Ericsson Extends Its Network Outsourcing Footprint to the U.S. with Landmark Sprint Deal

| Jul 13, 2009 | Telecom Infrastructure Services | Competitive Intelligence Report

| Analyst: John Marcus

Current Perspective: Positive
Vendor Importance: High
Market Impact: Very High

Event Summary

July 9, 2009 –- Ericsson has been awarded a comprehensive, long-term network outsourcing contract by Sprint worth $4.5 billion. Sprint retains full ownership and control of its networks and will continue to make all strategic decisions. The seven-year agreement is designed to deliver operational efficiencies for Sprint while further expanding Ericsson's network services business in North America. The transaction calls for 6,000 Sprint employees to transfer to Ericsson in Q3 2009.

Analytical Summary

• Current Perspective: Positive on Ericsson’s announcement that it has won a seven-year network outsourcing contract with Sprint despite some concerns, because the landmark deal represents a coup for the network equipment and services provider in more ways than one. Sprint is one of the largest carriers in North America, but Ericsson has previously had little to no traction in the account as a supplier. The deal is also, by far, the largest and most lucrative (in terms of top-line revenues) managed services engagement in the industry so far. This must be particularly satisfying to Ericsson due to the fact that it and its peers have been looking for years to drive managed services business in the large, top-heavy North American market, but with little uptake. For Ericsson and other vendors such as Alcatel-Lucent (ALU) and Nokia Siemens Networks (NSN), this event could represent a tipping point. With this deal, concerns remain for Ericsson in terms of execution, near-term profitability, and change management.

• Vendor Importance: High to Ericsson, and very high to its Ericsson Global Services business unit, because an outsourcing agreement of this scale—involving the transfer of 6,000 Sprint employees—in many ways resembles a significant merger or acquisition, changing and expanding the fabric of its internal structure while making a significant business and financial impact. To be sure, any customer win is very important to any company. But a deal worth between $4.5 and 5 billion over a seven-year period comes with risks as well as upsides. While contract negotiations went on for a significant length of time, winning the deal is the easy part. In order to capitalize on the upside it has projected, Ericsson must now deliver on an extremely challenging promise to both its shareholders and its likely skeptical new employees.

• Market Impact: Very high on the managed services segment of the telecom infrastructure services market, because deals and contracts are where competitors differentiate themselves in managed services, and this is the largest deal in the industry, to date. Like its European counterpart Ericsson, NSN’s services business has targeted the North American market in an entrepreneurial fashion, given its lack of deep traction in major carriers there. Its outsourcing deal with Embarq announced last year was a regional first, and showed that non-incumbent vendors could succeed with this model, but it has now been dwarfed by Ericsson’s win at Sprint. North America-based telecom-vendors have, somewhat curiously, announced relatively few deals at home in the broader managed services segment, despite pushing into this space in developing markets. With Sprint either “biting the bullet” or taking the strategic initiative, depending on one’s viewpoint of outsourcing, it is likely we will see other carriers in the region follow suit, despite residual cultural resistance to the model in the U.S., especially. Ericsson, ALU and NSN are best positioned to capitalize when they do.

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

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Recommended Competitor Actions

• Nokia Siemens Networks should consider its entrepreneurial approach to the services market in North America validated by proxy, with the awarding of such a large services deal to a non-incumbent supplier. It can also point out its own successes in the region so far, including its outsourcing deal struck last year with the formerly Sprint-owned Embarq, for wireline managed NOC services. On the mobile side, NSN’s profile in the U.S. will increase with its acquisition of Nortel’s CDMA assets, potentially creating even more opportunities for its services business.

• Alcatel-Lucent should evaluate its position as a leader in multi-vendor services, given Ericsson’s success in landing a deal involving multiple vendors and multiple technologies, including ALU and Motorola CDMA gear. Although it has also been successful in managed services to date, unlike NSN and Ericsson it can’t point to a significant customer in the former Lucent’s backyard yet. It should take note of Ericsson’s success in pitching methodoogies and experience over specific skills to win in a vendor-neutral environment.

• Other vendors with existing managed services businesses or future ambitions should re-evaluate their approaches to the North American market. Motorola could find it a challenge to translate its experience in largely new networks to its old guard carrier customers in North America, but those long-standing relationships are under threat in an uncertain environment for equipment spending. Newcomers such as Huawei and ZTE should closely monitor Ericsson’s recipe for success and continue to build up their track record globally before pushing too hard into the U.S. and Canada with large-scale outsourcing offers.

Recommended End User / Customer Actions

• In the absence of tangible “features and functions,” operators considering an outsourcing service provider like Ericsson should engage its existing customers for in-depth references regarding true cost savings and network operational efficiencies delivered. Ericsson can provide the references, based on its previous 100+ contracts, most of which are still ongoing.

• North American operators should take another look at Ericsson as a potential supplier for managed services, including both network outsourcing as well as service hosting. Ericsson has deep experience in the latter with several lucrative, long-term engagements for content and messaging application hosting, and now it can also demonstrate imminent success in the former following the Sprint announcement. Ericsson is clearly in the market for the long haul, and should be viewed as a Tier 1 supplier.

• Mobile operators in North America should investigate what made Ericsson attractive to one of their peers, ahead of incumbent technology suppliers such as Alcatel-Lucent. They may find that functional strengths trump technology heritage. They may also find that having a different vendor manage another supplier’s equipment is a wise hedge against potentially self-serving network partners.

• Operators should monitor the Ericsson/Sprint engagement to see how progress is made in a large-scale outsourcing deal involving multiple networks and functions awarded to a single supplier. In the early period of the market, operators would out-task a discrete function or process, and use multiple suppliers to assess their strengths as well as encourage competition. The Sprint deal is one of only a few outsourcing deals with such a comprehensive purview, and with responsibility for multiple networks assigned to a single player.

CLIENTS ONLY

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