The managed services trend is currently sweeping through every sector of the telecom industry. Let's hope we get it right this time.

A large corporation outsources management of IT and communications applications to a service provider. A mobile carrier signs a contract to have its primary equipment vendor take over responsibility for managing its network. Another carrier chooses a third party to host and manage a new application it wants to offer. An equipment manufacturer calls on another firm to design and produce its next product family. Device-makers and carriers hire distributors to configure and deliver all the handsets ordered from their online stores.

These examples are all seemingly unrelated, everyday business arrangements in the telecom industry, but each is an example of one important and increasingly popular trend. Providing managed services to customers is seen as the key, in an exceedingly competitive and price-sensitive world, to building longer, stronger, more rewarding business relationships. It's not hard to imagine why. A provider of managed services delivers something much bigger than a single sale of a particular product; the provider delivers responsibility. The buyer of managed services benefits from outsourcing responsibilities by being able to focus its energies elsewhere, on whatever it considers its core business. It sounds like an economic arrangement that benefits both parties.

The concept of managed services is really nothing new. Telcos have been trying to sell managed services to corporate enterprises for more than 10 years, and IT firms like IBM and EDS have been at it even longer.

“You have to follow the money,” said Jim Zucco, who was an executive at AT&T Global Solutions in the mid-1990s. “We were losing business to IBM and EDS, and that's why we launched [managed services].”

Zucco is now chairman and CEO of Corente, a firm that provides a managed software and services platform to carriers and corporate enterprises.

This time around, the managed services economy is again wooing telcos with promises of new enterprise revenue, and for them, the market for managed services is now more competitive than ever. Traditional long-distance companies have seen their once-core business erode under pressure from local telcos expanding into their business, as well as voice-over-IP (VoIP) operators. Meanwhile, technologies such as Wi-Fi and mobile push e-mail have begun to stretch the borders of the corporate enterprise. The variety of devices — desktop PCs, laptops, VoIP phones, mobile phones, PDAs — has increased, along with the applications and software platforms to which they are linked. For service providers, landing a multi-year managed services contract means both broad responsibility and influence, and it can be the antidote to the price erosion and commoditization that has hit telecom so hard.

“The benefits to a service provider aren't completely in the revenue,” said Mitch Ferro, Broadwing's senior director of product management for Internet and managed services. “The benefit is you are building a broader, longer-term relationship to that customer. The more you can work with them to provide a solution that really meets their business needs, the more important you will become to that customer over time.”

Still, to a board of directors, a crew usually more pragmatic than romantic, relationships mean about as much as the real revenue they produce. Ferro acknowledged that proving the bottom-line value of managed services isn't exactly a straightforward exercise.

“It's less about what the price of a service is, and more about the overall package,” he said. “It's a challenge to quantify the revenue. At Broadwing, we look at everything, including the ‘pull-through’ revenue. That means, for example, the revenue that could be gained not only from providing managed services to one customer, but managing all the devices at the hundreds of remote sites that customer owns.”

Although determining the revenue to be gained for selling managed services is not as easy as looking at the sale price, determining the real cost of providing managed services isn't any more straightforward. Much of the cost of providing a communications service is in the equipment that is involved in delivering it — the switches and other network gear, as well as the customer premises equipment (CPE) provided, in many cases, by the service provider. The capital cost of putting in a new switch is weighed against the potential revenue return from services. Likewise, CPE such as DSL and cable modems must be able to pay for themselves — and the broadband services they support weren't really a hit with carriers or users until they were able to do that.

“‘Big iron’ is the capital cost of providing a pure network service,” Ferro said. “With managed services, some of the cost is on the human resources side and elsewhere. It's not necessarily a higher cost. It's just different where the cost is being placed.” Broadwing also spreads some of the cost around to the partner companies that helped it provide specific services and applications under the managed services umbrella.

Other sectors of the telecom industry are seeing the same sort of shift. Mobile vendor giant Ericsson has won several high-profile deals to manage networks or applications for its carrier customers. Many of the deals call for Ericsson's Global Services unit to shift some of its 18,000 worldwide employees to customer sites in the field, according to Hans Vestberg, vice president of the unit, who described the company's approach to managed network services in a recent interview with Telephony.

Ultimately, the vendor hopes to prove itself as a “trusted adviser and partner” to the carrier. If the relationship leads to the carrier purchasing more network equipment from Ericsson, there's an added benefit, but Vestberg said the company isn't in the managed services business for that reason.

Lance Wilson, an analyst with ABI Research who recently completed a report on the managed network services trend in the wireless industry, said that providing managed network services for carriers is a matter of course for traditional equipment vendors that are “realizing that the hardware portion of this market is declining. But there is money to be made in the transition. Nobody makes much money upfront, but it makes sense over time,” he said. “Is management of the network a core business issue to carriers? Well, it turns out that it's not.”

But managed network offerings from vendors and managed service offerings from carriers still raise economic questions. With a variety of costs, including a fluctuating cost like human resources involved, it might seem difficult to determine the profit margin for managed services. A quick look at the public financial reports of about a dozen of the largest telecom service providers was telling for what it didn't tell. None of them break out revenue results or profit margins for managed services, despite the status of “managed services” as one of the industry's current buzz phrases.

Broadwing is among the carriers that don't separately state revenue derived from managed services in its financial reports, but Ferro added that the costs involved in providing managed services don't necessarily lead to low margins and, in some cases, bring higher margins than other services.

“It's a growing part of our business, and an important part of how we'll grow revenue on our converged network,” he said.

However, Corente's Zucco has firsthand experience of how difficult it can be for carriers to make money in the managed services business. At AT&T in the 1990s, “Managed services was a loss leader for bandwidth contracts,” Zucco said. “A lot of the contracts we had by year two or three were losing money.” He cautioned that in the past, telcos have approached managed services with a labor-intensive business model that proved costly and took them out of the comfort zone of their more traditional asset-based business model — operating networks.

“If you think about the instrument that telecom revolves around, it's a black phone,” Zucco said. “It's an asset-based model, and carriers want to continue to be in the asset-based business. About 40% of total IT budgets is spent configuring and re-configuring things. Telcos need to buy into more automation and less labor for managed services to work. Their destiny is really to manage the applications — and telephony on the [public network] is a hosted application.”

One of the areas of managed services in which the benefit of automation may be most easily realized is managed security services. With the enterprise IT environment becoming increasingly complex — and an array of wireless technologies and mobile devices creating the opportunity for new types of security threats — “enterprise customers have begun wanting carriers to offer fine-grained protection services,” said Danny McPherson, chief scientist at Arbor Networks, a company that provides managed security software to service providers for their managed services offerings.

Ferro said Broadwing sees managed security services in particular as one of “the hot points in managed services right now. With the number and variety of devices out there, it's getting more complex, and a customer can turn over management of that instead of having all those piece-parts to manage themselves.”

But Zucco said that ultimately the process of providing managed services must be refined to be sure that there is a clear and overwhelming argument why a customer can't do without the managed service a provider wants to deliver.

“Managed service providers are still saying, ‘let me manage a little bit better what you can already manage yourself,’” Zucco said. “That's not going to work. We need to look at the process and how we apply computing and telecom technology. It's about the productivity of the user and how you bring simplification and integration in to improve their productivity.”

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