Telecom points to more IT deals after Alcatel

By Rob Hosking

Friday 16th November 2001

ANYTHING GOES: Theresa Gattung

Telecom's impending deal with Alcatel for developing the carrier's fixed-line networks show that last year's deal with EDS to manage its IT was not a one-off.

The company has quietly adopted a strategy of concentrating on the customer end of its business and moving management and maintenance of its networks to other specialist companies.

"We, some time ago, adopted the position where Telecom is moving its operational focus to what we call the customer service management layer," Telecom's group general manager network, Simon Moutter, said.

"That means, increasingly, that the task of managing the network and the network elements - the lowest layer, the boxes in each particularly network - will be managed by the vendors who supply that network."

The company also has taken a similar approach with its recent appointment of Ericsson to take over running the existing cellphone network.

Telecom's move to concentrate on customer service management was one other carriers around the world were beginning to adopt, chief executive Theresa Gattung said.

"I think people underestimate the complexity involved in running the network and the ability to transition [networks] to the next generation.

"The theory that you line six vendors up, put them in a room and get the best price and terms is fine. But once you end up with lots of vendors, you end up with lots of operational support system complexity. We believe that in order to make this transition, which has to be integrated at the front and back end, we need to have a sort of committed relationship with EDS on one side and a network vendor on the other."

While such deals have been criticised as locking the company into one supplier and reducing the amount of contestability available for specific contracts, the company does not see it that way.

There were fewer opportunities for such contestability than many people believe, Mr Moutter said.

"When you build a new network, perhaps - and a good recent example is the mobile CDMA network - you get a point of contestability. But once it is provided by that vendor you continue to work with them for the life of that network.

"The similarity is with our NEC switching network - that commitment was made 20 years ago and that decision was the point of contestability. Since then we've always worked with NEC."

The closest precedent to the Alcatel deal was the outsourcing of IT management to EDS, Ms Gattung said.

"We had the same issue then - do you put all your eggs in one basket? That has worked well and we can demonstrate we have saved costs in IT through doing it."

Those costs were part of Telecom's good news for markets this week, as it announced its first-quarter result.

The cost of sales, particularly in mobile services, was identified before the announcement by analysts as one of the key areas Telecom had to show some progress.

Mobile cost of sales was a big positive in the result: a drop of nearly 20%, meaning the gross margin for mobile sales rose 17.5%. This area has been a focus of major concern by investors in telecommunications companies worldwide, and Telecom's good performance in that area is a major factor in this post-result lift in the share price.

Elsewhere, the cost of sales for the New Zealand landline rose by 0.8%, or $1 million, and internet cost of sales rose just over 15.4%, or $4 million.

However, the international part of Telecom's business - which includes the company's new Australian division - showed a 26% increase of $72 million.

"We are not satisfied with the margins from Australia, and we're going to be concentrating on those," Ms Gattung said.

The company is also scaling back its capital spending plans for the year, dropping them back from a budgeted $1.1 billion to $900 million.

That cutback is due to the post-September 11 world economic environment but is also due to the telecommunications sector being firmly in the dog-box with investors - especially telcos with large capital spending programmes.

The planned Australian capital expenditure was "almost entirely discretionary," Ms Gattung said, and the company was reassessing the return on investment for its planned roll out of infrastructure.

"We have already spent less in the first quarter than we intended.

"But we're not going to do a massive clawback."

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