Make it happen – Strategies for reducing costs

This is an extract from our recent report Cloud & Automation: Changing CSPs’ outlook. Download it now for the full insight into how CSPs have been cutting costs up to now, why new technology will impact costs in the future, and more.

It will become increasingly difficult for communications service providers (CSPs) to reduce costs through departmental budget cuts, especially when many large telcos have already made steep cuts. They must embrace new technologies like cloud, automation, machine learning and AI to reduce OpEx further – and impress existing and potential investors. Following are recommendations to help CSPs reduce costs as part of their efforts to transform digitally:

Think long term

When CSPs plan their investments in new technology, they typically think of a three-year return on investment (ROI). But if they are to benefit from public cloud services, they will need to take a longer-term view. Once operators have migrated applications and workloads to the public cloud, they no longer need to budget for new hardware because it is the public cloud provider that incurs the hardware costs. Cloud native software suppliers generally ask operators to measure five-year ROI rather than three.

Embrace automation

Executives in CSPs’ technology organizations are comfortable talking about automation, but it is not well understood within the investor community. For example, there is little understanding about the different levels of automation, the relationships between automation, AI and cloud, and the potential business impact of increasing automation. CSPs need to be able to explain these relationships to investors and why benefits will increase as they progress through the different levels of automation. Operators also must be able to explain why 5G and edge computing require automation.

Change CapEx to OpEx

When operators move network and IT workloads to the cloud, they will necessarily incur OpEx. Many of the CSP executives we interviewed recognize that it can be more difficult to secure budget for costs that are categorized as OpEx rather than CapEx, for which there are well established approaches and principles. This is because CSPs and their investors use EBITDA margins as a preferred key performance indicator. This could dissuade CSPs from using public cloud services, causing them to miss out on key benefits such as flexibility, scalability and the ability to experiment and innovate with more confidence. To overcome such obstacles, CSPs should build compelling, holistic business cases for cloud migration that demonstrate clear savings across combined CapEx and OpEx categories.

Cut costs to lift revenue

To build new lines of revenue, CSPs will need to invest in new systems and platforms to deliver new services, but this is only part of the story. When it comes to delivering IoT connectivity, for example, operators must lower their own costs to enable them to reduce their prices to their customers. IoT ARPU has fallen dramatically in recent years. On average, IoT is generating less than $0.50 per month in connectivity revenues. If operators want IoT connectivity to be profitable, they use to need new technologies and capabilities such as cloud native components and automation to radically alter their cost base.

Eliminate silos

CSPs have lot of legacy systems and processes. Over many years they have become siloed organizations with different cultures, vendor relationships and varying levels of digital maturity. If operators are to modernize technologies, architectures and working practices they must work across the silos. This means adopting a common culture, finding ways of overcoming technology fragmentation and introducing common targets and goals. This will require the adoption of new governance structures, more cross-departmental roles and teams and a reorientation of the whole organization towards the customer.

Adopt standards

One way to reduce silos and increase automation is to use an open architecture such as the TM Forum Open Digital Architecture, part of the Open Digital Framework (see page 39). The ODA is a component-based approach which enables CSPs to evolve to a fully automated, cloud native operations environment that relies on analytics and AI to deliver zero-touch services. It defines standardized, interoperable software components organized into loosely coupled domains. These components expose business services through Open APIs which are built on a common data model. The ODA offers a blueprint for evolving from legacy support systems to applications that are cloud based and cloud native, but widespread agreement, collaboration and contribution among many CSPs and vendors is necessary to advance it. To find out how you can get involved, please contact Ian Turkington.