The Rise of the Enterprise - October 2008

8/9/2019 The Rise of the Enterprise - October 2008

1/12

October 2008

The Delta Perspective

The Enterprise sector istaking off in the Middle

East, buoyed by continuedeconomic growth andextensive Government

development initiatives.Is this now the time for

operators to refocus?

The Rise of the Enterprise: Right time for telecom operatorsto focus on ICT in the Middle East?

Author Andrew Snead - associate partner: [email protected] Carvalho - partner: [email protected] von Maltzahn - manager: [email protected]

Information and CommunicationTechnology (ICT) is a popular topicof conversation amongst telecomexecutives within the Middle East atthe moment and for good reason.The region is continuing to experiencerapid growth within the Enterprisesector as local businesses expand andthe influx of international companiesseeking a local presence in the

area continues.

Having been focused on rapidConsumer growth, fuelledpredominantly by mobile, operatorsare starting to wake up to thegrowing opportunity within theEnterprise segment. The market isreaching a tipping point in a numberof countries, catalyzed by ambitiousGovernment ICT infrastructure

projects and the connectivityrequirements of the burgeoning realestate market.

The Enterprise ICT market definitelywarrants attention and there aresignificant opportunities to createvalue. However, this market is alsoextremely challenging, as evidencedby the low margins of BT GlobalServices and T-Systems. Most critically,the market demands a culturaltransformation with a shift in mindsettowards customer centricity and multi-

faceted solutions.

How should operators address theopportunity? Dependent on theirrelative capabilities, scale and marketshare, there are generally two options:1) A pro-active and aggressive

strategy focused on getting into themarket early to drive incrementalICT revenues.

2) A more cautious defensivestrategy focused on partneringand protecting the traditionalconnectivity end of the value chain.


2/12

2

Exhibit 1: GCC Enterprise internet connections (000s)

Managed service providers fromaround the globe are starting totarget what they also consider tobe an increasingly attractive sector.As examples, IBM is rumored tobe reinforcing its affiliated SBMoperation in Saudi Arabia andCisco recently opened its regionalheadquarters in Dubai, pledging toinvest US 1BN in the UAE over thenext five years. In parallel, investmentin the market is being made bylocal funds as evidenced by DubaiHoldings recent deal with the Voiceover IP specialist, Interoute.

Furthermore, the telecom giants fromEurope, North America and Asia arealso looking for a piece of the action.BT, AT&T, Orange Business Services,Verizon, PCCW and Vodafone are just

As an indirect indication of such growth, Enterprise Internet connections arepredicted to grow at 9% CAGR over the next four years.

a few of the experienced global playersestablishing a presence, and theyare not here to simply make up thenumbers or to serve the local needs oftheir global customers. They too seethe opportunity arising from the localbusiness growth and the likely need formore sophisticated ICT services.

So what does this mean? Is theMiddle East market ready for anICT revolution or are we at risk ofextrapolating parallels with westernmarkets too quickly?

This paper aims to clarify theopportunity and relevance to telecomoperators in addition to highlightingthe likely challenges and outlining thepotential strategic options.

Source: IDC


3/12

3

Whats the opportunityand why the fuss?ICT managed services generally refers to thetransfer of responsibility for the delivery ofspecific network-centric services (or elements of aservice) from the client to a service provider.

These services include managed connectivity (i.e. wide area and local area networks)IP-VPN, desktop, collocation and hosting.

Managed services is distinct from outsourcing in so far as it excludes the transferof people and assets. In addition, whilst not a rigid rule of thumb, outsourcingfrequently includes the transfer of responsibility for a particular function (such asIT) or end-to-end process (such as order-to-cash) whereas managed services usuallyinvolves the transfer of responsibility of more discrete elements of processes andfunctions (e.g. LAN management).

Due to the blurring of the IT and telecoms boundary, there is no clear consensus onexactly what constitutes ICT managed services. Market analysts and consultants alikehave different perspectives on what is in and what is out and consequently

deliver markedly different forecasts on the opportunity size. Some forecasts includeall IT and communications spend whilst others include those elements perceived tobe in the overlap i.e. net-centric IT. We also believe the latter represents the mostlogical demarcation and include managed connectivity, such as IP-VPN within theICT bracket.

Exhibit 2: ICT is the growing intersection of IT and telecommunications


4/12

4

Exhibit 3: 2008 KSA Telecoms and IT Market

Unsurprisingly, a large proportion ofthe historic growth of ICT ManagedServices has been in North Americaand Europe, but attention is nowturning to the emerging markets,including the Middle East.

