1 network privatisation: The trend for the future

Europmn Management Journal Volume 6 No 1 0 European Management Iournai 1987 ISBN 0263-2373 $3.00

Make or Buy: Telecommunications and the European Business Market

1 Network Privatisation: The Trend for the Future

Nick White

Head, Group Telecommunications and Technology Services, Midland Bank Group, UK

2 Make or Buy: Solutions to a Complex Problem

John F. Wilson

General Director, EDS Communications International

At the recent Financial Times Conference on Telecommunications and the European Business Market: the Perspectives for Change, two of the contributors examined the question of whether companies should “make” their own private telecommunications network, or “buy” a publicly-offered service.

The topic is not only interesting as a case study of “make or buy”, but is especially timely in the specific field of telecommunications in Europe. In June 1987, the European Commission issued its Green Paper on telecommunications liberalisation and rationalisation of Europe’s equipment manufacturers. Current difficulties include national regulatory powers, cross subsidies, lack of common standards, and lack of agreement on standards, frequencies and tariff principles. Not least, rapid changes in the technology itself has turned telecommunications into a strategic competitive asset for companies.

The two authors of these articles argue from slightly different perspectives; White as a major user developing into a provider, and Wilson as an adviser and provider. Both are convinced that the make or buy decision is an over-simplification; there are other, intermediate, options. Both agree that which ever decision is taken, it is likely to be the most important one in information technology that companies make in the next few years.

1. Nick White: Network Privatisation

Introduction

To make or to buy, that is the question. Companies are now faced with a new decision, where previously they did not even realise they had a problem. The newly-liberalised telecommunications environment has created options for Information Technology Directors and Strategic Planners that did not exist

five years ago. The question used to be whether public network facilities were adequate for a company’s needs, or whether for cost or functional reasons an in-house private network was justified. The original motivation was cost-saving through leased lines, but the cost of running networks was sometimes underestimated, or the functional and control benefits of an in-house facility were over- looked.

74 NICK WHITE and JOHN F. WILSON

When a network is a strategic asset affecting company performance, even increased costs for private facilities are worthwhile. Now a new option is possible: a private network, but run as a service on the company’s behalf for a third party. This has the potential of combining the best of both worlds: reduced costs through the principles of wholesale, but no management burden of responsibility for the network.

This article examines the background to the new three-dimensional choice, and the role of Value Added and Data Services (VADS). It describes how Midland Bank Group has positioned itself to take advantage of all three options, and act as a provider of the third option as a commercial undertaking.

Background

The last ten years have seen a remarkable change in the role of telecommunications. It used to be a utility, sold as a commodity acting principally as a service function, with responsibilities segregated for voice, data and telex. Now it is a strategic competitive asset, adding value to the business and IT functions of an organisation, and is co-ordinated across all types of transmission medium and application. This change has occurred for a variety of reasons, not least the convergence and integration of computing and telecommunications, accelerated by the emer- gence of digital technology for transmission.

Telecommunications linked to computing is an indispensable tool for the modem business, and is a determinant (almost a prerequisite) of success, especially in 11111 - International Interactive Informa- tion-Intensive Industries - such as finance, travel, retail and manufacturing. In this environment, private networks have emerged to overcome the functional constraints of public telecommunications facilities, and to control costs. The need for manage- ability, control, and differentiation in terms of performance, quality and reaction time, in all areas of telecommunications, from maintenance and service management to provision of facilities, requires Service Level Agreements of a very tailored and individual nature. This is hard to achieve, and indeed to justify achieving at very high quality, within the context of a public administration, a private mass market company, or a large public network operator.

Telecommunications within Europe needed competition to redress the unfavourable cost comparisons

which are so vividly illustrated by tariffs for leased lines within Europe, viewed in the context of similar length circuits in the United States. Although it is accepted that there are legitimate reasons which partly contribute to this, such as volume of business, geography, and the consequent lack of justification for the presence of satellites.

The United Kingdom initiative for the liberalisation of telecommunications has enabled new system functions to be supported, which would not be possible at all under monopolistic rules that prohibit any form of resale, distributed switching, or effective interconnectivity of networks.

Co-operative communities and trade associations which are not subsidiaries of an individual group of companies cannot operate in the modern business world without these functions, and they therefore require the so-called “value-added” or added value, telecommunications facilities.

