The Value of Proactively Managed Services


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White paper by Ovum: "The Value of Proactively Managed Services”. Based on a study of the eight-year evolution of the relationship between BT and leading FMCG company Unilever and showing what Ovum considers best practice in managed services in 2011. Read more on

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The Value of Proactively Managed Services

  1. 1. The Value of ProactivelyManaged ServicesA case study of the eight-year evolution of the BT/Unileverrelationship Reference Code: OT00084-003 Publication Date: June 2011 Author: Richard MahonySUMMARYIn a nutshell Here we provide an overview of the eight-year managed services relationship between BT and Unilever. In that time, not only have Unilever’s requirements evolved but so too has the service provided by its supplier, BT Global Services. We examine the drivers that have shaped the development of the managed services market and the new ways of working that are now evident. In conclusion, Ovum identifies what it considers best practice in managed services in 2011. The perspectives in this paper are rooted partly in Ovums engagement with Unilever and BT Global Services but also from what we have observed in other multinationals and suppliers with whom we have worked over the last two years.Ovum view The foundation of a traditional managed services contract is one where a telco commits to a level of technology performance and/or a reduction in the total cost of ownership (TCO) of the service. However, this traditional thinking is being challenged by providers which are looking to differentiate on the basis of a service proposition, which is accompanied by a more robust commercial commitment around the value to the enterprise of the providers actions and outcomes. In its sourcing business, Ovum is already seeing a shift away from a static traditional break-fix service model to a position where suppliers are looking to flex their service in response to changing market or enterprise requirements.The Value of Proactively Managed Services (OT00084-003)© Ovum (Published 06/2011) Page 1This report is a licensed product and is not to be photocopied
  2. 2. This more proactive service makes for a stronger relationship between supplier and customer, which is first and foremost centered on offering the customer best value for services throughout the contract term and a continuous improvement ethos that looks to optimize the cost, technology performance, management practice, and use of technology within the enterprise. In this way then, many managed services contracts will move from being broadly static once the deal is struck to a commercial structure that allows for more flexible terms, so that both the customer and supplier can respond to changing market and enterprise environments – flexing price, usage, and the scope of managed services. This greater commercial flexibility allows the telco to offer the enterprise better value over traditional methods by proactively optimizing the enterprises technology, people, and processes. It is this broad practice examined here that Ovum defines as proactive service. To support this new, more proactive service relationship between buyer and supplier, Ovum sees a series of new managed service principles. These new service principles, which will shape the managed services market over the next three years, are as follows:  A growth in spend around the service premium. A greater proportion of total contract spend will be allocated to service, although this growth in spend is accompanied by a sustained erosion in the cost of technology to the enterprise.  The service premium will be placed at risk. While we expect enterprises to allocate a growing proportion of total contract spend to service, the premium charged for the service will be placed at risk by the supplier. So, if the service falls short of defined parameters over a period of time, the premium charged is clawed back by the enterprise. Most contracts will therefore have 5–20% of their total contract value placed at risk against the standard of service delivered.  A decline in the number of inflexible TCO (total cost of ownership) reduction deals. There will be a move away from the blunt –xx% TCO reduction deals which have often created tensions and sometimes failure between the buyer and supplier relationship. Many of the TCO contracts signed during 2000–2007 failed to deliver value as both the enterprise and its supplier underestimated the fall in technology costs. In addition, the costs on novation to the new managed service environment were often not sufficiently well baselined to support the TCO intent, meaning the contract was innately flawed from the outset. We therefore think the larger TCO deals in fixed communications will become increasingly less common. That said, many deals will have a smaller floor TCO commitment, somewhere between 5% and 10% of total cost, but these are set as a minimum performance standard as opposed to the ceiling or even the end point of the suppliers function in the deal. The much lessThe Value of Proactively Managed Services (OT00084-003)© Ovum (Published 06/2011) Page 2This report is a licensed product and is not to be photocopied
