Enterprise Cloud: Clear blue skies ahead?

Enterprise Cloud: Clear blue skies ahead?

The Delta Perspective
Authors Christophe Meunier - Partner - cme@deltapartnersgroup.com
Gunish Chawla - Principal - gc@deltapartnersgroup.com
Rick Zhen - Manager - rz@deltapartnersgroup.com
 
overview
 
Globally, telecom operators have been facing slowing growth in their traditional revenue streams. Fixed operators have faced stagnant or declining traditional revenues, typically due to a combination of mobile substitution, VoIP migration and a steep reduction in bandwidth pricing. Mobile operators are still enjoying top-line growth largely driven by mobile data, though growth momentum has slowed notably in certain markets.
 
As a result, telecom operators are increasingly tapping into new revenue streams, with the IT market representing an attractive opportunity given its large size and growth momentum. Within the IT market, enterprise cloud represents a unique opportunity for telecom operators. Both telecom and cloud IT businesses employ a highly-centralised delivery model, which relies on scalable core infrastructure and wide-reaching networks to operate. Since operators typically excel in such asset-heavy and centralised delivery businesses, they are well positioned to compete in the cloud space, as compared to other premise-based IT markets.
 
In this white paper, we explore the enterprise cloud opportunity for telecom operators, the key challenges in an operator‘s cloud journey and the key success factors that an operator needs to consider for a successful cloud launch.
 

How is enterprise cloud defined?

The definition of enterprise cloud computing is ever-broadening, with operators, vendors and researchers adopting varying definitions. For the purpose of this white paper, enterprise cloud computing refers to standard cloud services including IaaS, PaaS and SaaS, while excluding the broader cloud definitions such as software defined networking, big data analytics or online advertising (Exhibit 1).


 

What is the enterprise cloud opportunity for telecom operators?

Globally, fixed operators have been facing stagnant or declining traditional revenues, typically due to a combination of mobile substitution, VoIP migration and a steep reduction in bandwidth pricing. Mobile operators are still enjoying top-line growth largely driven by mobile data, though growth momentum has slowed notably in certain markets. For telecom operators, the IT market represents an attractive opportunity given its large size and healthy growth (Exhibit 2).
 
However, despite this vast market size and healthy growth, the IT market presents some challenges to most telecoms operators. This is largely due to the very different nature of the IT business as compared to the traditional telecom business. IT businesses are either about making hardware and software for consumers and enterprises (e.g. Cisco, Microsoft), or delivering professional services to enterprise customers (e.g. Accenture, IBM). The former requires strong research and development capabilities, while the latter requires advanced professional IT services skills, managed in a cost effective way.



Therefore, enterprise cloud represents a unique opportunity for operators to participate in the IT market. As illustrated in Exhibit 3, both telecom and cloud IT businesses employ a highly-centralised delivery model, which naturally relies on scalable core infrastructure and wide-reaching networks to operate. Since operators typically excel in such asset-heavy and centralised delivery businesses, they are well positioned to compete in the cloud space, as compared to other premise-based IT markets. Cloud also offers synergies with operators‘ core connectivity businesses as it will drivebandwidth consumption. As cloud computing rapidly grows from a US$65 billion market today into a US$100 billion market by 20161, it should clearly be considered as a critical pillar of telecom operators’ enterprise IT strategies.


What are the key challenges in launching enterprise cloud services? How can telecom operators tackle this?

Challenge #1: Value chain positioning
 
Telecom operators entering the cloud space often face the strategic challenge of where to play in the large and complex cloud computing value chain.
While the answer may vary depending on the context of the operator, it generally requires a systematic decision making process.
 
As a first step, telecom operators need to understand the overall value chain and the economics linked with each value chain component. As illustrated in Exhibit 4, the cloud value chain consists of four main components:
 
  • Cloud product development:
Covers the research, development and production of software and hardware, including the virtualisation-enabled servers and storage, as well as the various cloud-based software applications. This part of the value chain commands more than half of the total cloud revenue, with very attractive margins. However, like any R&D-centric business, this is also a highly-volatile business with high barriers to entry and operating risks.