Despite this, it should be noted that private networks were well established long before liberalisation, partly driven by cost economies, and partly for reasons of control. It was in this environment that suppliers who were evolving products, for example, for network management and packet switching, needed a rapidly growing market to justify their investments in ever increasing complexity and sophistication. They needed liberalisation. Midland Bank Group realised that in both the finance and travel industries, information about the product is at least as important as the product itself, and consequently better networking means better banking and better travel services. In order to provide the acceptable face of communications in the electronic banking and on-line travel environment, the Group had to maintain direct control over its own networking facilities. Having established that control with its corporate network, MIDNET, it took the strategic step of deciding to gain more value from the activity, by selling the benefits of its technical lead, in the areas of payments, travel, and networking technology.

This philosophy is not universally applicable, partly because there are huge skills shortages in a field where experience is in short supply, and proven track records of success are a scarce commodity. Major public telecommunications operators require significant capital investment to satisfy existing network users, and most manage technical uncer- tainty, volatility, volume of traffic, and conflicts of business priority simultaneously.

The new aifernufi~es

The choice between establishing a private network and using public telecommunications facilities has been made wider by the introduction of third party network operators; the ‘value added’ providers. This has already changed the technical and political map of telecommunications in the United Kingdom and the United States, and is gradually occurring in other countries as well.

The question for the user is which of the three options is best, and as a subsidiary question, whether there can be a gradual process of migration from one to the other. If one particular option is chosen, and there is a range of potential suppliers, the user is faced with a second stage of the dilemma; whether he is qualified and equipped to make the choice.

The concept of a virtual private network, or “facilities management”, is a good one, which is here to stay, meeting a real market need. The prospective customer must satisfy himself that the service is good enough, permanent enough, and secure enough. He must also be sure that the customer/supplier relationship can adequately reflect business management priorities and required reaction times to operational problems, and that it will continue to be affordable in the long term.

It is fairly easy to identify certain specialist areas where third party networks wiil always meet a need, and can therefore exist as a complementary facility to private and public facilities. Examples of this are SWIFT and Reuters in the financial area and SITA and TRAVICOM in the travel area.

The main needs of the customer in this environment are a standard form of connection to networks, and guaranteed interconnection between operators, to provide a general utility, and access to any combination of services which a customer may require, without exclusivity or lock-out.

For suppliers, differentiation must come by adding more or unique value, not just by price reduction. It can also come from variants on tariff structure, reflecting particular business profiles. This is not a market in which a commodity is being sold, where a Dutch auction approach might produce the best returns and margins. This may be so for the raw commodity of bandwidth, but even this will become questionable.

MAKE OR BUY: SOLUTIONS TO A COMPLEX PROBLEM 75

In the case of the Midland Bank Group, the unique selling characteristic which underlines its presence as a major network provider is its role as a natural provider of finance, travel and leisure services, which are universally required by all companies. There is therefore a guarantee of home-grown products to add value to the network facilities, linked to confidence in the high priority according to network security.

Organisations which operate in this field can enjoy economies of scale for their in-house network usage. Related business relationships can help to grow a customer base, but it is clear that to succeed in the long term, operators will need to be large and international to survive. There is only room for a few success stories.

The market needs providers other than ex-public administrations and computer manufacturers, both to add dimension to the field of supply, and to provide a source of base applications. The suppliers, coming from very different markets and with different economic forces bearing upon them, must find a way of interconnecting their networks without passing on double charges to the customer.

Suppliers must also work together to ensure that the market grows rapidly, through an increased aware- ness of the benefits of business to business commun- ication. This objective is being addressed in the UK in part through the Government sponsorship of the Vanguard scheme, which provides support, guid- ance and information to potential VADS users.

How fo decide?

Faced with the three choices of make, buy or use, reflecting the in-house private network, the facilities- managed third party network, and the public network, it is necessary for the network user to ask himself a number of key questions.

Does the network directly affect my business performance? Will profit margin be paid to a competitor? Can I achieve a Service Level Agreement with the parameters that matter to me, including cost, lead time, volume discount, response time, intercon- nect, barring, security and maintenance? Can I recruit and retain the people necessary to operate and develop an in-house network? What are the members of my industry peer group doing, and are they likely to change, possibly


influenced by my decision? l Do I wish to be a fast follower, an innovator or to

be cautious?

The answers to these, and other questions will influence the final choice, which may not be the same for every application within a single company.

