New major deals in Services
This development can be seen at Ericsson in the marked increase in discussions with customers about outsourcing. The 2008 revenue target that Hans Vestberg had set for the services operations at the 2003 GMC was SEK 70 billion; the final result was SEK 70.5 billion. When the figures for the second quarter of 2009 were released, services accounted for 38 percent of Ericsson’s sales.
Valter D’Avino, newly appointed head of outsourcing at Ericsson, said in an interview in spring 2009: “Mobile operators have been able to charge customers high prices and so in many cases they have been operating inefficiently … The operators feel pressure from the market. Their shareholders waste no time in pointing out that growth is slowing down and demand cost-cutting.”
Also in early 2009, Ericsson signed a contract with Vodafone on outsourcing network operations in the UK for seven years. “This is a very important and strategic order. Vodafone is an institution in this sector and they are opting to outsource on their own doorstep,” D’Avino says.
In July 2009, another seven-year contract was announced: Ericsson was to take over responsibility for the operation and maintenance of US operator Sprint’s fixed-line and mobile networks, for the equivalent of just under SEK 40 billion. Sprint had about 49 million subscribers.
Analyst Helena Nordman-Knutson observes: “This is a very large deal and it is interesting that it went to Ericsson and not to Alcatel-Lucent, for instance.”
Also during 2009, Ericsson completed yet another record upgrade, this time of Vodafone Essar’s network in India, and established its managed services model in Africa through a contract with operator Zain in Nigeria.
Does this mean that the operators are beginning to view Ericsson as a competitor?
Svanberg responds: “Operations and outsourcing are not about us or the customer. Only a few of the hundreds of contracts we have involve doing everything for the operator. For instance, Deutsche Telekom lets us manage transmission and Vodafone wants us to deal with spare parts. The core business is different for different operators.”
Vestberg adds: “We have built something in services that did not exist before.”
JUST THE BEGINNING
Hans Vestberg’s successor as head of Global Services, Jan Frykhammar, says major growth is still possible.
“In global terms the market for services is estimated to be something like USD 200 billion each year. Today one-third of this is managed by vendors, two-thirds by the operators themselves. In the long run, the proportion should be the other way round. The more infrastructure sold, the greater the need for services,” he says.
Service companies are labor-intensive. In 2003, just under 10,000 of Ericsson’s employees were working with services; in 2009 the figure exceeded 37,000. In collaborating with Sprint alone, Ericsson took on more than 6,000 employees.
In 2009 there were about 350 million subscribers in networks managed by Ericsson; the company provides year-round customer support to operators with more than a billion subscribers.
Taking on so many new people with different backgrounds and skills naturally makes its own special demands. One major challenge has been to create a shared culture in the operations that have been outsourced to Ericsson, D’Avino says: “This is a journey. We have made mistakes – after all we were pioneers. We set up this area from scratch and now it is changing Ericsson’s DNA.”
Frykhammar sees a special strength in Ericsson’s long experience of the sector and the way it works with human resources, culture and communication. “We would never have been able to take on a contract like Sprint without the mix of global and local expertise we have developed.”
Managed services in particular have long and complex sales cycles. It can take a year or more to land a contract, and it needs input from many different employees. A major sales project may have a staff of 50 from different sections of the organization, Frykhammar says.
“Know-how about how to roll out a network, customer support, system integration, consultancy, managed services, the ability to create shared methods, tools and processes, local and global expertise, endurance, team spirit, a close relationship with the customer, and understanding of different cultures and approaches are success factors, and the combination is difficult to replicate,” he says.
Author: Svenolof Karlsson & Anders Lugn