The race is on to wire up the world's multinationals for everything from worldwide voice and data communications to video conferencing and full-blown multi-media.
Alfred Mockett, managing director of global communications at BT, is riding high. It is almost 18 months since he launched Concert, BT's bid for the international telecoms network services market, a joint venture, with MCI, the US telecoms operator. Concert has notched up 2,000 customers and contracts worth £500 million. 'Not bad going when you think we only set up in June last year,' Mockett says.
Concert is not the only runner in the race to wire up the world's multinational organisations for everything from voice and data communications to video-conferencing and full-blown multi-media. Once wired, business will benefit from a revolution in international communications which includes computer-to-computer transmission of information and quick-dial phone numbers between colleagues working in different countries. At the more advanced end of the spectrum, benefits encompass worldwide video conferencing and collaborative working so that customers can set up global virtual teams. Of course, multinational organisations can set up global networks for themselves. But network service providers such as Concert aim to remove customers' headaches as well as offering state-of-the-art technology and economies of scale.
The stakes are high - BT and MCI have pledged $1 billion investment in Concert over the first five years - but the cash rewards are equally vast. International telecoms traffic is already worth at least $50 billion a year, according to Datapro, a US-based market research company. Of this, the revenue from managed network services and outsourcing is more than $10 billion, reckons Courtney Munroe, Datapro's associate director for global telecoms services. 'What's more, the market for managed services is growing ahead of the rest, at around 12-15% a year.' The growth in managed services is being driven by the globalisation of 2,500 multinational corporations. They need worldwide telecoms links for internal communications and for exchanging information with customers and suppliers. In the past, the task was handled in-house by many corporates, but as networks get bigger and more complex, an increasing number are choosing to outsource part or all of their networking.
Concert, like its rivals, offers a number of managed network services. One of the most popular is the 'virtual network'. As the name suggests this is a telecoms network that appears to be exclusive to individual customer corporations whereas in fact the lines are shared with numerous other customers. This arrangement provides economies of scale not available on private lines leased by single corporations. In Mockett's words: 'It gives you all the benefits of running your own networks without tying up capital and staff to run it.' The growth of such services has been restricted by the slow pace of deregulation in many parts of the world. The first area to be opened to competition in many countries has been data communications. Concert's network service for data now encompasses over 100 countries. Ultra-fast data links, known as frame relay, are available in 27 countries.
Voice communications are being liberalised much more slowly. However, service providers are introducing virtual networks for voice in several countries, enabling users to dial colleagues across borders as easily as if they were in the same city. Concert's voice network, launched last November, spans 11 countries.
AT&T, the US telecoms giant, is rapidly signing up partners for its own group of managed network services under the Worldsource banner. These will be run by partners in countries such as Telefonica in Spain, CGE in France, KDD in Japan, and Telstra in Australia. So far, World-source extends to 26 countries, encompassing the locations of 2,400 headquarters of multinational corporations.
By joining forces with local partners, AT&T hopes to avoid the conflict experienced by some of its rivals when negotiating in foreign territories, according to Merrill Tutton, president of AT&T UK. 'We try to look seamless to our customers while having a local guy on the ground,' says Tutton. 'Global but local.' Each of AT&T's Worldsource partners has had to go through a rigorous certification process to ensure it can meet performance requirements. 'AT&T is probably the most expensive global carrier, but you know what level of quality you're getting,' says Datapro's Munroe.
Industry experts reckon there is room for three to five major consortia in the market, of which Concert and Worldsource are the front-runners so far. The third emerging group comprises Sprint, the US long-distance operator, Deutsche Telekom and France Telecom. Code-named Atlas, this group has yet to win the approval of regulators in the EC and Federal Communications Commission in the US. The objection to Atlas is that the French and German markets still remain closed to any outside competition. Moreover, a joint venture between France and Germany would dominate international telecoms in Europe with more than 40% of the cross-border traffic.
UK-based Cable & Wireless (C&W), which has a 57.5% stake in Hongkong Telecom, remains non-aligned. C&W would make a powerful partner in the Far East for any of the existing consortia which are focused mainly on Europe and the US. But last year it resisted a partnership deal from overtures from AT&T that would have brought Mercury, C&W's troubled UK company, into Worldsource. For the present, at least, C&W, which has its own international business networks division, seems determined to go it alone.
However, it's not just telecoms companies that are chasing the network services market. Telecoms switches these days are little more than large computers, and convergence between the industries is beginning to happen. Not surprisingly, computer manufacturers, service suppliers and consultancies, such as IBM, GE Information Systems, EDS and Andersen want their share.