  3. 3. mature managed mobility market will continue to see TCO deals in the order of 20–35% for the larger MNC pan-regional contracts over the next two to three years.  Proactive service. In the buyer/customer relationship we describe in this research, providers will be more proactive in how their service can be improved upon or how technology can be better applied within the client organization. This commitment will mean that providers will move on from vague continuous improvement terms that often offer ineffective or unused gain share agreements where supplier and customer share the benefits of cost-saving programs. Through taking a proactive approach to service, enterprises can expect to exceed the traditional TCO measures of cost reduction value, which was the hallmark of success in the past.  Transparency. In order to derive value in the enterprise, telcos will need to be more transparent about how they execute their services, their costs, and the value which is produced. This will require the telco to proactively share the costs of specific service activities and highlight where price or performance is outside the market standard.  Extended proactive service management. An area often overlooked by enterprises is the suppliers effectiveness in third-party management. In the past, telcos would typically either route enterprise spend through a central procurement function, which for the larger contracts is often inadequate to best serve the particular needs or scale of large enterprises. Greater emphasis will be placed by enterprises on the telcos role in managing these relationships, which will go beyond simply ekeing out cost efficiencies but also designing integrated solutions with third parties, as hardware vendors look to provision services out of the cloud.  Industry vertical orientation. In order to be more proactive to the needs and value of technology in the enterprise, a deeper understanding of the customers operational processes is needed. Suppliers will invest in vertical orientation and place greater commercial risk against the performance of the service within the context of the clients business, as opposed to measuring the success by the performance of the technology alone.The Value of Proactively Managed Services (OT00084-003)© Ovum (Published 06/2011) Page 3This report is a licensed product and is not to be photocopied
  4. 4. TABLE OF CONTENTSSUMMARY 1 In a nutshell 1 Ovum view 1ANALYSIS 7 Commercial background 7 The evolution of the BT and Unilever relationship 7 Unilever’s service experience 11 Value for money 15 Extended vendor management 17APPENDIX 17 Methodology 17 Author 17 Ovum Consulting 18 Disclaimer 18The Value of Proactively Managed Services (OT00084-003)© Ovum (Published 06/2011) Page 4This report is a licensed product and is not to be photocopied
  5. 5. TABLE OF FIGURES Figure 1: Product to service orientation 8 Figure 2: Technology, process, and commercial evolution 13 Figure 3: Incident management SLA failure (all severities), 2008–2010 15The Value of Proactively Managed Services (OT00084-003)© Ovum (Published 06/2011) Page 5This report is a licensed product and is not to be photocopied
  6. 6. TABLE OF TABLES Table 1: MNC managed services contract mix, 2008–2011 10The Value of Proactively Managed Services (OT00084-003)© Ovum (Published 06/2011) Page 6This report is a licensed product and is not to be photocopied
  7. 7. ANALYSISCommercial background Unilever is one of the largest consumer goods companies in the world, employing 200,000 staff across 150 countries. In November 2002, BT Global Services won a seven-year deal with Unilever to manage its global voice and data networks. This was a landmark deal for the industry; at that time, the scale and reach of the managed network deal was unsurpassed, with BT managing a service that spanned more than 100 countries serving more than 1,000 sites. The contract was extended in May 2006 for a further three years, with the original 2002 deal seen as offering poor value to Unilever due to a faster than expected decline in MPLS pricing. In November 2010, Unilever awarded a contract extension to BT Global Services worth £144 million. The contract scope is now broader than the original 2002 deal, with BT supplying managed network services that include messaging, supply chain, and wireless technologies. However, to focus only on the technology change would overlook the most significant shift in the BT/Unilever contracts across the last eight years. In Ovum’s view, the most radical evolution has not been the adoption of new technology, but that of the altered service premise between buyer and supplier. This research therefore examines not the technology change, but how Unilever’s managed service requirements developed and how BT Global Services has adjusted its service proposition in order to sustain its value to Unilever. The strong working relationship that is evident between the parties has led to Unilever awarding BT leading supplier status. To put the achievement into context, BT won one of eight accolades among 130 key vendors and service providers. Pier Luigi