Sensing the growing commoditization of its PC product line and looking to turn around the company’s losses in the mid-90s, IBM supremo Lou Gerstner decided to develop deeper, longer-term relationships with its clients by expanding its services business beyond routine maintenance work into an organization that provides impartial advice to clients on their IT strategy and supports kit manufactured by its rivals.
IBM Global Services has grown from representing 29% of the group’s total revenue in 1998 to 49% in the fourth quarter of 2005, after IBM pulled out of PC manufacturing earlier in the year. An estimated 40% of the servers supporting IBM customers in its data centers are non-IBM boxes, and companies such as Lucent, Avaya, and Nortel are keen to follow this lead into becoming genuine multi-vendor services operations.
Per Kristiansson, director of strategy at Lucent Worldwide Services EMEA, and a former IBM and CSC executive, told Computer Business Review: If you look at what telecoms equipment vendors are doing in services, it is like what IT products manufacturers were doing 15 years ago. . . It is not unusual for IBM to support Hewlett-Packard hardware today, but this business [network services] is more traditional and conservative than I thought it was. The maturity of the industry towards services is happening slower than it did in IT. We are currently where IBM was back in 1996.
Lucent Worldwide Services has more than 10,000 employees providing maintenance, deployment, and network transformation services such as professional and managed services. Kristiansson said: Services is going to be one of our fastest-growing areas. This is being partly driven by commoditization in some product areas, caused by competition from Huawei and ZTE. . . Operators and service providers are moving away from the traditional network topology to something closer to the IT world, where systems and network integration services are required to make it work.
Lucent’s services revenue declined 1.5% to $540m in its first fiscal quarter ending December 31, 2005, but Kristiansson expects increasing demand for managed services and multi-vendor equipment maintenance to reverse this trend. We see some traction for multi-vendor maintenance and services and we are making sure that we have the right skills to run Avaya or Cisco products in order to provide an end-to-end service for our clients, he said. Service providers have hundreds of maintenance contracts, which is not economical as they migrate towards a single network. They are looking for someone to maintain that network and provide them with a single service level.
Lucent’s key product rivals, including Avaya, Nortel, and Cisco, as well as Nordic giants Ericsson and Nokia, have all made expansion in services a priority. Avaya Global Services’ revenue reached $1.97bn in its financial year ending September 30, 2005, with an additional $637m in sales from rental and managed services. Avaya boosted its services delivery capability in December 2004 through the acquisition of German network integrator Tenovis for $370m, and now has 2,800 services staff based in Europe. Dave Millet, EMEA business development director at Avaya, said: We have a large direct services workforce in Europe, and are strong in the contact center services. A high proportion of our services business is driven by VoIP.
Nortel Networks agrees that the network infrastructure services market is developing in the same way as the IT services sector did in the mid-90s. The company sells managed services, integration, optimization, and security services under the Nortel Global Services banner, and employs about a third of its 30,000 workforce in the division.
Curt Hopkins, head of Global Services business development Europe at Nortel, said the company will make a major services-related announcement later this month. We see services as a very substantial growth area, he said. Our CEO Mike Zafirovski said on an investors call last month that the company currently makes less than 20% of its $9.8bn annual sales from services and applications, and said that sales from these areas should be between 50% to 100% higher.
Cisco is the only one of the four major American networking products vendors not to have established a separate Global Services division, but chief executive John Chambers has dropped recent hints about building up the company’s consulting, services, and software activities. Cisco must tread carefully in its services expansion as it currently passes on a lot of services work to partners such as IBM Global Services and Hewlett-Packard.
John Leigh, head of outsourcing at BT Global Services, believes that the equipment manufacturers will have to take a selective approach to services if they are to reap any significant profits. He said: Every product manufacturer is attracted to services because of the recurring revenue streams on offer from annuity contracts. But what they don’t always realize is that 90% of services work has a profit margin of around 6% to 9% which is well below what they make on product sales.
The current signs are that the telecoms product companies can reap healthy margins in services. Avaya Global Services made an operating profit margin of 10.2% in its most recent fiscal quarter, compared to a margin of 6.5% in its products business. Lucent’s services operation made a solid operating profit margin of 16.5% in the quarter ending December 2005, ahead of a level of 11% in its network solutions division, although it was well behind the 33.5% margin of its core mobility access and applications unit.
Managed services are one area that has been earmarked for growth by all the major comms equipment manufacturers. Avaya won a five-year global contract last year with financial services company ABN AMRO to support its migration to IP telephony across 14 countries. Avaya is supplying mobility, messaging, and contact center applications, supported by Avaya managed services.
Nortel Networks is targeting business with multinational clients as well as telecoms carriers, having won more than 100 managed services deals to date. It has contracts with clients such as Cable & Wireless and BellSouth to roll out and maintain their long-distance networks, and last year extended a contract for another six years with automotive systems manufacturing company Johnson Controls which will see Nortel continue to manage the client’s telephony network.
Hopkins said that clients already entrust managed services contracts to support equipment manufactured by their rivals, in the same way that IT services companies such as IBM Global Services and HP Services operate multi-vendor equipment. He said: Around 60% of the elements in the 100 networks we are running are non-Nortel products. The client doesn’t care whether it’s an Ericsson, Lucent, or Nortel switch – the technology behind it is not important, it is the way you deliver it.
This article is from the CBROnline archive: some formatting and images may not be present.
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