IT professionals have a different view of business networks, says John Harris, communications industry group executive at EDS. 'We are focused on organisations' IT needs,' Harris says. 'Networking is part of the overall enterprise, not just as something for data communications.' The telecoms links are raw material, he adds. 'You really do not need to own the network - the key is in knowing how to use it.' So which groups will succeed? The advantage of a company like EDS, whose core business is computer outsourcing, is that it is not trying to sell hardware. And unlike the telecoms operators, it is not trying to push more traffic on to the networks. But it is at the mercy of the telecoms operator from which it leases lines.
AT&T still has far to go in winning European favour, according to Andrew Johns, director of National Utility Services, an analysis service which monitors telecoms pricing worldwide. 'AT&T doesn't seem to be winning friends here,' says Johns. BT, however, he thinks it 'is poised to take on the world'. Its partnership with MCI creates a very powerful alliance, he adds.
Another criticism of AT&T's Worldsource is the number of partners involved. This can create a contractual minefield. Until recently AT&T's global advance has also threatened to be held back by the fact that, as well as being a service provider, it manufactured the switches on which networks are based. Indeed telephone equipment accounted for more than a quarter of total revenues. Governments that have bought AT&T switches may deem it politically unwise to hand over the running of their networks to the same corporation. 'It was a sensitive issue,' says Munroe.
As recently as the summer, AT&T executives were arguing that switches provided a substantial 'build, operate and transfer' business in many developing countries. They also cited the IT skills gained through AT&T's acquisition of NCR, the computer company, as a major advantage. In September, however, the group announced its break-up into three separate businesses - communications services, communications equipment, and transaction intensive computers. The new sharper focus could make it a much more threatening opponent in managed network services.
The contestants still have much work to do. Many countries are not yet included and most corporations have to negotiate with network providers depending on where they require links. In addition, customers often have to forge agreements with local PTTs over the last mile. 'Suppliers boast of end-to-end services but they are not there yet,' says Munroe. Network providers also need to operate a seamless service that has the same look and feel wherever it is accessed. Multinationals want to be able to offer identical features to all locations. 'That's Concert's strength,' says Munroe.
Reliability is the other main issue. Successful consortia will have to persuade network managers that they can provide advance warning of problems, and that they can make alternative services available if faults cannot be rectified fast enough. Another key requirement is for a business to know that it can be guaranteed secure access to the Internet. Every self-respecting multinational will be requiring a gateway to the world's emerging electronic shopping malls.
But it is still early days. We hear much from the telecoms industries about global virtual teams, yet in reality these are rare. According to Tutton, most customer requirements are 'pretty basic. Customers want a private line service that doesn't break down.' To put it in perspective: half the world's population has yet to make its first phonecall.
Despite that, the battle for global business networks has begun. And it's not just the multinationals that will benefit. Once the lines are in place, operators will be keen to extend services to the mass market.
All in-house versus third-party service dilemma
At Exco, the London-based money broker and foreign exchange dealer, networking is crucial to business. Exco has offices across the globe from the Asia-Pacific region to Europe and the US. But most of its networking traffic is voice communications created by trading with its customers - banks in some 30 countries worldwide.
'Our business is totally dependent on telecoms,' says Dick Cawdell, Exco's IT director. 'It is the only way our customers see us. Even a couple of seconds of down-time costs the business money.' In the past, Exco has used private networks with 'small pockets' of managed services where high levels of bandwidth were needed. This was a means to guarantee reliability and cost control. 'Also, no service providers were able to offer infrastructure and a business presence in all the locations we needed.' Now Cawdell is considering sub-contracting Exco's networking requirements to one of the emerging consortia, and is evaluating what each can offer. They claim to be able to provide a significant cost advantage because they have economies of scale, he says. But given the importance of networking to Exco's business, he cannot sacrifice quality and reliability for reduced price.
Moreover, any cost savings would have to be offset against the overhead of maintaining network skills within the organisation, says Cawdell. 'We would always need to retain the ability to bring networking back in-house if necessary.' He doesn't anticipate laying off any of his dozen or so telecoms staff worldwide as a result of a switch to a third-party network service. Cawdell, like other potential customers, is currently trying to evaluate the range of network services on offer, each of which has different advantages and drawbacks. Unlike most customers, he has to take into account the technology on which the service is based. 'I can't afford to say "give me the service and I don't care how you do it" as some users can,' he says. 'For us, the network is effectively our production line. We have to understand how it works and retain a degree of control.' Cawdell is not yet convinced that network service providers can meet all his needs. The problem for them is understanding the complexities of their customers' requirements, he says. 'They are best able to do this when they have staff who have worked in customers' businesses.' As to whether or not Exco will be using a third-party service provider a year from now, the jury is still out.
