the carrier’s organization will have to learn new skills to work with an IP platform, two particular areas—sales and network administration—are the keys to managing successful transitions.

Sales teams must be able to demonstrate IP’s value proposition, and to do so they often have to upgrade their offer from a bundle of services to a more comprehensive solution.⁴ As with companies in any industry that shifts from selling bundles to selling solutions, telcos will need to retrain the sales force, bring in new talent, and change incentives in order to get salespeople to lead this change. Most telecom sales organizations are evaluated on business volume, but incentives will need to be realigned to take into consideration the number of customer accounts migrated and the sale of high-value solutions, which often take longer to push and can reduce profitability in the short term.

Network engineers too will have to learn new skills related to IP, VoIP, and IPTV (television delivered over IP). As companies transform their networks, their central switching offices will look increasingly like data centers, with traffic passing through servers instead of copper connections. They are also likely to shift from a few big switching locations to a more distributed network, whose servers, services, and devices—huge numbers of them—will have to be monitored and maintained remotely. Many telcos have outsourced their data centers, but as IP becomes more important to the business, they will need to bring some of that competency back in house. Some are combining their network and IT departments to do so. In certain cases, bringing in new talent will help, while in others (especially where a strong union may limit options), retraining could be more productive.

Building the business case for an IP transformation will remain challenging for some time, as its value to a telco carrier depends on revenues from products yet to be defined and tested. However, carriers must compare the investment with the cost of doing nothing at all—a course that would marginalize them as pipeline providers for any company offering the very services that they are best placed to enable.