Sigismondi, Unilevers Chief Supply Chain Officer said that the award was made on the basis that "Unilever and BT have proactively worked together to create a valuable commercial relationship that is built on a joint commitment to continuously improve service and cost. The new way of working between BT and Unilever has been embodied in a revised and progressive outsourcing contract that is mutually governed and executed.”The evolution of the BT and Unilever relationship Figure 1 depicts how the central premise of the BT/Unilever contract has evolved over the past eight years from a product- to a service-orientated relationship. In 2002 the contract was essentially a break-fix relationship, where the primary target was reducing the total cost of the network by 20% across the contract period.The Value of Proactively Managed Services (OT00084-003)© Ovum (Published 06/2011) Page 7This report is a licensed product and is not to be photocopied
  8. 8. By 2011 the contract has become centered on a relationship whereby BT Global Services plays a more proactive role in the Unilever business. It does so by offering a more flexible service to the Unilever stakeholders and looks to optimize service and cost. As depicted in Figure 1, the contract now carries a higher proportion of service-related cost. However, the most marked feature of the commercial evolution in Figure 1 is the rapid decline in network cost. The total cost of the network, expressed as an index across eight years, far outstrips the original –20% TCO goal that the 2002 contract targeted. In fact, the trigger to the renegotiation of the contract in 2003/4 was that the –20% TCO across the seven-year term was thought to offer relatively poor value considering the rapid decline in network costs. Figure 1: Product to service orientation 100 Network cost index Service cost as a % of contract value Index % 0 2002 2004 2010 Product BT/Unilever orientation Service Source: Ovum OVUMThe Value of Proactively Managed Services (OT00084-003)© Ovum (Published 06/2011) Page 8This report is a licensed product and is not to be photocopied
  9. 9. The eight-year relationship narrative can be broadly accounted for by three key industry drivers:  bandwidth price decline  extended services and convergence  the rising role of the proactive service provider (the focus of this research). Bandwidth price decline Ovums global enterprise market analysis indicates that the retail VPN/MPLS and access price decline sits between 6% and 9% per year over the last ten years. However, that rate is not uniform across the globe, as retail pricing is partially dictated by local conditions. The diversity of country retail price decline can be accounted for firstly by the extent of de-regulation of the communications market but also by the development of trans-national managed service capability locally. The underlying economics which have supported such a rapid decline in IP VPN costs on the supply side are that the core technology transport cost to the carrier has simultaneously fallen dramatically. In 1993 system capacity was 2.5Gbps and bandwidth cost in $ per Gbps per km was more than $2,000. This year, we expect costs to decrease to $1.30 per Gbps per km while system capacity is as high as 1.6Tbps (160 waves × 10 Gbps per wave). As such, we are confident of a further decline in the cost of MPLS and other networking technologies. Extended services and convergence Enterprises are undoubtedly sourcing their services in new ways, as convergence between software and communications and to a lesser extent fixed and mobile services are adopted across the enterprise. This technology shift is most evident when looking at the rate of adoption of IP telephony and unified communications. Telcos are also successfully pushing into the data centre and cloud services markets, where they are taking on management of enterprise applications and other traditional IT services. Ovum’s analysis of the deals between the years 2008–2011 shows a growth in total contract value as the range of telco services grows. In 2010, 21% of MNC deals included services across the WAN, LAN, and application service towers as enterprises seek to benefit from integrated service management across both the traditional network and newer IT domains.The Value of Proactively Managed Services (OT00084-003)© Ovum (Published 06/2011) Page 9This report is a licensed product and is not to be photocopied