Outsourcing spreads the cost of travel telecoms
For Neil Beck, vice president of international marketing at Worldspan, the travel industry computer reservation system operator, one of the major benefits of outsourcing networks is spreading the cost across countries.
Worldspan works with 12,000 travel agencies in 35 countries worldwide, helping them book flights, tours, hotels and vehicles via its central database in Atlanta, Georgia. Many of its networks are provided and managed by AT&T.
The cost of telecoms lines in some countries such as Greece can be expensive, points out Beck. "By going through a service provider such as AT&T, to which we give a huge level of voice and data business across the world, we can get a certain amount of price-averaging. This makes the service in countries such as Greece more competitive."
Worldspan, many of whose customers are in rural areas, wants to be able to offer a seamless service worldwide. It also needs help with the multitude of data conversion tasks needed to get so many different computers to understand each other. 'We depend on AT&T for the nuts and bolts of the network on a daily basis," says Beck. "It also finds us discounts and more efficient ways of managing the capacity such as adding lines or putting the traffic through larger pipes".
But AT&t can't provide a service everywhere, so Worldspan needs to make other arrangements for countries such as Katmandu and Botswana. 'We have relationships with a number of other providers such as Sita (the airlines network)', says Beck. Worldspan also makes extensive use of Compu-Serve, the dial-in network at present.
The jigsaw of different services is likely to continue for some years, reckons Beck. "It won't be cost-effective for AT&T to go everywhere before it has volume customers," he points out.
Managing so many different services means Worldspan has had to retain much networking expertise in-house. But Beck seems unlikely to reclaim full control of the network. He is not worried about a loss of control: "We have extensive service level agreements, and the service providers are so keen to build their businesses that they make reliability a high priority.
The competitive nature of outsourcing means it offers cost-savings, Beck believes. 'AT&T can provide volume discounts based not just on the traffic we are generating but on the fact that the same lines are being used by other customers. In fact, we don't mind if our competitors use them too if it means further reductions.'
Who is on-line for calls
Concert (BT and MCI): Banco Santander (Spain), Norwegian Telecom (Norway), Nippon Information and Communication (Japan), Telecom Finland (Finland), TeleDanmark (Denmark), VIAG (Germany), Banca Nazionale del Lavaro (Italy), Telenordia (Sweden), International Telecommunications Authority (Taiwan)
Worldsource: AT&T, KDD (Japan), Singapore Telecom, Swiss PTT, Telefonica (Spain), Netherlands PTT, Telia (Sweden), Telstra (Australia), Philippines Long Distance, Telecom New Zealand, Hongkong Telecom, Korea Telecom, Unitel (Canada) Atlas (awaiting regulatory approval): Sprint, France Telecom, Deutsche Telekom.
How to close the gaps in the consortia's coverage
Unilever, the Anglo-Dutch group, has extensive experience of network outsourcing. Most of its telecommunications links, which extend to some 50,000 users in 67 countries, are handled by third parties. Sprint, the US telecoms company, has been running much of the network since 1991, and BT took on responsibility for most of the rest two years ago.
Networking in FMCG companies is not usually as advanced as the finance and retail sectors, which have invested heavily in the technology. But at Unilever, many staff are already involved in video-conferencing, collaborative working and multimedia. Nick White, head of the group's worldwide telecoms, says: 'These applications are providing all the classic benefits such as flatter organisational structures, faster decision making and flexible working.' The reasons why users outsource networks are similar to those for other areas such as IT, says White, who is also vice chairman of the International Telecoms Users Group. 'You ask yourself whether operating networks is a core business, and whether you are spread so thinly in some areas without management backup that you wouldn't have a stable base,' he says.
However, network service providers still have some distance to go in meeting customer needs, he says. They are still being held back by lack of global infrastructure, regulatory restrictions and the high level of investment, White reckons.
One problem for large customers like Unilever is the fact that each consortia has gaps in coverage. This means the customer has to negotiate with several consortia for different parts of the world, and even with individual PTTs in countries that are not deregulated. 'There has to be technical and commercial transparency across the entire network. If I'm in country A and I want a link to country B, I should not be penalised in terms of functionality or cost if a different service provider is responsible for each end,' White says.
Whether or not Unilever will continue to outsource networking remains to be seen. But one thing is certain: White will continue to press service providers for collaborative agreements that he sees as essential to the future network users.