As an illustrative example, the KSA

Enterprise IT services and connectivitymarket is estimated to be worth around$1bn in 2008. Whilst the true ICTmanaged services component will beless (i.e. factoring out non net-centric IT)this spend is sizeable and growing fast.

Why the fuss? The casual observermight well remark on the marketstill being relatively moderate whencompared to other elements of the IT

and telecommunications sector.

Key players such as T-Systems havestruggled to deliver cash flow positiveresults whilst BT Global Services hasonly recently delivered double-digitEBITDA margin, and yet both have beenrelentless in their pursuit of global ICTmanaged service deals.

Its all about strategic positioning

Its not purely the current absolute valuethat is of importance, its also aboutstrategic positioning. Whilst operatorshave been able to expand their service

offerings into new domains such asnetwork consulting and infrastructuretype services, the core motivation hasbeen one of strategic positioning withtwo principal reasons in mind.

1) Protect core revenues: i.e. resistcompetitor threats arriving from the

opposite end of the value chain.Such threats are coming from traditionaland non-traditional players, due to thedelayering impact of the IP revolution.The implication is a collision of telecom

and IT players at the ICT divide.

2) Prepare for IP growth: i.e. positioning

for the expected future growth of net-centric applications & services.

Its the expectation of growth in IP-enabled products and services thatis capturing the imagination, suchas convergent applications, unifiedcommunications and niche businesssolutions (such as security offeringstargeted specifically at financialservices companies). As these productsand services proliferate, the size andattractiveness of the ICT space willcontinue to increase, making it evermore

important to IT service providers,equipment manufacturers and telecomplayers alike.

1 Forecast includes IP-VPN carrier connection

IT services includes hardware and software install and designLAN/WAN management includes managed security, wide area and local area network design, installation and management

Managed corporate connectivity includes Internet, and IP-VPN

Source: IDC; Delta Partners analysis

According to Ovum,the global ICT managed

services market (excludingconnectivity) 1 is set toreach $66bn by 2012,driven by a compoundannual growth rate of

around 18% over the nextfour years


5/12

5

Key growth driversGovernment, construction and new competition

is catalyzing the marketThe ICT managed services market isbeing driven by a number of regionaland global factors.

Local pull factors are stimulating growth:

1) ICT go vernment agendas:

Government e-enablement initiatives

such as eLearning, smart citydevelopments and the modernization

of Governmental departments arecatalyzing markets. In some cases,Governments are mandating the useof B2B gateways for the interaction

between commercial companies andministries, thereby coercing businessesto adopt new ICT capability.

2) Growing ICT sophistication within

the Enterprise sector: Enterprisedemand for ICT managed services is

growing due to (a) the need to servegrowing Enterprise and Consumerpopulations with more sophisticated

services (e.g. security products forpost-pay transactions); (b) a lack of

local skills to perform many of thetasks internally; and (c) the desireto lower cost and refresh legacyequipment.

3) Burgeoning real estate boom:Development of new Corporate and

Residential property is continuing togenerate ICT infrastructure projectsacross the region. This is particularlytrue in the UAE where developers

seek new avenues to differentiatetheir offerings from their competitors,in some cases promoting connected-home and future-state business parks.

A number of construction companiesalso view the ICT component of theirdevelopments as business opportunities,thereby further enlarging thecompetitive field.

Source: UN, World Economic Forum, Delta Partners

Exhibit 4: Casting an eye across the region and assessing a number of factors, such as relative managed connectivityand IT spend, its not surprising that the UAE and KSA markets are attracting most of the attention.


6/12

6

Global push factors are drivingincreased competition:1) New non-traditiona l players are

arriving: The arrival of IP networks hasallowed non-telecom service providers

to offer network independent productsand services that can be delivereddirectly to customers as illustrated byover-the-top offerings from Google,

Microsoft and Yahoo.

2) Existing players in pursuit ofgrowth: IT integrators, equipmentmanufacturers and global Telcos areall looking for new revenue growthopportunities. Traditional IT growth

has slowed across North Africa andEurope to around 5-6% whilst thelarge global telcos continue to struggle

against increasing competition, voice-over-IP erosion and mobile substitutionin their domestic markets. Many ofthese global players are now focusing

on the Middle East for growth

Exhibit 5: IP is enabling the opening up of the value chain

Example: KSA

opportunities, thereby increasing

awareness and publicity.

From the Consumer perspective,Internet take up has historically beenlimited due to high prices, poor qualityand a lack of Arabic content. This isstarting to change as competitionincreases and alternative accesstechnologies stimulate demand throughadditional devices such as laptopcomputers and PDAs.

