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Economic Value of NFV for your Organization
Sep 14, 2015

We expect that success in telecommunication services over the next 5 years will require more than a transformation of the network and technology, but the business as well. However, while a lot has been written with respect to the technologies, there has been very little structured/formal analysis of the business and financial benefits. Which is ok, but great technologies will not have an impact if they cannot be viably commercialized and create value for shareholders. We need to discuss the evolution in a holistic approach including the impact in the architecture as well as into the business as well.

 

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How NFV and SDN create value for your Business?

 

At a high level, there’re three major economic value creation categories that you can achieve through NFV & SDN:

 

  1. Generate new revenues, with service agility that opens up new strategic buyers and markets.
  2. Efficiency gains through increase capital investment efficiency maximizing the long-term asset utilization and well as improved operational efficiency, or productivity with automation.
  3. Flexibility and optionality which is achieved via “platform” investments that address the potential future needs of the organization and minimize risk

 

So while these are the benefits, it is important to also look at how investments would be aligned. Now let’s understand each benefit category at a greater depth and how this will help Network Service Providers to be more competitive and relevant in their markets.

 

Revenue Generation

 

In a nutshell, you get this from developing, launching, provisioning new services faster; from being able to better expand into new markets; expanding into new services, new business models.

 

With the evolution towards more sophisticated services, we see the cost for serving users is rising, while the ARPU (Average Revenue Per User) growth has been flat. At the same time, competition have become more intense, with OTT adding competition pressure and raising customer expectations. Finally, customer preferences are evolving rapidly and what they would prefer in future have become much uncertain.

 

Overall, cloud and virtualization drives huge upside revenue opportunity for carriers serving the enterprise segment. Businesses of all sizes and verticals are adopting virtualization due to the benefits from lower cost, flexibility, reliability and scalability. SPs need to find ways to grow IP/MPLS /Ethernet connectivity economically as businesses seek a more managed offering, especially in the SMB segment that has been traditionally underserved. As cloud adoption continues to increase, SPs have a compelling opportunity to facilitate reliable and secure access to cloud and bring to connectivity the same cloud attributes such as instant activation or ease of use. This is achieved by digitalizing all aspects of service life-cycle provisioning and removing the hardware dependencies of their services.

 

For example, in the traditional connectivity services offered by SPs, the physical CPE is becoming a roadblock in service agility: it takes time to ship it physically, configuration is not trivial, CPE capabilities limit the upsell opportunities so it makes the overall service provisioning expensive and lengthy on time. Virtual CPE simplifies it! It all starts with the on-ramp to cloud service. With a vCPE platform, SPs can easily extend their portfolio of services including additional cloud based managed services as they are needed and all through a fully automated service provisioning.

 

As you do this we believe that you can make your revenue grow by opening up new markets, like the SMB, then offer new services to, and extending to new business models and services that are delivered either directly from your Datacenter or in partnership with Web Service providers.

 

Efficiency Gains.

Efficiency gains provided via this technology come in two forms. The first is via capital efficiency gained by improving the outpour per dollar of capital investments. The second are the gains made via operations efficiency the improves worker productivity.

 

Increasing Capital Efficiency

 

So while there is some uncertainty in the growth of these services, the use of software based platform for service delivery will improve profitability, reduce your investment risk, and drive shareholder value. In NFV based architectures, costs behave as a function of growth, meaning they are aligned to growth and investments are made closer to realize benefit. Outside small initial setup costs, the investments align to revenue growth, because most of the additional costs are either variable or semi variable in nature. This is extremely important, especially for upcoming new services that will benefit of the existing NFV service platform in place.

 

Some portion of costs or capital investments are not incurred until the customer signs up, or demand is more certain, this has two implications: Risk reduction, because if the services is not successful, the service provider is not straddled with stranded assets, and fast fail is enabled with little cost; and Cashflow improvement with break even point earlier on time and shorter return of investment.

 

Another key point is the improvement in operating margins. Based on our work with customers, the estimated take rates and costs, we believe that at scale, these advanced services will benefit of a healthy operating margin as result of a better aligned infrastructure.

 

Finally, due to operating a fully digitalized service lifecycle management, operating costs and SG&A will be reduced over as well, thereby further improving the profitability and reducing the overall investment risks.

 

 

Virtualization of infrastructure introduces primarily variable costs for the operator and reduces fixed costs, lowering upfront costs to facilitate SPs to de-risk the experimentation of new services. For mature services, where demand is pretty certain, then physical infrastructure will bring the performance (with specifically designed ASICS) and the scale.

 

 

Increase Opex Efficiency

 

Similar to the Capex challenge, today’s rigid and static network also represent big challenge for Opex, as it require substantial human resources to do network operations, resulting in high manual cost, high error rate and long development, deployment, certification and fulfillment cycle.

 

With technology advancement in virtualization, now, automation and orchestration capabilities across the Physical and Virtual components of the IP infrastructure, could enable a DevOps style environment. This represents great opportunity to improve the network operational efficiency and become more responsive as an organization.

 

By identifying and matching major network operations activities with required resources and associated costs, SPs can gain insights on where the saving would be coming from, in the transition from PMO (Present Mode of Operations) to FMO (Future Mode of Operations). The greatest cost saving potential would be coming from faster fulfillment cycle, faster service deployment and higher labor maintenance efficiency such as testing.

 

Flexibility and Optionality

 

With the development of a software-like platform for service delivery and the automation of operational processes, carriers are now provided with flexibility and optionality.   This flexibility is called service agility and is a quantifiable benefit.   Flexibility especially as it relates to the ability quickly scale capacity and bring new services to market.  

 

In silo’ed architectures the ability to do these quickly was not existent. In this environment, and with the proper platform, carriers now have options to 1) scale-out and in existing service capacity, switch up to a dedicated platform to increase operating leverage, or simply re-scope existing applications as user preference change.

 

What is required for success?

 

To transform your network economics you will need to take a Holistic Approach of your business and technology strategy. It should include multiple steps:

 

  • Formulate you company’s strategy with virtualization, your customer needs, the business processes that have to evolve. You can have a look at this paper: Navigating the Uncertain World Facing Service Providers
  • Identify new business models enabled with the economics of NFV for your company – which will help you monetize new opportunities. These include utility based pricing models, IT services, marketplace services, cloud brokerage, and even big data applications.
  • Empower your organization, with evolving leadership roles, new skill sets and processes. See the paper: Transforming the Service Provider Organization
  • More importantly, you’ll need an agile, open and secure network platform that will become the heart of your competitive advantage at long term. Find here some ideas

Virtualization is transforming the way Network Service Providers operate and will fundamentally transform its competitive landscape. It is not anymore a matter of “IF” or “WHY”, it became a matter of “When, what and how”.

At Juniper we can help you understand where and when to invest - our goal is to make sure you have the right infrastructure to handle current customer demands, while preparing you for future needs.

 

Have a look to the new WhitePaper: Building Your Business Case for Network Virtualization - A Total Economic Value Assessment Framework for Financial Analysis

 

My Big NFV Idea is to use virtualization to transform the economics of networking, what is yours?