WHITE PAPER
Success in delivering managed services to the midsize enterprise can be measured in two ways-increased profits for the service provider and reduced IT costs for the business customer.
Today's service providers face a challenging landscape. Continuing price and volume pressure can compromise overall profitability. Capital efficiency and increased returns on invested capital are primary financial objectives. An answer to increased profitability with rapid return on capital investment may center on offering managed services to new customers and to current customers that subscribe only to transport services today. Cisco Systems® has created two new tools that help demonstrate the potential profits to be made by service providers that offer bundled IP managed services. The tools also can be used to prove to business customers the significantly lower total cost of ownership (TCO) they can enjoy by allowing a capable third party to provide the value-added IP services they rely on most.
PROACTIVE SERVICE PROVIDERS SEEK ALTERNATIVES TO ACCESS-ONLY REVENUE MODEL, NEW SOURCES OF REVENUE
For service providers serving midsize-enterprises, today's environment presents twin points of concern: downward price pressures, which tend to limit profits, and financial market pressure to grow revenue per customer.
These service providers, offering access such as DSL, private line, and Frame Relay services, have become increasingly aware of the trend toward commoditization of the services they offer. This process has made them vulnerable to deep discounting by competitors. The result is not only ongoing pricing pressure, but also an increasing customer churn rate that threatens the user base and diverts marketing resources.
Managed services can address these market factors and tactical challenges, creating a more deeply embedded relationship with the customer and thus decreasing churn rate and improving capital efficiency by increasing revenue over the same circuit and network infrastructure.
GROWING BUSINESSES TO MIDSIZE ENTERPRISES DEMANDS MANAGED IP-BASED SERVICES
The reasons for increasing midsize enterprise (ME) demand for managed IP-based services are simple, yet compelling. The nature of the applications used most by MEs to enhance productivity and trim costs is changing dramatically, from simple, low-bandwidth applications to higher-bandwidth, business-critical multimedia applications that are policy-based, network-intensive, and time-sensitive.
These value-added services include videoconferencing, hosting services, IP telephony, and distance learning. These applications, and others, have become more critical to business success because of their remarkable ability to improve productivity while reducing costs. The foundation for enabling these converged services is IP VPN. A converged data and voice WAN requires the implementation of an IP VPN to prioritize and secure traffic. Without IP VPN, convergence is more difficult.
The most significant of these changes to the customer's operations is the transition to IP telephony from traditional private-branch-exchange (PBX) switching. The primary benefits of migrating from a traditional PBX environment to IP telephony are savings in networking costs and complexity-and a rapid return on investment (ROI)-all of which are made possible by converging voice and data over a single network infrastructure. A core enabler of IP telephony is IP VPN, so at a minimum, these two managed services tend to be deployed in tandem, simplifying network operations and reducing its cost structure.
The business customer's need for IP telephony and IP VPN managed services can lead service providers to develop and offer an entire suite, or bundle, of additional managed services for ME customers (Figure 1). That is because the managed services in this bundle complement each other. For example, an IP VPN service makes managing an IP voice network simpler and more effective by establishing quality-of-service (QoS) capabilities for data and voice traffic. Complete control over the entire IP network, including the LAN, routers, firewall, and more, reduces the complexity and costs of network management.
Figure 1
Converged Network with Managed Services
OPPORTUNITIES FOR NEW REVENUE, REDUCED SUBSCRIBER CHURN
Offering managed services to business customers creates new, profitable revenue streams for service providers. Service providers bring their scale and expertise to managed services, resulting in a set of high-margin services, with a low initial investment for the service provider. In fact, ROI on a per-subscriber basis can be almost immediate.
An additional benefit of offering managed services is that the relationship between the ME customer and the managed IP services provider becomes, of necessity, more integrated and more complex. Therefore, the cost for business customers to change their providers increases greatly. The result is a longer life to the customer and increased lifetime value of that customer. Reducing monthly churn from 1.8 to 1.5 percent increases the average life of the customer by 11 months-a 15-percent increase in lifetime value. Managed services converts transport-only, high-churn subscribers into "transport plus," long-term customers, for reduced turnover and a larger customer base.
Service providers can offer these services more efficiently than the business customer because the service provider benefits from economies of scale, managing thousands of IT staff and monitoring thousands of sites. For example, a firewall policy developed for one customer can be applied to hundreds of other customers.
This paper describes the benefits of managed services for the ME customer, and then describes a compelling new tool developed by Cisco® that demonstrates to service providers just how rapid the ROI can be for deploying managed IP services to current ME access-only customers.
