By: Mark Cummings, Ph.D.

There is a growing consensus that today’s telcos must innovate in order to survive and prosper. The move to cloud computing is seen by many telcos as the model for telco transformation. In the creation of cloud computing, start-ups played a key role. To achieve their transformation vision telcos need to learn to work effectively with innovative start-ups empowering the small number of thought leaders in the large companies.

Barriers to innovation

The challenge that confronts telcos today is to reform an ecosystem that has produced telco networks that don’t adequately meet the needs of their end users, operators, nor owners. They are inflexible (slow and difficult to field new services), brittle (recent S3 incident), insecure (recent Deutsche Telekom breach), difficult (manual staffs under increasing stress), expensive to operate (non-linear growth in costs), and financially challenged (dividend cuts and depressed share prices).

This ecosystem is based on a set of business practices and procurement processes that are well suited to the past, but are a barrier to the innovation desperately needed from small start-ups and large vendor thought leaders. These practices and procedures are based on two principles:

1. Procurement through complex tenders with year or longer cycles;
2. Squeezing as much as possible from vendors for free.

These have created an ecosystem that protects the existing large vendors from new entrants. But that is antithetical to the needs of innovation driven start-ups that need small but regular revenue, based on successfully completing simply defined and well-articulated milestones.

Cloud computing model

A few years ago, telco executives observing the financial success of cloud service providers started visiting them to learn how they did things. What they saw was the end result of a chain of innovation. The conclusion: “transform” their telcos to operate like cloud companies. Thus, the birth of transformation. But it has proven very difficult for the telcos to get beyond talk and some PoC (Proof of Concept) demonstrations. This is because the telco leaders misunderstood the chain of software innovation that made the cloud companies successful. Each of the major innovations along that chain started with a small innovative group organized as a start-up. For example business model innovations for Google came from a start-up founded by two Stanford graduate students; and cloud technology’s foundation, VMware was founded by a small start-up that struggled in its early days, resorting to its early product allowing Macs to run the native Windows Operating System. Open Source came as a way to build components that required a lot of work, but not innovation and were deployed on top of the innovative foundation produced by start-ups.

These cloud companies still foster start-up innovation. They have budgets to provide milestone-based contracts in the $250K to $500K range to companies who have innovations that could help them. Some end up as dead ends, but many lead to on-going streams of innovation.

Now, innovative start-ups approaching telcos find that the existing telco business practices and procurement processes create an insurmountable barrier.  Meanwhile, the telcos look to their traditional large vendors for the necessary innovations, and the Open Source groups are composed of the large vendors. It is very difficult for these to provide that innovation because of legacy skill sets, legacy product portfolios, and these business practices and procurement processes. The practices and processes not only kill start-up innovation, but work against those in the telcos and large vendors who know that change is needed.

To understand how these business practices and procurement processes inhibit innovation, it is helpful to look at how they evolved.

Evolution of today’s business practices and procurement processes

The foundation business practices and procedures for acquiring technology were set in the immediate post war period. These foundation business practices and procurement procedures were mechanistic. That is, they approached acquisition of equipment as if the equipment were mechanical machines and used extremely long and detailed specifications that were contained in tender documents that only very large companies could afford to bid on. The bidding process could take a year or more and resulted in infrequent but very large financial commitments. Because the vendors were very large and had easy access to the financial markets (both debt and equity) and in many cases had government support, they were able to take infrequent, but very large injections of revenue and support stable staffs while producing a steady stream of annual profits.