The Midland Bank situation

The telecommunications history of the Midland Bank has many similarities to the other major clearing banks in the U.K., with the first on-line facilities appearing at the beginning of the 1970’s. In 1982, in support of a move towards greater group synergy, a Group Telecommunications function was established and a proposal for the MIDNET corporate network was approved in May 1983. In 1982, developments in Videotex in support of travel led Thomas Cook to realise that there was a market opportunity in selling a communications based service to Tour Operators and Holiday principals, which became known as TRAVINET, and registered under the VANS General Licence.

During the last four years, the Midland Bank Group has established a pre-eminence in the field of electronic payments systems, and is the major user of CHAPS, providing very powerful correspondent banking facilities and a variety of methods of on-line linkage. Services have been extended to provide Telebanking facilities.

The Group owns three computer bureaux operating throughout the UK, and runs a major factoring operation providing ledger processing facilities. On- line facilities for a number of product support areas have been developed, including insurance, cash management, credit scoring and reference, and foreign exchange purchases.

The Group decided, in 1986, to increase the emphasis and co-ordination of bureaux activities and network services, by establishing a composite subsidiary to provide Group Technology Services. The process of developing this initiative has been formalised recently, and given greater organisational status, with the appointment of a single executive accountable for both Group Telecommunications and Technology Services.

Network services were relaunched in 1986, under the brand name “FASTRAK”, and new access methods were added, including an asynchronous dial-up service, a link-up with Telecom Gold to

provide an electronic mail service, and plans for IBM support. Links within the Group have enabled other products to emerge such as Ledgerline, which provides access to factoring information.

Bureaux services are co-ordinated throughout the United Kingdom, to exploit turnkey packages on market-leading minis, for estate agents, colleges of education, health authorities, customs and excise, and unit trusts, and to provide a complete range of computer support for pay-roll.

The Group also has a wide range of other processing facilities, for example Stock Exchange, Trust, Insur- ance and Corporate Services. There is therefore wide scope for extending the base of technology products to encompass the full range of activities to the Group.

Conclusions

Network strategy has become a business decision rather than a technologist’s part-time hobby. The decision to make, use or buy a network, with systems linked to it, may be the most important IT decision a company makes for the next S-10 years. The decision is somewhat (but not entirely) irrevoc- able, and may apply to particular functions rather than a whole company.

There is perhaps a parallel to Herb Grosch’s famous law on computing power and costs, which might be christened “White’s Law of Latent Telecommunica- tion Demand”. This law states that demand for throughput and switching in a telecommunications network expands to fill the bandwidth and power available.

This was certainly true historically in polled networks, where if an improved protocol or higher speed of operation was applied, generally speaking the transaction load from each connected terminal increased to return the response time to the original level.

The supplier or suppliers chosen, for telecommunications equipment, for a managed network, or for both, need to be selected with care, and Service Level Agreements must be entirely compatible with business objectives.

It is unwise to decide purely on cost, because like many purchases you get what you pay for, and a quality network cannot be the cheapest. Public networking facilities are destined to fall in price


(their costs have already fallen), as a result of competition. Digital facility prices will fall relative to analogue, once funding the transitional period in the public networks is complete. In the longer term, telecommunications networks may have the characteristic that bandwidth is virtually free, whilst switching and concentration costs continue to escalate.

The best guide to choosing a network supplier to satisfy a company’s needs is to determine the supplier who needs to use his own products in order to survive in business, and who has the best natural value in-house to generate additional services.

The key conclusion for the whole debate in the “make or buy” question can be summed up best with the words of the slogan “Never forget you have a choice“. In telecommunications the choice, in technological and commercial terms, is wide open.

John Wilson: Solutions to a Complex Problem

The decision to make or buy a particular product or service is of concern to every business. Quite rightly, this fundamental decision should be approached through a process of rigorous analysis, performed against a backdrop of business objectives. In the field of telecommunications however, the question of make or buy is, to say the least, complex.

Even the definitions of “make” and “buy” are rather complicated when applied to telecommunication services. A pure “make” is defined as a situation where a company designs, implements and operates a private network to support it’s needs. This may, of course, include leasing of transmission capacity and buying of switching and other equipment. Pure “buy”, on the other hand, is defined as a situation where a company fills all of its telecommunications needs with publicly-offered services. As this article will point out, there are many solutions which involve a mixture of make or buy.