  • Data centre hosting: Covers the integration of cloud-enabled software and hardware into enterprise-ready services, and hosting of such services in carriergrade data centres. This is an asset-heavy and capex-intensive business which typically enjoys healthy margins, but requires large data centre assets and upfront investment in cloud servers andapplications
  • Sales and distribution: Covers the marketing, sales and distribution of cloud services. In order to introduce cloud to any enterprise customer, significant marketing and sales efforts need to be undertaken to create customer awareness, and push cloud across various online and offline distribution channels. Like any distribution businesses, the typical value-add and margin levels are significantly lower than product development or hosting. However, the entry barriers are often lower for telecom operators, as most of them have existing enterprise sales channels
  • Implementation and services: Covers the end-to-end cloud professional services that assist customers to migrate to, implement and run cloud services. Typical services scope may include consulting, deployment and managed services. This is a professional service business which typically has lower margins, though corporate customers often expect their cloud service providers to be able to offer such services as part of the telecom operators’ overall cloud proposition
     
After understanding and assessing the cloud value chain, the second step requires telecom operators to identify a suitable entry approach that they can pursue (Exhibit 5):
 
  • Option 1 - Value-added reseller: Telecom operators do not own or host any cloud offers. They simply resell existing cloud offers hosted by vendors. Operators create additional value by providing billing, deployment or customer support

  • Option 2 - Cloud-enablement provider: Telecom operators provide all the services of valueadded resellers, plus the data centre environment, cloud hardware and provisioning platforms
  • Option 3 - End-to-end cloud player:  Telecom operators provide all the services of cloud-enablement providers, and also own the research and development of certain cloud services
 
Clearly, each option represents very different capability and asset requirements with different underlying economics (Exhibit 6).
 
  • Option 1 provides the easiest way to enter the cloud business, as telecom operators may make use of existing sales channels and service teams with limited additional investment
  • Option 2 requires operators to acquire data centre facilities and cloud hosting hardware, in addition to the key enablement platforms that allow the provisioning of third-party cloud solutions. As such, operators will need to bear the risks of colocation space, cloud hardware and platform investment. These are however limited by the fact that operators may make use of existing data centre space, and adopt a “build-as-we-grow“ approach towards cloud hardware
  • Option 3 will require operators to take a more active role in cloud product development, either in the form of direct R&D investment, or the setup of funding vehicles to build a vibrant local cloud product market. Clearly, this option is even more risky, given that the investment is R&D-driven
 
As telecom operators fully understand the trade-offs of different entry options, a final step is to develop a decision framework that provides clear guidance on the best option, based on a set of external and internal decision criteria. As per exhibit 7, these criteria fall under two broad categories: market maturity and internal capabilities.



 
Market maturity refers to the availability of ecosystem players (which could be potential partners or competitors depending on the entry strategy) along the value chain. Internal capabilities include a combination of capital, infrastructure and skills.
 
Where the market is at a very early stage and the operator has very limited exposure to the enterprise sector, it is probably too risky to enter the cloud market. Operators may instead start to focus on addressing enterprise customers‘ basic connectivity and data needs. By comparison, in a mature cloud market where operators already have strong enterprise sales reach, a value-added reseller role (option 1) may be the most feasible entry point. For example, mobile-centric operator MTN launched a cloud application store to resell top SaaS and IaaS products, as the first step of its cloud journey.
 
If an operator already has substantial data centre assets and IT expertise, or is well funded and can therefore develop the required capabilities, it needs to consider the level of market maturity to determine its entry strategy:
 
  • If the operator’s local cloud market is mature with a good mix of international and local product providers available, operators may focus on being a cloud enablement player, in order to best make use of its infrastructure assets while avoiding the risks associated with developing new cloud services from scratch
  • Only if operators are convinced that popular international cloud products cannot fully address the local market needs (due to factors such as limited choice, high pricing, lack of local features, etc.), they may consider getting involved in an end-to-end play to incubate the local cloud market. For example, when SingTel started its cloud initiative in 2008, it had to launch a cloud incubation platform to attract developers to build a comprehensive local cloud application portfolio

Challenge #2: Product portfolio mix

Clear value chain positioning is only the first step of a telecom operator’s cloud journey. Another key challenge that operators face is how to develop a compelling portfolio of cloud products amongst an increasing amount of applications.
 
While different markets may require different applications, a segmented approach is often required towards portfolio development.
 
As shown in Exhibit 8, mid-tolarge corporate customers, typically defined as 500 employees and above, require very different IT products and features when compared to their SME peers which range from 10-499 employees. SME customers typically have very limited ICT budgets and knowledge, which make them most value low-cost and easy-touse products. In contrast, corporate customers often have sufficient budget and skills, and therefore instead focus on the service and experience (availability, performance, security and customisation), in order to support their stringent business requirements. While cloud has blurred the distinction by allowing SMEs to access enterprise grade features and availability, SMEs’ ICT budgets and capabilities dictate that they are still best served by highly standardised, low-cost solutions with low skill requirements.
 
