Download the related report Time to kill the RFP? Reinventing IT procurement for the 2020s: Volume 1 and 2.
Communications service providers (CSPs) spend hundreds of billions of dollars annually procuring technology. Market research firm Ovum estimates that CSP spending on capital expenditure (CapEx) in 2019 will total $327 billion, and analysts at investment bank Credit Suisse forecast that CapEx spending on wireless networks alone will total $176 billion in 2019. A reasonable assumption would be that 90% of this spending is on networks and 5% on IT.
There is less data – and fewer forecasts – available on operating expenditure (OpEx). However, as a general rule of thumb, CSP OpEx is three times as high as CapEx, which would mean that operators are spending about $1 trillion annually on OpEx. In 2017 Norwegian CSP Telenor provided a breakdown of its OpEx, stating that 14% was accounted for by operations and maintenance. If we were to apply this proportion globally, it would mean that CSPs spend more than $140 billion a year on operations and maintenance.
So, between CapEx and OpEx, CSPs are spending more than $450 billion a year on network, IT, operations and maintenance.
Spending on IT
When it comes to CapEx and OpEx spending on IT specifically, CSPs and analysts often suggest it’s about 5% of total operator revenue. Ovum estimates that fixed and mobile operators’ total revenue in 2019 will be about $1.8 trillion, which would put spending on IT at about $90 billion a year.
Drilling down a bit further into procurement of IT systems by CSPs, Ovum estimates that the telecoms IT software market will be worth $15.5 billion to vendors in 2019, while Analysys Mason forecasts that total spending on “customer experience systems” by telecoms operators will total $71 billion from 2018 to 2023.
This equals roughly $14 billion a year, although most market forecasters expect spending to grow by low- to mid-single digits over the period.
Suppliers’ costs
CSPs aren’t the only ones that incur procurement costs. Costs to suppliers can be quantified by calculating how many people are involved and how much time is spent responding to and engaging in the request for information (RFI), request for proposal (RFP) and request for quote (RFQ) processes (see Section 2).
The CSPs and suppliers interviewed stressed repeatedly that the time involved in writing, responding to and presenting documentation would be better spent demonstrating how vendors’ solutions can help CSPs address specific business and technology challenges and opportunities.
We surveyed vendor participants in the report asking them to estimate the cost to their businesses of participating in RFI, RFP and RFQ processes, and their answers ranged from 1% to 10% of total revenue. If we were to take an average – say, 5% – and apply it to Ovum’s estimate for the size of the telco IT procurement business in 2019, this would put the cost at $750 million for suppliers.
Analyzing CSPs’ costs
Analyzing the overall cost of procurement to CSPs is more complex because it includes not only measurable costs like staff but also hidden costs like the effects of bad decision-making and missed opportunities.
We estimate that there are more than 10,000 employees working for central procurement teams around the world.
However, only a small percentage of them – perhaps 5% – are dedicated to IT procurement. The cost of employing those people is fairly easy to measure by multiplying the average salary for a procurement director ($60,000 in the US, according to Glassdoor) by 500, which equals $30 million.
The costs of bad decision-making are likely much higher but difficult to measure. Indeed, one of the major criticisms of the RFP process is lack of visibility of the full costs over the contract period. This is because of the high volume of change requests.
Some CSPs interviewed said that some of their project costs have overrun by 100% to 200%. This can arise when capabilities are left out of the initial contract and treated as change requests later on in order to make the business case work. Or it can be because strategic priorities change over the course of a five-year contract and the business decides to change direction or even to abandon a project entirely.
Hidden costs can result from things like late delivery of new customer experience capabilities or a new business support system (BSS) and could be measured in terms of their impact on customer experience or missed revenues from new services.
Another hidden cost is the missed opportunity of leveraging the most valuable and innovative technologies and solutions at any given time because the RFP process has not enabled the CSP to make the most informed choice.
Finally, there is a real risk that the telco IT market could become less competitive. Some companies could fail while others spend less on research and development because of the high costs of competing in a market where the relationship between vendors and CSPs is deteriorating. Contractual terms are becoming more onerous as CSPs seek to protect their interests, and the RFP process continues to impose a tax on the industry.
Many of the suppliers interviewed said that they may have to become more selective in the RFPs they respond to and that they likely will seek new ways of engaging with operators, either by building relationships directly with specific lines of business or changing their product portfolios to be able to bypass the RFP process altogether.
More than $1 billion
Estimating the cost of CSPs’ poor procurement decisions is difficult. However, given the high incidence of failed transformation projects and the prevalence of procurement and contractual processes that put the onus on CSPs to specify requirements seven or eight years before they are implemented (a two-year RFP process plus a five-year contract), it is not at all unreasonable to assume that the cost is at least as high as and very likely much higher than the $750 million a year price tag for suppliers.
This means that we can confidently state that current IT procurement practices are costing the telecoms industry well in excess of $1 billion per year.
Mark Newman, TM Forum