A lack of compelling local contenthas, in part, been the result of acomparatively low level of privateinvestment as evidenced by $1.6bnof private equity investment intechnology/communications/mediacompared to $2.3bn in real estate. 2 However, this is potentially starting tochange with a number of large playersrumored to be developing syndicatedcontent plays.

2 (ABQ Zawya Ltd Private Equity Monitor 2007)

Source: IDC and Delta Partners analysis; 1 Non-exhaustive


7/12

7

Where should operatorsfocus from a products andservices perspective?

The region remains relatively immature in termsof Enterprise connectivity services.

Many countries still have reasonablylow broadband penetration, partially

due to relatively slow liberalisationin some markets. Even in the moredeveloped markets, there is a lack offull carrier grade offerings e.g. manyoperators are not able to provide basicQuality of Service (QoS) for MPLS orpoint-to-point Ethernet connections.

Operators need to get the basics right first and foremost On the assumption that competition

will increase in time, the initialpriorities for most operators shouldcentre on:

1) Get the basics right: Such as

delivering quality of service to secure

the connectivity heartland. Whilst

many incumbents continue to enjoy

privileged last-mile access, this will

inevitably change in time through

increased competition, alternative

access technologies and wholesale

line rental regulation.

2) Drive Internet take-up: Drive the

uptake of connectivity and Internet

services, particularly in the SMB

market, thereby creating a foundation

layer of customers to whom

additional products and services can

be sold.

3) Establish simple managed

connectivity propositions: Such as

managed IP-VPN, managed securityand managed Wide Area Networks

(WAN) to develop internal skills

through lower risk propositions.

In time, Enterprise Voice over IP (VoIP)

may be significant due to the high

volume of green-field business parks

coupled with the concerted efforts of

hardware and software manufacturers

(such as Cisco) to push office in a

box type solutions at more acceptableprice points.

Beyond this, operators need to decidehow far down the value chain they

should proceed There is no single approach and theanswer will depend on the relativeopportunity, competitive marketand ambition of the organization.However, as we highlight later, theICT market requires new capabilitiesand operators will find it increasinglychallenging the further they moveaway from their connectivity heartlandtowards IT services. Many Europeanoperators have attempted to moveinto the systems integration (SI) andbusiness process outsourcing (BPO)markets too quickly, burning theirfingers in the process.


8/12

8

Which customer segmentshould operators prioritise?One of the key questions many executives areasking is which segment should we focus on?

Whilst the volume of Small MediumBusiness (SMB) companies outweighthose within the large Enterprisesegment (as highlighted - Exhibit 6)the more sizable revenue opportunitylies within the latter. As an example,approximately 67% of the 2008 KSAICT managed services spend is estimatedto reside within the large Enterprisesegment.

There exists two main clusters:

a) Local enterprises growing quicklyand looking to expand (in some cases,internationally).

b) Arrival of global conglomeratessuch as Reuters and Goldman Sachsseeking a local presence.

Its the latter who are perceived to becatching the attention of big globalplayers (such as Orange BusinessServices and BT Global Services) butthey too see the opportunity of growthwithin the local ecosystem.

The SMB segment is interesting dueto the volume of businesses andpotential for some of them to growinto large enterprises with moresophisticated needs. However, itsalso a very challenging segment toserve profitability due to the need for

a sufficiently strong touch point acrossa high volume group. Even withinthe more mature markets, operatorshave struggled to serve this segmentsuccessfully.

Initial priority for most operators should be on the large Enterprise segment For the more sizable operators, itmakes sense to prioritize the largeEnterprise segment from a threat andan opportunity perspective. However,parallel focus should also be applied todriving internet penetration in the SMBsector, thereby creating a foundationlayer for future products and services.

SMB offerings should be highly standardised For smaller operators with apredominant SMB/Consumer customerbase, an ICT proposition might still makesense although it is imperative to focuson one-to-many standardised offerings(e.g. software-as-a-service).

Incumbents should focus heavily on theGovernment sector In terms of verticals, the key sectorsare likely to be Government, FinancialServices and Oil and Gas.

Incumbents continue to enjoy aprivileged position with Governmentsthrough continued ownership orthrough informal relationships. As such,theyre extremely well positioned totake advantage of such opportunities asprime contractors and should thereforeprioritize Government as a key sector.However, given the intense publicexposure these programmes oftenhave, incumbents need to ensure they

have the sufficient capability to executeaccordingly. Failure to do so couldtarnish their brand and inhibit theirability to win future work.