  10. 10. Table 1: MNC managed services contract mix, 2008–2011 % 2008 2009 2010 2011 Principal service type Global WAN (no 23 19 8 7 management) IP VPN managed 35 23 25 24 network Hosting/integration 12 18 19 20 including mobility Applications 18 22 26 28 including IPT, conferencing ICT including 12 19 21 22 managed LAN and contact centre Source: Ovum OVUM By 2010, Unilever similarly extended its service portfolio with BT Global services through the addition of firewall and security managed services, video, and telepresence services along with the trialling of UC, IPT, and supply-chain technologies. Proactive service Ovum has observed a growing number of sourcing decisions made on the basis of the service premise offered by suppliers. The decision point in its most basic form aims to account for difference levered by the telco in the service management schedule of a contract. However, in Ovum’s experience such a narrow view of service limits the opportunity for the enterprise. In fact, the new service principles that we see in the market today encompass many aspects of the managed service proposition. The service activities that are swaying supplier selection include technology or contract transition, the proposed transformation plan, and the skills and people deployed in managing the service. All too often we sense that supplier responses in these key activities are often templated and are not tailored to the account in order to secure real advantage in comparison to alternative suppliers. However, at times we do see a service element which is more attractively positioned to the enterprise when, for example, the telco aims to continually improve the use and value of technology throughout the organization. While not universally available, it is this feature thatThe Value of Proactively Managed Services (OT00084-003)© Ovum (Published 06/2011) Page 10This report is a licensed product and is not to be photocopied
  11. 11. characterizes the best sourcing decisions today. Further examples of what defines this proactive approach are provided below. What is a proactive service? Ovum defines a proactive service across four parameters:  Technology – where the provider looks to proactively optimize how technology is deployed, whether that is through simple tasks such as auditing and optimizing design, or by deploying more cost-effective technology for either cost or business value benefits.  Process – where the provider improves its own operational management processes, so that it more effectively manages the enterprise’s service incidents or problems. Alternatively, the telco proactively manages the enterprise’s operational processes, so that it becomes more effective or efficient at core business activities. For example, a telco might improve customer aircraft boarding times through adding boarding pass scanning services at the departure gate.  People – where the provider proactively looks to consolidate the client’s internal resource by globalizing activities. In addition, the supplier looks to ensure that it maintains the appropriate level of resource to reflect the resource demand of the organization throughout the contract period.  Customer – as yet a largely untapped service element, where the service provider’s influence and value directly extend into the enterprise’s customer domain. For example, the telco may offer a service to redeem discounting coupons over a mobile device. Across each of these service parameters, the telco has the opportunity to enhance each element’s value to its enterprise customer. Through proactively managing the enterprises technology, process, people, and customer, the telco can therefore influence the enterprise’s costs and revenues. The following section explores how BT Global Services has adjusted its service to improve BT Global Service’s value to Unilever over the last eight years.Unilever’s service experience In 2002, the premise of outsourcing Unilever’s network services to BT was that it could provide global reach, but also a guarantee to reduce the cost of the network by 20%. In the event, the 20%The Value of Proactively Managed Services (OT00084-003)© Ovum (Published 06/2011) Page 11This report is a licensed product and is not to be photocopied
  12. 12. cost reduction guarantee was insufficient given the rate of decline in MPLS pricing. The parties renegotiated the contact within three years in order to re-set the value of the network to Unilever. Today, rather than focusing on reach and cost alone, the commercial orientation is centered on service, which is proactively managed throughout the contract to ensure that BT continually offers value across technology, process, people, and customer-service parameters. The emphasis by both parties is on aiming to improve service throughout the period, rather than negotiating a guaranteed outcome on day one of the contract which is likely to offer limited value or become obsolete as the market environment changes. Figure 2 depicts the evolution of the service across the parameters of technology, process, and service principles. People-related service parameters have been removed as they are commercially sensitive. Figure 2 also shows BT and Unilevers value for money mechanism; the way that the parties’ accountability and risk have evolved over the period.The Value of Proactively Managed Services (OT00084-003)© Ovum (Published 06/2011) Page 12This report is a licensed product and is not to be photocopied