The cloud portfolio for the two segments needs to accurately reflect the differentiated needs of each one. The SME portfolio needs to be comprehensive so that it is possible to address most of the IT needs of SME customers with a “one-stop-shop” approach. Such a portfolio may include a mixture of mainstream and long tail IaaS and SaaS services, and an assortment of premium international and low-cost local brands, packaged in an “application store” model where SMEs can shop for applications in a similar manner to how consumers do so on their smartphones.
 
To serve corporate customers with cloud products, operators need to master the end-to-end delivery and servicing of the selected product portfolio to ensure excellent customer experience. For example, to deploy cloud-based ERP solutions, operators need to build a specialised professional services team who are highly experienced in both cloud and non-cloud ERP deployments, so that they will be able to help their corporate clients integrate cloud solutions seamlessly with any legacy on-premise solutions.


 
Clear value chain positioning is only the first step of a telecom operator’s cloud journey. Another key challenge that operators face is how to develop a compelling portfolio of cloud products amongst an increasing amount of applications.
Developing such delivery skills for any corporate product will take substantial time and resources. As such, operators need to focus on a set of core cloud portfolio products and avoid including too many which they cannot master. Benchmarks also suggest that leading operators typically start with cloud services that best make use of their infrastructure advantages, such as IaaS and Unified Communications-as-aservice (UCaaS).
 
In the following section, two case studies are presented as typical examples of highly-segmented cloud product portfolios.
 
As illustrated in Exhibit 9, both SingTel and Deutsche Telekom have built comprehensive product portfolios to cover a wide range of SME needs,while opting for a highly-focused approach towards certain corporate cloud services.
 
Both SingTel and Deutsche Telekom work with a variety of ISVs (Independent Software Vendors) to enrich their SME portfolio. As part of their corporate portfolio, SingTel picked its strength in data centre and network security to offer IaaS and security cloud services. Deutsche Telekom made use of its infrastructure and network assets to offer IaaS andUCaaS (Unified Communications as a Service). In addition, its subsidiary T-Systems has already developed deep SAP expertise as one of the leading SAP consulting providers. Deutsche Telekom was therefore able to launch SAP cloud services given its experience in SAP consulting.


 
Challenge #3: Go-to-market capability development
 
Launching a cloud service is a highly complex initiative, which will often require operators to develop significant new capabilities. Based on Delta Partners’ experience in supporting cloud launch initiatives across various markets, we have identified five key areas that operators need to focus on for their capability development (Exhibit 10).
 
  1. Infrastructure: Solid data centre and connectivity
 
Cloud services will require two key infrastructure  elements to operate– a data centre and connectivity. A non-telecom player may choose to lease data centre space and rely on customers’ own connectivity to reach their customers. Nevertheless, an operator with both the assets may enjoy a lower operating cost structure, while maintaining a high level of control over the end-to-end customer experience.
 
For example, even though Google and Amazon’s data centres can achieve a high degree of availability, they typically do not control the communication link between their data centres and the customers’ premises. In contrast, an operator with good connectivity infrastructure may offer customers such end-to-end availability assurance. Such end to- end performance assurance will be a key differentiator in the
corporate market, as they havevery low tolerance for availability and performance issues. “Single SLA“ may also serve as an effective argument to cross-sell operators‘ core connectivity services together with cloud services.
 
For mobile operators without well-established data centre and connectivity businesses, the cloud entry may provide a good opportunity to extract additional value from infrastructure assets, such as fibre backbones and network data centres


 
For example, many mobile operators have witnessed a drastic reduction in the size of their network equipment, which allows them to host their cloud infrastructure in their spare datacentre space. As they build up national fibre backbone, they may also make use of this to offer customers competitive enterprise connectivity solutions, bundled with cloud offers.
 

2. Platforms: An adaptive and expandable cloud platform architecture

Operator cloud platforms (Exhibit 11) will need to be very flexible to support a variety of cloud products and value chain options. For example, operators may decide to use the value-added reseller option for selected applications, while using the hosting service provider option for other cloud applications. In such cases, the provisioning and metering platforms will need to support both in-house hosted solutions, and vendor-hosted (e.g. Google Apps) solutions. In order to support such a complex setup “cloud brokerage” platform is often required.
 
Such platforms may come with a large portfolio of pre-integrated cloud applications that operators can plug-and-play into their application stores. Most of the brokerage platforms also significantly simplify the process of integrating in-house hosted or developed applications into the brokerage platform, through standard APIs (Application Programming Interfaces).
 
