The Bloor Perspective: Nextel's lessons, more outsourcing and integration tips

Nextel ranks fifth in terms of US mobile phone operators. In its fourth quarter results for 2002 it was able to claim to be the first publicly listed mobile operator to generate positive free cash flow, some $122m. It's not so much the figures which are of interest, though these are good. More interesting is the strategy it has pursued. Most mobile phone operators have tried to drive their growth through aggressive and very competitive promotional campaigns, with the intention of acquiring customers in volume. Nextel has done little to extract growth from the wider US mobile market, where less than 50 per cent of the population uses a mobile. The carrier has barely participated in price wars to attract new customers. It has focused instead on attracting subscribers from rival carriers and offering specific services. In consequence, it has developed a predominantly business client base, a base that generates one of the highest average revenue bases per subscriber in the industry (ARPU). This has been reinforced by spending money on retaining existing customers, supported by acquisition of existing mobile users. This tends to support the contention that the market may be nearing saturation in terms of high revenue users. Acquisition of new subscribers, while generating some additional revenue, is subject to the capriciousness of the consumer. High acquisition costs at what is really the far margins or peripheral are unpredictable, subject to fashion and don't provide strong consistent income and growth in usage. The price war amongst the US mobile carriers is now diminishing, partly as a result of the general cooling of consumer demand. In truth it is an acknowledgement that a high cost acquisition strategy of new consumers to the mobile market is unprofitable in both the short and longer term. Other operators should take note. *Banking on outsourcing*

It is interesting to note the observations and commentary around the gathering speed of outsourcing of IT infrastructure by many of the major international financial institutions over the past year. Historically, it has been the small banks and financial institutions which have provided the major source of revenues from outsourcing of IT infrastructure. The major financial institutions have tended to outsource very specific applications such as credit card/mortgage processing and related services. Furthermore, financial services organisations have inclined to regard information technology as integral to their business, not as a utility service. So, what has changed? Most obvious perhaps, is the uncertain economic outlook. This has forced the large institutions to look at their cost base. They need to reduce fixed costs and find more innovative ways of addressing the technology support for their range of services. The past three years have witnessed volatility and rapidly changing demand in the spectrum of financial markets. There has been a fall in demand for equity-based instruments and a rise in demand for debt and commodity services, placing huge demands for flexibility on the technology departments which support the revenue generating capabilities and capacity. However, there are other, maybe less obvious, drivers. The internet has posed a number of issues for large financial institutions in areas such as security and network consolidation and replacement. These difficult areas of transition and development are being passed over to the outsourcers as part of the outsourcing deals. The impending Basel II accord demands that financial institutions place a portion of their capital aside to cover operational risk. Much of the ability to manage operational risk resides in the strength, quality and efficiency of technology. The financial institutions are again turning to the outsourcers. Of course, critical application development continues to reside in-house, though many banks are handing over the care and maintenance of legacy applications to their outsourcer. The outsourcers are taking onto their books substantial fixed costs for periods of at least five and normally 10 years. The question is whether utility-based deals have the longer-term profit margin in them? It does not edge the outsourcers nearer the business processes and applications. However, the increasing trend of financial institutions outsourcing the maintenance of their legacy systems at a time when they continue to rely heavily on them should obviate some of these concerns.

*Integrate, stupid* There are many different integration solutions available in the market place today and careful selection is of paramount importance. The most important consideration is that the chosen solution should be an enabler or automaton. It should not under any circumstances add further complexity to an already complex IT architecture by necessitating a lengthy and complicated implementation process. Some of the facts to consider include: - Scope of operation - what hardware and software platforms are supported. Aside from the ISV-produced applications, support for bespoke legacy systems must be considered. - Operational management - things never work the way we expect and with increasingly complex IT architectures, we need to be sure that the business data gets to its intended destination, and if it doesn't, that appropriate remedial action is taken. A further consideration is the architecture used by the integration technology itself, and its ability to scale to the needs up. - Processing overhead - bandwidth is cheap but that is no reason to soak up excess capacity without thought. Integration by nature places an overhead on every aspect of IT architecture, which must be carefully considered. - Customisation - it is vital that integration technologies effectively address the legacy systems through the use of bespoke adapters. Speed and ease of deployment are vital in this area, especially given the business critical nature of many legacy applications. - Out-of-the-box - today every application offers some degree of out-of-the-box functionality. Use of templates and best practices helps enterprises quickly deploy a solution and realise the benefits in quarters, not years. Training must also be considered, and the availability of on going support. - Security - security is of paramount importance as the integration technology is the transport mechanism for the enterprise's data. - Pricing - these days it's all about money and with the diversity of scenarios that integration technologies address, pricing models can be complex. By taking a standardised view of functionality and price, it is possible to see the wood for the trees. - Governance and financial stability - we've all seen the newswires. With integration playing such an integral part in the enterprise's IT operations it is vital that the selected vendor be there in the future.

Bloor Research is a leading independent analyst organisation in Europe. You can find out more at www.bloor-research.com or by emailing mail@bloor-research.com.