  13. 13. Figure 2: Technology, process, and commercial evolution 2002–2004 2005–2010 2010+ Technology and transformation UNL migrates FR Revised, re-negotiated MS Cisco UC integration network agreement trialled, with cloud trials under Key technology milestones to - Managed security, intrusion way MPLS detection Process Global contract and ITIL fully rolled out. FMCG communication specific Service evolution service teams Global incident management objectives incorporated established SLAs under way. Service and commercial innovation Non-exclusivity of suppliers TCO baseline, from which Price Review Mechanism Third-party scorecards – Commercial tools introduced subcontract review TCO measures are drawn Integrated management Value Move away from TCO -15%, Cost reduction reviews, Service improvements Third-party management, Accountability and risk -20% TCO reduction achieved achieved and open book service risk and reward pricing introduced initiatives Source: Ovum OVUM Technology evolution A key technology evolution was the migration from frame relay to MPLS – a project that was rolled out within 18 months across more than 1,000 sites, significantly reducing costs and improving the manageability of the network. BT Global Services is running a unified communications trial with Unilever. It has also taken on network audits to ensure that the technology in place is optimized and offers value to the client. As part of its commitment to Unilever, BT will audit and optimize the technology in the business as part of business-as-usual activities around the contract. A good example of this proactive approach was the network and access review which yielded cost savings of approximately 20%. Other projects include:  telepresence video sessions, with the aim to reduce travel by 30% globally  access and network review, with the target to reduce costs by 20% globallyThe Value of Proactively Managed Services (OT00084-003)© Ovum (Published 06/2011) Page 13This report is a licensed product and is not to be photocopied
  14. 14.  drive end-of-life (EoL) equipment replacement for WAN, LAN, and fixed line voice  global dial plan and call routing strategy  transport optimization (on-net, OneVoice FON, PSTN optimization). Process value Unilever fully rolled out ITIL by 2006, which supported a shift in the contract where BT was financially accountable not just for the performance of the technology but its effectiveness to provide timely resolution to service incidents and problems. Unilever looked to provide global SLAs which the BT Global Services team implemented across the business, taking on penalties associated with performance service management shortfall. By proactively looking to continuously improve its approach to service management, and by working with the Unilever team in addressing recurring problems in the network, by 2010 the service was performing well. Issues surrounding order processing had also been reduced. Figure 3 demonstrates the continuous improvement BT and Unilever have made in reducing the failed ticket rate for incidents of all types. This was only achievable through a proactive continuous improvement program that required BT to proactively improve its service to Unilever stakeholders.The Value of Proactively Managed Services (OT00084-003)© Ovum (Published 06/2011) Page 14This report is a licensed product and is not to be photocopied
  15. 15. Figure 3: Incident management SLA failure (all severities), 2008–2010 50 45 40 35 30 Total failed 25 tickets globally (all incident severities) 20 15 10 5 0 1 9 18 28 6 14 22 June Sep Dec Mar Jul Oct Jan 2008 2008 2008 2009 2009 2009 2010 Source: BT, Unilever OVUM FMCG process value BT Global Services has also looked to find new, more effective uses of technology in the Unilever business. Examples of projects include investigations into improving the distributor efficiency through M2M technologies, and e-coupon promotion and redemption across a range of productsValue for money While the focus of proactive service is on how the buyer/supplier relationship can continuously take advantage of new ways of working or driving new efficiencies, the investment has to outweigh the premium cost to support the premise. In short, proactive service has to add value to the enterprise, not just cost. The BT/Unilever case study offers some good lessons on how this value/cost balance can be equitably struck for both parties. The –10% TCO floor BT and Unilever recognize that the most productive relationship for both parties was a complementary one and not one built on an adversarial premise that the supplier could always reduce its costs. To this end, the TCO reduction principle was moved from a ceiling of 20% cost reduction, to a floor of 10%. Whereas the 2002 contract looked to guarantee a 20% saving, inThe Value of Proactively Managed Services (OT00084-003)© Ovum (Published 06/2011) Page 15This report is a licensed product and is not to be photocopied