Having said that, even with third-party brokerage platforms, operators still need to integrate the cloud systems with their existing IT systems, such as enterprise customer portals andbilling engines. Such integration requires full collaboration amongthe brokerage platform providers, the operators’ system integrators and the operators’ IT/telecomequipment vendors. Due to the inherent complexities, it is critical that operators set up dedicated project management teams to ensure successful execution.


 
3. People: A highly-skilled cloud Team
 
In order to manage the cloud launch process effectively, and depending on the chosen market entry option, operators need to build a “core team” of dedicated resources with at least four types of key profiles (Exhibit 12):
 
Cloud product managers: Cloud product managers are responsible for understanding enterprise customers’ requirements, and converting such requirements into a compelling cloud product portfolio. The product managers also need to define the roadmap and corresponding business case at a product level, in line with the market situation and the organisation’s internal capabilities
Cloud architects: Cloud architects are responsible for translating the various cloud product requirements into a technical design that is integral to the operator’s overarching IT architecture.As such, the architects need to possess in-depth understanding of both telecom IT infrastructure,as well as a wide range of IaaS, PaaS and SaaS cloud platforms
Operation specialists: Operators may need to hire new IT specialists or train their IT staff to operate thevarious cloud platforms that they plan to deploy as part of the cloud architecture. Operators may often make use of vendors to provide such resources
– Deployment consultants: As many corporate customers are still at the early stages of cloud adoption, cloud service providers are expected to provide customers with comprehensive migration services, from high-level IT strategy assessments to detailed cloud implementation roadmaps. Deployment consultants allow operators to effectively compete with more-established system integrators in the cloudmarket


4. Processes:  A set of well-defined cloud operating processes
 
As the cloud systems become more complex and automated, the importance of proper processes, a clear responsibility matrix and strong governance cannot beoverstated. While operators may be able to reuse or enhancecertain existing processes, it may be necessary to define new processes or revamp existing ones to adapt to the new IT environment (Exhibit 13):
 
- Product development and sales: re-use or enhance existing processes for these two activities, since both involve limited interaction with the cloud platforms
– Operation, provisioning, billing, integration and support: define new processes to adapt to the new, automated cloud platforms. For example, provisioning will no longer be done through manual configuration but instead directly through a web portal. This will eliminate certain manual procedures. However, this may also blur the responsibilities between customers, provisioning teams and cloud platform operation teams, making it necessary to set up clear governance models and policies.



In defining the operating processes, operators also need to be comprehensive in covering various value chain scenarios and go-to-market / customer service channels. For example, a product hosted and managed by a partner may require a very different customer service process, as compared to a product which is hosted or owned by the operator.
5. Channels: 
A strong channel strategy to push cloud services to corporates and SMEs Last but not least, self-provisioning is not equal to self-selling. In order to drive cloud products, successful internet players have invested significantly in their cloud marketing and sales efforts. For example, in 2013, Salesforce.com spent two-third of its total operating expenses on marketingand sales, compared to one six thin research and development.
 
Operators are no exception. To bring cloud to their corporate and SME customers, operators need to effectively make use of their existing internal and partner channels. One key challenge that many operators face is incentivising their corporate sales teams to sell cloud services as opposed to other, typically more profitable or easier-tosell enterprise communications products. Similarly, its SME channel partners may prioritise basic data and voice products, as opposed to less-proven cloud products.
 
In order to set the right incentives for its sales team and channel partners, operators may consider approaches such as setting up dedicated KPIs for cloud sales, or allocating a higher commission percentage to cloud products. Operators may also need to explore new dedicated sales channels such as online IT resellers, or direct online marketing to reach more web-savvy enterprise customers.
 
With all the additional incentives and new sales channels, operators may find it very challenging to profit from cloud sales, particularly in the SME market where unit revenues are very low while cost of sales can  be quite high. This is why a successful sales strategy entails getting a foot in the door then cost-effectively cross-selling once the SME customers are on the platform, or in the market place.
 

Conclusion

In conclusion, as the cloud space grows rapidly, it is set to become a critical part of a telecom operator’s strategy. The enterprise cloud space can provide telecom operators with a crucial platform to unlock additional value by making use of their strong infrastructure assets.
 
However, in launching cloud services, telecom operators need to systematically address a few key challenges: determining the right value chain positioning based on market reality and internal capabilities; developing a highly segmented, compelling product portfolio to address corporate and SME customers, and; acquiring key go-to-market capabilities across infrastructure, platforms, people,
processes and channels.
 
Telecom operators are well positioned to compete in the cloud space – but need to take a proactive approach by defining their enterprise cloud strategy.

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Delta Partners - TMD Advisory and Investment