Exhibit 6: Number of SMB and Large Enterprises by Country


9/12

9

What capabilities arerequired?So where should operators start? Wevetouched on the characteristics of the industryand the ensuing challenges, but one of the keyquestions surrounds building capability.

Its all about solutions not productsFrom a people perspective, operatorsneed to ensure they have access toresources that understand whatsrequired to win and deliver managedservices contracts. The market demandsa consultative and solutions-styleapproach and rewards trusted advisorsthat demonstrate an understandingof the clients problem, rather than aone-size fits all strategy. From a skillsperspective two of the most importantelements which operators frequentlyfail to give sufficient prioritization areprogamme management and partner

management. These are important sincethey act as the glue that keeps the manymoving parts together.

Partnering is difficult to get right and not a panacea for all illsWhilst partnering with anotherorganization can provide muchneeded skills quickly, there areinevitable challenges that require activemanagement, including channel conflict(and lack of trust) and ambiguity overresponsibilities, resulting in finger-pointing and contractual dispute whenthings go wrong. Whilst cooperatingmodels and prime/sub contracts canminimize potential fallout, there willinevitably be shades of grey that requirecareful management and resolution.

Changing the culture is the biggest challenge change the people or change the people

A cultural transformation is requiredin terms of mindset and behaviour,requiring a shift from the relative

bureaucratic and regimented approachof the traditional operator towards amore agile and entrepreneurial outlookof a service provider. A key considerationis a realignment of performancemanagement and incentives. Toofrequently, the sales team is rewardedon sales order value (SOV) which resultsin prioritization of revenue over marginand closure of deals the organizationcannot realistically deliver. To changebehavior and culture is the hardestchallenge of all and takes time. Anacquisition can help expedite thisprocess although only if managed

effectively.

Resist the temptation to over-engineer every solution The principal issue is the industryhasnt yet fully matured from a processperspective, and as such, many providers(including the experienced ones)have not industrialized their sales anddelivery cycle or established the rightbalance between standardization andpersonalization. The implication is anoverly high cost-to-serve.

As an industry, the telecoms sectorstill lags behind other industries (suchas manufacturing and retail) from acustomer-centricity perspective andwhilst incumbents are very adept atindustrializing the creation and deliveryof standard products (such as ATM andframe relay) they struggle to translatethe same characteristic into managed

services. Part of the answer lies in thehighly automated nature of the formerwhen compared to the latter.


10/12

10

The implication is that managedservices contracts are often overengineered and too bespoke, ratherthan relying on standardized andreusable components, with a layer ofappropriate personalization on top.Its not that highly bespoke solutions

are wrong, they are fine for complexsituations where the client recognizesthe complexity and is willing to pay thepremium. However, a high proportionof clients require far more standardizedsolutions and only willing to paycommodity prices.

So what? - What strategiesshould local operators adopt?

The ICT opportunity is significant and all operatorsneed to have a clear strategy for how they respond toit. Given the variation in competitive dynamics, marketopportunity and regulation across the region, there isnta one-size-fits-all strategy.

The situation for the incumbent is,as always, different to that of thechallenger. For some incumbents, the

relative lack of competition at theaccess layer affords an opportunity toexpand down the value chain towardsIT services without the immediatethreat of traditional connectivitydisintermediation. Alternative accesstechnologies are less effective forEnterprise services whilst digging newducts for independent fiber accesstakes time (although the Data ServiceProviders (DSPs) are progressing

with increasing speed within KSA).The implication is that some localincumbents can benefit from theopportunity of the ICT revolutionwithout necessarily experiencingan immediate threat, especiallywhen compared to their westerncounterparts. This will however,inevitably change in time.

For those incumbents facing intensifying

competition, they need to respondquickly to avoid heavy losses oftraditional revenues.

The key question for incumbents istherefore when and how?

1) Should they pro-actively expandinto ICT services in advance of thecompetitive threat?

2) How should they establish therequired capability?

There are probably two strategic optionsfrom a When perspective:

a. A largely reactive strategy that

focuses on expanding into ICTservices once the competitive threatbecomes significant. A number ofincumbents appear to be adoptingthis strategy, although not alwaysconsciously.

b. A pro-active strategy that focuseson building a compelling ICT offeringin advance of the competitive threatto get in early and drive the industry.


11/12

11

Exhibit 7: Operator Strategies for the ICT Market

There are two principal approaches froma How perspective:

Approach 1: Tactical defender strategy.A tactical defender strategy has theprincipal objective of protecting coreconnectivity revenues i.e. buildingan ICT offering to protect traditionalrevenues with less focus on generatingnew ICT net income.