  16. 16. broad terms that was the end game of BTs responsibilities. In the event, it easily achieved this target, as the sharp drop in network prices meant that this reduction in cost was easily achieved. Today, the contract has a cost saving floor of 10%, in that BT will deliver at least 10%. The expectation is that this floor will be exceeded by adopting a proactive service, which will look to sustain the value of the BT service to Unilever. It will continually improve the management of people and technology, as well as the use of the technology by the business throughout the contract term. Price Review Mechanism (PRM) The PRM provides an agreed approach to price reviews through which disputes are resolved. Originally Unilever relied upon its contractual benchmarking clauses to regulate the cost of services in order to seek adjustments where market forces had driven a fall in retail prices. However, the weaknesses of this traditional approach to benchmarking were encountered early on in the BT/Unilever contract, as the process was found to be cumbersome to manage and it produced inconclusive results. Rather than continue to apply an ill-fitting solution, the PRM was designed so that pricing disputes could be resolved through an agreed process which examines the cost of product but also the cost of service delivery, in order to arrive at a position of fair value for both customer and supplier. Ovum sits between Unilever and BT as an independent partner of both. In its role as arbitrator, it evaluates the price of a service and whether the disputed price offers fair value. In arriving at its conclusion, Ovum is given access to the costs incurred by BT in delivering the service to Unilever. The PRM, with its proactive pricing principle, offers not only a more reliable measure of the value of service pricing, but it also benefits from the fact that the process rapidly resolves disputes. With the ‘always-on’ availability of the PRM, the process has led to BT proactively reducing its prices as the provider Proactive market sensing and pricing adjustment BT has also adopted a proactive approach to validating that its pricing is in step with the market. Prices are reviewed on an ongoing basis by BT, rather than it defending cost challenges when the customer highlights a potential area of dispute. The pricing validation task to ensure that costs are in line with the market is a role traditionally taken on by the customer. In the BT/Unilever relationship, this task is flipped on its head and it is BTs responsibility to ensure that current pricing is in step with the market. Where BT finds material changes to market pricing, it will moreThe Value of Proactively Managed Services (OT00084-003)© Ovum (Published 06/2011) Page 16This report is a licensed product and is not to be photocopied
  17. 17. often reduce but very occasionally increase the cost to Unilever to reflect the current market conditions.Extended vendor management BT manages a range of suppliers for Unilever, the bulk of which are third-party vendors. In the latest iteration of the contract, there was the recognition that it was to Unilevers benefit that it did not maintain an exclusive channel relationship with BT in order to source its hardware and other third-party services. The revised contract requires BT to seek an improvement of the value of these third-party services, even if that solution or product is not procured through the BT channel. In this way then, BT becomes more proactive, firstly in the way that third-party costs are managed, but also by ensuring that it looks to improve the vendors value to the business by encouraging closer working practices between hardware vendor and BT.APPENDIXMethodology Ovum has worked on several projects during the last eight years and has acted as the mediator between Unilever and BT Global Services. This paper is built on this experience and a series of interviews with key stakeholders within BT Global Services and Unilever. Ovums perspective is also augmented by its experience in working with other larger multinational accounts and other suppliers in the market. Interviews were conducted with Emer Timmons CEO of BT Global Services UK and MNC, and Alan Crowther Global VP of Sales and Marketing. Interviewees at Unilever included Willem Eelman Global CIO and Paulo De Sa, VP of Infrastructure Services. Ovum is an independent provider of sourcing advisory services. If you are an enterprise that wishes to discuss the implications of this paper for your business, you can contact Richard Mahony directly on +44 207 551 9209 to discuss your communications sourcing strategy and supplier requirements.Author Richard Mahony, Research and Analysis Director, Telecoms Richard.Mahony@Ovum.comThe Value of Proactively Managed Services (OT00084-003)© Ovum (Published 06/2011) Page 17This report is a licensed product and is not to be photocopied
  18. 18. Ovum Consulting We hope that the analysis in this brief will help you make informed and imaginative business decisions. If you have further requirements, Ovum’s consulting team may be able to help you in your sourcing decisions. For more information about Ovum’s consulting capabilities, please contact us directly at All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher, Ovum (a subsidiary company of Datamonitor plc). The facts of this report are believed to be correct at the time of publication but cannot be guaranteed. Please note that the findings, conclusions and recommendations that Ovum delivers will be based on information gathered in good faith from both primary and secondary sources, whose accuracy we are not always in a position to guarantee. As such Ovum can accept no liability whatever for actions taken based on any information that may subsequently prove to be incorrect.The Value of Proactively Managed Services (OT00084-003)© Ovum (Published 06/2011) Page 18This report is a licensed product and is not to be photocopied