MES WIN WITH MANAGED SERVICES, TOO
ME customers, by contracting outside their organization for managed services, can reduce or reallocate IT resources. Highly skilled and costly staff can be relieved of routine tasks such as monitoring routers, responding to help-desk inquiries, and resolving user problems, turning their attention instead to such strategic objectives as service quality, employee mobility, and new-technology integration.
The result for the ME customers adopting managed IP services is an extraordinary cost savings-in some cases 25 percent or more.
Managed services also tend to deliver an overall better quality of IT services because service providers have larger, more experienced IT staffs specializing in these tasks. In addition, managed networks are larger and more robust for greater reliability and availability, with service-level agreements (SLAs) promising up to 99.999-percent availability. Also, because service provider-managed networks are monitored 24 hours per day, the business subscriber benefits from a higher level of monitoring. To achieve that same level of service on its own, an ME IT staff managing an in-house IP solution 40 hours a week would have to increase by a factor of 5.
ME SAVINGS FROM SELECTING MANAGED SERVICES
Cisco has identified four primary areas in which MEs can realize savings by switching to managed services for value-added IP-based services: traditional service fees, hardware, IT costs, and transport. In this example (continued in case study 1), a midsize enterprise reduces service fees by 49 percent, IT costs by 21 percent, hardware costs by 20 percent, and transport costs by 10 percent (Figure 2) after adopting the managed services listed in Table 1.
Table 1. Types of Managed IP Services
Figure 2
Breakdown of Recurring Cost Reductions
Depending on specific customer characteristics, most of the cost reduction in service fees is the result of forgoing an outmoded traditional PBX environment in favor of IP telephony. The traditional PBX customer must pay providers the regular management fees plus hardware costs. Employee moves, adds, and changes add significant additional costs. Although these traditional PBX fees are replaced by IP telephony fees, the IP telephony fees cover telephony hardware and maintenance and other costs that were additional expenses in the PBX environment. And employee moves, adds, and changes can be accomplished at a fraction of the cost with an IP telephony network.
Another area of savings comes from a significantly reduced need for purchased hardware. Again, the largest savings comes from replacing the PBX, but with a managed service, the ME also can offload ownership of its switches, routers, and firewall, as well as the software and platforms required to monitor the network.
The remaining savings potential comes from a combination of customers' newfound ability to reallocate or reduce their IT resources and the lower cost of a digital transport network. As customers out-task the responsibility for managing their networks, they spend less time monitoring the network, upgrading facilities and platforms, and restoring service to a troubled network. In addition, the cost for setting up these network platforms and policies is transferred to the service provider.
Also, customers can rearchitect their network, relying on service provider network intelligence to provide greater efficiency in satisfying bandwidth demand.
It is important to note that this breakdown of savings, though typical, may not reflect every customer's actual savings. Generally, businesses operating in a distributed environment with many remote sites or branch offices with fewer employees will realize greater savings from managed services.
Case studies can best exemplify the potential revenue potential and other benefits for service providers and their business customers. This paper provides two case studies.
CASE STUDY 1-MIDSIZE ENTERPRISE-PROFESSIONAL SERVICES FIRM
In this scenario, a hypothetical midsize professional services firm with 2500 employees has 500 employees in the headquarters office and the rest are disbursed across eight branch offices.
Using the five bundled services listed in Table 1, the service provider could expect:
• Increased revenue of US$130,000 per month, including telephony fees, in addition to the transport fees they currently receive from the customer
• Increased contribution from this customer by US$78,000 per month
• Increased capital efficiency
The same circuit and network hardware that served the access-only customer now also carries additional service revenue. Moreover, operating leases minimize the initial investment in customer premises equipment (CPE) required for the service, creating a self-sustaining business model fairly rapidly.
The breakdown of revenue by service is shown in Figure 3. The figure does not depict transport revenue or other revenue not covered by the five services.
Figure 3
Allocation of Professional Services Customer Payments to Service Provider
This one-customer business case does not include the setup costs associated with launching the overall business plan, such as integration costs, initial marketing efforts, training, and others. These activities, which are described in more detail later in this paper, are critical to the success of the business. Cisco also can assist service providers with the planning and other initial phases for developing managed-services offerings.
THE TCO FOR THE CUSTOMER
Adopting managed services requires the end customers to significantly increase their overall service provider spending. However, adopting managed services can strongly reduce the overall IT costs to customers to offset those expenses. By out-tasking network management, the customers:
• Reduce management activities
• Reduce planning activities
• Improve data and telephony access-line efficiency
• Reduce overall hardware investment
Out-tasking the five services can reduce the hypothetical professional services company's IT expenses by more than 25 percent for the relevant services (Figure 4).