To examine the question of make or buy a number of factors must be considered:

First, the nature of the technology itself; it is evolving at incredible speed. Second, the demand for highly specialised skills, given the technological evolution, the skills themselves are changing so rapidly that only the most devoted communications professionals can really keep up to date. This has of course led to a severe shortage of really qualified people. Third, the regulatory environment; on the one hand, liberalisation seems to be the order of the day, on the other hand, every country has a

unique approach and set of regulations to create a nightmare for a multinational. Fourth, the diversity of vendors; each is deter- mined to lock a customer into one product line and yet avoids questions of compatibility and connectivity. Fifth, convergence; more computer companies are getting into the communications business, more communications companies into the computer business and a large number of new companies are appearing, offering whatever combination the market will bear. Sixth, the problem of standards; it frequently takes a large proportion of the life cycle of a new technology to arrive at even partially accepted standards. Finally, the fact that none of these factors can be talked about or dealt with in isolation; each is interrelated with the others, which compounds the complexity.

is important to concentrate on this compounded complexity, because understanding the nature of the problems helps to produce a methodology for answering the question of make or buy.

The first point concerns technology. Thanks largely to the dramatic advances in the development and use of the microprocessor, there are many more communications services available. Integrated voice, facsimile, telex, data, imaging and mobile networks are a fact. Satellite and optic fibres are simultaneously improving clarity and security whilst greatly expanding capacity. The engine driving these advances is of course, expanding computer technology. Vastly improved processing power and speed, coupled with miniaturisation, give much greater flexibility and reliability.

This leads to a first major strategy statement:

The communications strategy of a company must be based on data processing needs and the data processing strategy must be based on a solid communications infrastructure.

A data processing strategy which fails to consider the aspects and implications of the communications function is a strategy doomed to failure. Without communications as the corner stone, a company will quickly find its data processing fragmented - a collection of upgrades and add-ons with the accom- panying budgetary and organisational chaos.

The second point concerns organisation and the regulatory environment. For example, skills cannot be ignored. Finding the right mix of experience and expertise can be frustrating for several reasons. In a


traditional setting, the telephone system, the basis of business communications, has fallen under the aegis of a building or office services function, whilst data processing has typically been a separate group. With integration can come resistance to changing the status quo with the emphasis, again, on budget and organisation.

The second strategy statement is therefore this:

Management must be committed, from both a budget and organisational perspective, to the chosen communications infrastructure.

The regulatory environment adds to the confusion in several areas. It places special demands on multi- country operations, particularly on multi-country operations, particularly in the areas of trans-border data flow and the variations on the Data Protection Act currently in force around the world. At the same time, liberalisation and privatisation have presented, in many cases for the first time, ,competition in the market place and the increased number of options which follow. This choice implies a new responsibility in an area that has never known it.

This leads to a third strategy statement:

Every business must be prepared to devote the resources, both human and ~nancial, to urr~ving at a fhorough understa~djng of fhe ~mpl~caf~on of the environment before attempting to arrive at a make or buy decision.

The vendor and convergence elements described above have created a wide range of choices and options, all sold or leased or rented by an ever- increasing number of vendors. The combinations and permutations on offer require a very high level of analysis in order to answer the make or buy question.

Standards, or lack of them, provide a completely separate dimension. Each proposed solution must be tested for compliance with accepted standards and compatibility with other public and private networks with which the network must interface.

Ail too often assumptions are made: a classic assumption is that, given two companies in the same industry and roughly the same size, their communications requirements will be identical. What works successfully for company A can meet the requirements of company B. The reality is generally just the opposite: A’s success is B’s disaster.

Strategy statement number four is therefore: Each business must evaluate its communications requirements based solely on its own criteria.

So far this article has identified some of the complexities and defined some of the major elements that must be considered in approaching a make or buy question. This process of identification and definition is the same which any business must adopt to ensure, as far as possible, that any make or buy question is answered appropriately. In the field of telecommunications it is trite, but none the less accurate, to say that whatever works successfully for a given company is the right answer. The key point to remember is that success must be judged by the same standards that are used to judge the overall success of the business.

But if there is no single right answer, where does one go in approaching the decision to make or buy? There are some generalities which will help. To an extent, any company’s telecommunications requirements are a function of both its size and the nature of its business.

