Spread the risk and renegotiate contracts

What can network managers do to ensure they get the best price/performance?

What can network managers do to ensure they get the best price/performance?

It has been a tumultuous time for telecoms providers. Although the number of suppliers going to the wall has slowed to a trickle, it is worth asking what the outlook is for network service providers (NSPs) and what precautions user companies need to take.

For many larger enterprises, uncertainty in the telecoms industry and the general economic downturn could not have occurred at a worse time. The pressure to produce faster and sell cheaper translates into a strategy to buy the most cost-optimal networks and services.

Although IT investment was high in 1999-2001, the distorted economic picture changed the investment/return equation before companies could start reaping the benefits of their newly acquired assets.

More recently, after waiting in vain for telecoms competition to herald a new dawn, IT managers have had to endure an array of bankruptcies among NSPs. But is this period over? Will there be more economic failure and if so, how do IT managers deal with it?

In the relative market positions of NSPs in Western Europe, the incumbents are still in good shape in revenue terms with market shares of 50% to 70% or more, depending on service and geography. However, the picture is quite different for the next layer of NSPs. There are many operators and service providers with market shares of between 5% and 20%.

Gartner's stance on regulatory matters is that market stability requires the existence of a few strong competitors, rather than many smaller ones. This indicates that while the top tier of NSPs has consolidated, there are still mergers, acquisitions and, sadly, insolvencies in store for the smaller operators.

That is not to say that enterprises served only by ex-incumbents will enjoy stable, improving service contracts. There is, of course, significant fiscal discipline to rein in debt. The impact of these exercises on service levels should not be discounted.

The bottom line advice Gartner has been dispensing to its enterprise clients is that a single-NSP strategy is too risky for most businesses. Spreading the risk and contingency planning should be imperative for IT managers.

Read your contract

As the NSP market has shrunk, network buyers will have noticed a resistance to continued flexibility on price and other terms. Surviving suppliers will be less keen to be as accommodating as they were at the height of competition.

So before the market consolidates further, enterprises should look to renegotiate their contracts as soon as possible.

One area where this is essential is contingency planning for critical services. A refusal to renegotiate should count unfavourably towards renewal, but companies should actively seek alternative NSPs for any new or uncommitted business.

What are the alternatives?

If the so-called alternative NSPs are unlikely to survive in their current shape, where else should IT managers be looking?

Many medium-sized and large businesses are looking to professional services providers and the emerging breed of network aggregators. IBM, Computer Sciences Corp and EDS are some that merit attention, although they may only consider network management and/or outsourcing within a larger portfolio of services, rather than offering standalone connectivity or voice services.

The professional and managed network services arms of incumbent telcos have also been actively courting business, although they may or may not support network services from other operators. Companies such as Vanco in Europe, which provides a combination of managed network services and IT services, is a likely candidate.

Pricing for the future

Some of Gartner's recent research indicates that large enterprises with complex networks covering multiple sites served by multiyear contracts could explore negotiating forward pricing clauses. To do this, companies need to forecast their use of bandwidth and network services over the duration of their contracts and look at the most likely price trend to be reflected in the NSP's offering.

These are likely to be protracted negotiations attractive to only the largest customers. But it does address the uncertain state of the telecoms environment as well as providing the relatively future-proof strategy of taking advantage of the longevity of a contract, and the IT manager's imperative for the most cost-optimal network.

Bhawani Shankar is principal analyst at Gartner

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