Figure 4
A Comparison of Monthly Recurring Costs for Self-Managed Versus Out-Tasked Network Services
CASE STUDY 2-MIDSIZE ENTERPRISE-FINANCIAL SERVICES FIRM
In this scenario, a typical midsize financial services firm with 2000 employees has 1000 employees working in the headquarters office with the rest disbursed across 49 branch offices. Compared to the previous case study, this company has fewer employees but more remote locations.
Using the same set of services and similar pricing, the revenue potential is similar for the service provider. Reduced IP telephony revenue is offset by higher revenue from managed router, firewall, and VPN services (Figure 5).
Figure 5
Allocation of Financial Services Customer Payments to Service Provider
The contribution from the customer also is similar:
• Increased revenue of US$125,000 per month, including telephony fees, in addition to the transport fees they currently receive from the customer
• Increased contribution from this customer by US$78,000 per month
• Increased capital efficiency
The subscriber truly benefits in this scenario. The reduction in IT costs associated with managing and monitoring these distributed platforms across the 50 sites is much higher, with these costs representing more of the overall cost reductions (Figure 6).
Figure 6
Allocation of Recurring Cost Reductions for Financial Services Firm
The overall improvement to the IT budget is higher as well. These distributed routers, switches, firewalls, and VPN sites cost more to manage, given the higher number of network elements per employee. The professional services company reduces its costs by more than 25 percent, and the financial services company reduces its costs by more than 40 percent. Generally, the smaller the size of the office the greater the relative savings.
Figure 7
Comparison of Monthly Recurring Costs for Self-Managed Versus Out-Tasked Network Services
CISCO TOOLS DEMONSTRATE VALUE
Cisco has developed a set of modeling tools that demonstrate the benefit of managed services to potential ME customers, thus illustrating demand for those services and the profit potential available to service providers that offer managed services to their business customers.
MANAGED SERVICES TCO TOOL FOR MES
The Cisco Managed Services TCO tool is designed to demonstrate-to MEs that either manage or are planning to manage their own, internal IP solution-that choosing the managed-services option can dramatically lower their network TCO. This tool helps enable a service provider and its respective customers to create a customized, realistic, cost-savings estimate that can be achieved through the adoption of managed services. This exercise accomplishes two objectives: It demonstrates value to the end customer and it verifies the rationale for demand of managed services to the service provider.
MANAGED SERVICES PROFITABILITY/ROI TOOL FOR SERVICE PROVIDERS
The Cisco Managed Services Subscriber Profitability/ROI tool for service providers illustrates, on a case-by-case basis, the profitability and ROI potential that could be available to service providers that begin offering managed services to business customers. One profitable ME customer does not mean a service provider's entire business turns profitable in just a few weeks; significant startup costs are associated with deploying new services.
These tools are available only through your Cisco account manager. For a live demonstration based on your actual operating environment and actual customer base, call your Cisco account manager.
MORE TO SERVICE PROVIDER SUCCESS
Additional factors will determine how quickly any given service provider reaches profitability in what is still a highly competitive field. Such factors include ease and efficiency of integration, training requirements, customer adoption curve, and the cost of investment capital needed to build out managed networks. The one-subscriber views, as shown in the case studies, reflect only the incremental benefit to the service provider.
SUCCESS IS POSSIBLE THROUGH PARTNERSHIP WITH CISCO
Service providers that understand the value creation in offering managed services should know that Cisco Systems is uniquely positioned to provide the industry-leading expertise and powerful resources to deliver these success factors. Cisco products and solutions help enable service providers increase revenue by offering compelling data and managed services to ME customers. In its aim to be the preferred partner for profitable services, Cisco offers three advantages to its service provider customers: industry-leading technology and solutions, expertise in creating products that support new services, and the ability to identify and influence business demand for service provider offerings.
The Cisco Powered Network Program is the primary Cisco membership program for service providers that deliver their services over networks built end to end with Cisco equipment. The program provides many benefits for service providers to market their services more effectively using Cisco resources. To learn more about the Cisco Powered Network program and service providers, visit http://www.cisco.com/cpn
For more information or to schedule a live demonstration of the Managed Services TCO and Managed Services Profitability/ROI tools, which will help you discover the tangible benefits of offering managed services, contact your Cisco representative today.