Such an approach is unlikely to warrantsignificant investment and is appropriatefor those operators with insufficientscale to make the economics workfor an expansive play. Instead, suchoperators should focus on partneringwith experienced players, enteringinto consortia deals as the primecontractor, leveraging their local brandand relationships. In this instance, theoperator maintains its core connectivity

revenues and presents itself to themarket as an ICT player, yet allows theexperienced solutions players to takeon the more complex elements. Giventhe size of the operator, it makes senseto limit the expansion down the valuechain to avoid the more challenging andscale-based IT services end. Naturally,the operator might expand its own rolein time.

Incumbents opting for this approach arelikely to be smaller operators, potentiallyoperating in a duopolistic market and/

or with heavily Consumer centric focus.It is likely (yet not always the case) thatthe more reactive operators will adoptthis approach.

Approach 2: Aggressive Market-Maker strategy. This strategy has theprincipal objective of both protectingtraditional revenues and generatingincremental ICT net income. Such anapproach is likely to be adopted by

larger incumbents with both scale anda sizeable corporate customer base,seeking to establish a market leadingposition that can contribute positiveshareholder returns. They will also viewan attack as the best form of defence.

Such players are likely to have themeans to warrant a more adventurousexpansion down the value chain,potentially including data centre and

application management, with a viewof eventually building on-demandcomputing offerings in line with theirwestern counterparts. However, ashighlighted earlier, the IT end of thevalue chain presents many pitfalls foroperators and should be approachedwith great caution. It is likely (yet notalways the case) that the proactiveoperators will adopt this approach.

The key question is how to establishthe capabilities to execute this strategysuccessfully. Partnering can provide

short-term skills but unlikely to providelong-term sustainable capability ifthe objective is to generate bottomline contribution (i.e. partnering ispredominantly pass-though revenuewith little margin).

The second option is an acquisition ofan experienced player. This could addcapability quickly and help catalyze thecultural shift although the challenge

comes from identifying a suitable targetand managing the integration. Dueto the nascent state of the market,its unlikely to be populated with aproliferation of experienced players,rendering a local acquisition possiblebut challenging.

The third option is a transformationprogramme focused on building internalcapabilities across the three principal

dimensions (e.g. process, people andsystems). Such a programme can buildsustainable capability although requirestime, investment and prolonged seniormanagement dedication and focus.

These options are by no means mutuallyexclusive and the likely answer is ablend of all three, with the emphasisdependent on the specific aspiration andmarket conditions.

Not likely


12/12

12

ConclusionThe Enterprise segment offers operators a new wave of

growth in the face of a maturing Consumer business.The ICT market is reaching a tipping point in a numberof countries presenting operators with significantopportunities to augment their top line. Irrespective of the adopted strategy, operators needto ensure they approach the ICT market with aclear understanding of the challenges and pitfalls.Fundamentally, its a different type of business to

traditional telecoms, requiring a shift in culture,

capabilities and focus.

Operators should therefore filter the facts from thehype and consider their approach carefully. This is nota one-size-fits-all market and only some operators willcreate positive shareholder value. As such, operatorsshould stand back and consider their options beforethey proceed.

Delta Partners is the leading integrated management advisory and investment firm specialized in the Telecoms, Media and Technology

(TMT) sector in high growth markets, with more than 100 professionals operating across the Middle East and Africa from i ts offices

in Dubai and Johannesburg, and through its three highly synergetic business lines:

Advisory: Delta Partners, as the largest advisory team specialized in telecoms in the Middle East and Africa, operates in more than

25 markets in the region, partnering with C-Level executives in telecom operators, vendors and other TMT players to help them

address their most challenging strategic issues in a fast-growing and liberalizing market environment.

Private Equity: As a fund manager, Delta Partners manages a $75M private equity fund, targeting investment opportunities in the

TMT space in the Middle East and North Africa. Delta Partners private equity business unit leverages the Groups unique TMT industry

expertise to create value for its investors throughout each stage of the investment cycle, from deal sourcing, to opportunity analysis,

and support to portfolio companies.

Corporate Finance: Delta Partners provides corporate finance services and has been involved in several tel ecom transactions in the

region. As true industry specialists, the firm offers a differentiated value proposition to investors and industry players in the region,

either to the seller or buyer side of the transaction. Delta Partners actively leverages its close link to Delta Partners private equity arm

to access the investor community as well as top-level financial talent.

At Delta Partners we deliver tangible results to clients and investors through an exclusive sector focus, and a unique approach to

services, combining strategic advice and hands-on pragmatic approach.

The Rise of the Enterprise - October 2008

Documents

Transcript of The Rise of the Enterprise - October 2008