If the small neighbourhood shop is taken as one extreme and the giant multinational as the other, one can begin to define how the requirements and the solutions differ. Any local chemist shop, in all likelihood, requires only a telephone. Large multinational companies on the other hand, have’a need for instant global communications. Each requirement is founded on the base of business prudence. Where they are similar is that each has choices to make, where they differ is scale. The chemist is probably going to buy his phone service. Large companies will tend to be much closer to our definition of “make”. That is, designing, implementing and operating their own networks. If the local chemist is part of a chain or group of chemists, then fax, telex or an electronic POS network might become viable service options, again based on sound business sense. As we move up the scale of the size of the business, with increased requirements, the decision becomes less clear cut.

A group of chemists may well find their needs are no longer met by public service offerings. They can no longer be competitive with a pure “buy“ soiution. They need to move in the direction of “make“, and are faced with a variety of options. These include Network Services, Facilities Management and System Integration. Each of these has its proponents and each is a feasible solution for the group of chemists.

Let us examine each option in turn:

l First, “Network Services”. Network services are an arrangement where an outside supplier will provide a set of services customised to the users needs but carried on the supplier’s network. This approach has probably been the most popular to


becoming involved with telecommunications that they have decided to offer telecommunications as part of their core business. There are a number of reasons for this: competition, the need to hold market share, and the need to diversify in order to expand. A rather rough management rule of thumb is to say that a purely “make” solution is out of the question for all but the largest and most geographically-dispersed companies.

It is now possible to picture a progression of make or buy options progressing from Pure Buy through Network Services, Facilities Management and Systems Integration to Pure Make. These options would apply to company size as follows:

Small Companies Pure Buy or Network Services

Medium Size Companies Network Services, Facilities Management or System Integration.

Large Companies Facilities Management, System Integration or Pure Make.

date. The primary reason for its popularity is that it requires less commitment than Facilities Man- agement or System Integration solutions. The negative aspects to this approach can be summed up as a too heavy reliance on an outside supplier who may not be in the position to offer the most appropriate technology.

l Second, “Facilities Management”. Facilities Man- agement offers the opportunity for the supplier to become intimately involved with the client’s requirements. A typical Facilities Management arrangement would have the provider moving on to the customer site, with appropriate and requisite staff transferring to the supplier company. A long term arrangement is necessary so that the available economies of scale and the concurrent savings can be used to the utmost.

Further advantages of a Facilities Management arrangement revolve around the totality of the service: every aspect of the telecommunications function comes under the scrutiny of a specialist supplier whose sole interest is providing solutions to the particular needs of the customer. Yet more benefit lies in the fact that the client company does not find itself in the position of running a second business at a time when all businesses are facing increased competition. Competition demands that successful companies devote their entire management resources to their primary business. The downside or negative aspects are primarily the feeling that the client is losing control over what becomes an increasingly important part of the business. Therefore, an important factor in any Facilities Management solution is mutual confidence between the supplier and client.

l The third approach, “Systems Integration”, is similar to Facilities Management with one significant exception: in a classic Systems Integration arrangement the customer becomes responsible for the day-to-day management and control of the network once it is operational. Obviously, this would be an attractive proposition for a company which remained concerned with the control. factor. On the other hand, the Systems Integration approach requires an extensive commitment on the part of the customer to training and staffing requirements, as well as capital investment in the network.

As explained earlier, the nature of a company’s core business will to an extent, help to resolve the question of make or buy. Probably the most clear cut example lies in what is broadly referred to as the service industry. So many service companies have found themselves faced with the prospect of

This breakdown provides general guide-lines only. More specific solutions depend on the nature of the individual company itself. Any company should therefore reach its decision via the following steps:

1. Ensure management commitment. 2. Analyse the needs - taking account of all the

factors discussed above. 3. Evaluate the options. 4. Make a choice. 5. Reaffirm management dedication. 6. Implement the strategy.

The following is a case in which EDS was involved.

General Motors, the world’s largest company, had for years been at pure make. Early in the 1980’s the GM management felt the natural auto industry product cycle of 4 to 5 years was not in line with their needs in the data processing and communica- tion areas. They wanted a different “culture” applied to these elements of their business. GM came to EDS for a Facilities Management approach which EDS has been implementing since 1984. As a result, in the communications area EDS has shortened GM’s plans to develop a world-wide digital network by several years. This case is one where the overriding decision was not size but the need for management to tune to the short response time requirements of today’s data processing and communications industry.

The general conclusion to be drawn is that most


companies are going to require help in finding their any company facing these choices must also devote correct telecommunications solution - and that help the proper resources to analysing the task, and is available in the market place. The management of implementing the chosen solution.

Documents

1 network privatisation: The trend for the future