Sprint sends for Ericsson

Jan Dawson/Ovum
14 Jul 2009

Equipment vendors offering network outsourcing and management services have long struggled to convince the US carriers of the merits of this model, since they have always believed that managing networks was a core competency and source of differentiation.

Many of the early wins in other parts of the world were with smaller carriers - either alternative operators or incumbents in smaller countries - but recently vendors have started signing more deals with larger incumbents such as BT, Deutsche Telekom, Vodafone and the Hutchison Group. The Sprint deal represents the continuation of that trend but is also a major breakthrough as the first major deal in the US.

Sprint was in some ways the ideal candidate for the first US win: it suffers from a lack of scale against its major competitors in both wireless and wireline, it needs to cut costs and improve margins more than the others, and it has a complex set of three networks to manage. All three problems are solved to some extent by outsourcing the day-to-day network to Ericsson.

Significant cost savings should follow, even though Sprint will be paying over $4.5 billion over the seven years of the contract. That represents just over $100,000 per year for each of the 6,000 employees to be transferred, which suggests there could be significant savings overall (Sprint has refused to quantify these savings publicly).

What's interesting is that Sprint says it plans to plough most of these savings back into the business rather than allowing them to filter through to the bottom line.

The timeline for implementing the deal is very aggressive - the companies plan to transfer those 6,000 employees within the next three months, which is an enormous and complex undertaking. At the same time, Ericsson will have to create and ramp up an entirely new entity, Ericsson Services Inc., to deal with its first major US business in this area.

All of this is no mean feat, not least because Ericsson is taking on not just one but three separate networks with multiple different technologies, including iDEN, with which it has very little experience. Governance is always crucial to the success of any such deal, but very tight management will be absolutely crucial in the first few months to ensure a smooth transition and minimal disruption for customers.

Under Alca-Lu's nose
One of the most surprising aspects of the deal is that it was Ericsson, rather than Alcatel-Lucent, which won it. Though Alcatel-Lucent and one other vendor were part of the bidding process, Sprint selected Ericsson for three main reasons: transparency about its model and the associated financial implications for Ericsson; excellent references from existing customers (some of which Sprint visited in person); and the relative productization of its offering made possible by many previous deals.

Ericsson's relatively weak position in the US generally and Alcatel-Lucent's position as a US-based competitor with significant existing business with Sprint make the win all the more impressive.

Alcatel-Lucent points out that it is still a major supplier to Sprint in several other areas, and is emphasizing transformation and legacy migration services over pure "outsourcing" agreements going forward.

In addition, of course, such contracts - like all outsourcing contracts - tend to be unprofitable for the first several years, and a contract of this size could have a significant negative impact on a vendor's overall financial performance over that time.

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