Introduction
The cost of developing a managed services offer can be considerable for service providers. The development lifecycle for managed services often costs in the millions of dollars with timelines often reaching 18 to 24 months or more. Added to this burden are the threats service providers increasingly face from a new breed of competitor looking to disintermediate them from their customers. All of these realities increase the pressure to develop truly resonant, meaningful, and successful managed services offerings that drive growth, differentiation, and profit.
When designing a managed services roadmap and portfolio, service providers must use a comprehensive approach to evaluate the many factors that will contribute to the market success of their service portfolios - analyzing not only simple cost and revenue elements but also the total profit potential over the lifetime of the portfolio for any target customer base.
The Total Lifetime Profit (TLP) method from Cisco captures the key variables of this comprehensive evaluation and suggests a methodical approach to assessing each of variables included in the calculation.
Total Lifetime Profit
Total Lifetime Profit can be represented in a mathematical function as follows:
The remainder of this paper describes each of these variables completely, highlights their importance in the overall Lifetime Profitability assessment, and provides an approach for quantifying and assessing the Cisco® technology solution that optimizes each variable
Service Revenue for Multiple Services
Definition: The sum of all revenue from all services (services 1 to n) for a given customer base over the lifetime of the managed services portfolio.
Importance: Four key factors typically compel service providers to deliver multiple services to their customer base.
• The need to increase revenue and profit
• The need to differentiate themselves from their competition
• The need to amortize lengthy and costly sales cycles over many services
• The need to maximize the monetization of customer premises equipment (CPE) and network-based managed services offers
As the basis of any TLP calculation, an evaluation has to be made for all the revenue that portfolio generates over its lifetime, with the goal of maximizing that revenue.
Approach for Evaluation: When evaluating an enabling technology, the service provider should assess the following to help determine the maximum service revenue opportunity:
• What services does the enabling (typically customer premises-based) technology support?
• What is the up-sell and cross- sell linkage between each technology and corresponding managed service?
• What extended roadmap of services does the enabling technology support?
• What competitively differentiating features can be included in the service offerings so that price premiums can be enjoyed?
Maximizing each of these variables will maximize the total revenue the managed services portfolio can generate.
The Cisco Solution: Cisco's portfolio of Integrated Services Routers (ISRs) provides an excellent platform to maximize multiple-service revenue. The robust and flexible Cisco ISR enables the delivery of a range of complementary services from one platform. Some examples include: IP VPN and connectivity services; integrated, managed security services such as managed firewall and intrusion detection services; call control services; and more advanced services such as wide-area application acceleration.
With the Cisco ISR, service providers can offer multiple complementary services to meet increasingly sophisticated customer requirements, differentiate their brand, and stay ahead of the competition.
Revenue from Complementary Services
Definition: Revenue streams from the services that are "pulled through" by the primary portfolio (typically CPE-enabled) of services. These services are typically delivered from the service provider's network or data center.
Importance: The long-term goal of a service provider is typically to monetize large-scale capital investments, such as investments in network and cloud capabilities. As a result CPE-based services are often seen a key hook to pull through additional network-based services and monetize capital assets.
Approach for Evaluation: When evaluating Total Lifetime Profitability, the service provider should attribute revenue and profit generated from network-based services that otherwise would not have been provided to a customer were it not for the CPE-enabled, primary managed services. This might include data center-based services such as Software as a Service (SaaS)-based services.
The Cisco Solution: Examples of services that can be delivered from an integrated platform, such as the Cisco ISR, combined with a Cisco IP Next-Generation Network (NGN) might range from advanced Layer 2 and 3 VPN services (that can be used to meet sophisticated connectivity and transport requirements of the customer) to connectivity services, SIP trunking services, application-aware VPN services, Cisco Wide Area Application Services (WAAS), or services delivered from the Cisco technology-enabled service-delivery data center.
The provisioning of these services as a complement to the CPE-enabled primary services drives monetization of network assets along with differentiation of the network-owning service provider.
Cost of Operations
Definition: Operational costs of delivering managed services over the time period of the Total Lifetime Profitability calculation.
Importance: When evaluating overall profits over a five-year period, operational costs will usually represent the majority of the cost portion. Even small changes in the assumptions for operational costs can have large effects on the forecasted profitability.
Approach for Evaluation: Operational costs should include:
• Headcount associated with provisioning the ongoing management of the service, including Network Operations Center (NOC) staff along with customer engineers; headcount costs should include salary and benefits as well as ongoing training costs
• Capitalized costs of the CPE (typical capitalization periods for CPE can range from three to five years)
• Capitalized costs of any directly associated network improvements
• Actual and administrative costs of managing vendor support contracts that are associated with the enabling technology
The Cisco Solution: The Cisco ISR represents lower operational costs than a multidevice, multivendor solution. As CPE, the ISR provides an integrated set of enabling technologies from a single vendor, simplifying both maintenance and support. And service providers can design support processes through the award-winning Cisco SMARTnet® technical support services.
A single device from one vendor requires a smaller set of common skills and training requirements in the NOC. In addition the Cisco ISR often eliminates the need for truck rolls when new services are ordered, and minimizes ongoing provisioning costs when coupled with features such as Zero-Touch Provisioning.
Footprint Costs
Definition: The cost of cooling, power, and space required by the managed services-enabling technology.
Importance: Increasingly end customers are moving to greener data center and data room architectures and so environmental impact is becoming an important consideration. Service providers can differentiate themselves by minimizing the footprint and enhancing the "greenness" off their offering.
Approach for Evaluation: Evaluate, in fiscal terms, the following for all required equipment over the period of the Total Lifetime Profit analysis:
• Power consumption
• Heat dispersion and HVAC requirements and power consumption
• Rack space, data room, and data center requirements
The Cisco Solution: Compared with a multidevice, multivendor solution, the Cisco ISR delivers clear advantages for minimizing footprint. The ISR, being an integrated device with an integrated power supply, uses significantly less space than a multidevice solution and less power (with features such as intelligent power management), while heat dispersion and cooling requirements also diminish.
Market Acceptance
Definition: The market share, and therefore acceptance, of the underpinning technology that enables the managed services portfolio.
Importance: The most successful managed service portfolios see service providers combining their value proposition with the value proposition of the enabling equipment vendor. Clear advantage is given to the provider that develops a managed services offering based on a technology that already has demonstrable market acceptance and market share.
Approach for Evaluation:
• Evaluate the market share of the enabling technology that the managed services portfolio is based on. Work with the equipment vendor to understand geographical, vertical, and horizontal market shares they have achieved in the desired target markets.
• Evaluate the go-to-market support that the vendor will provide to enable the success of the portfolio. Look at vendor sales compensation schemes and understand alignment of vendor goals to strategic goals.
The Cisco Solution: Market acceptance of a Cisco ISR-based managed services portfolio is aided by a large existing install base. The Cisco ISR has leading market share of over 90 percent in prime markets. At the time of printing, Cisco had just achieved the milestone of 5 million ISRs deployed in commercial and enterprise markets, and this translates into significant opportunity for the service provider.
Total Addressable Market
Definition: The Total Addressable Market (TAM) for a managed services portfolio is the companies within the market that may buy the managed service offering.
Importance: To maximize the return on investment in design, development, and ongoing marketing costs, it is important to develop a portfolio of offerings that covers that largest total addressable market. The largest possible portfolio would have offerings aimed at the small office/home office (SOHO), small and medium-sized business (SMB; up to 250 employees), mid-market (250 to 1000 employees), and enterprise (more than 1000 employees). A key factor in determining the maximum possible coverage of the managed services portfolio is the addressable market of the enabling CPE.
Approach for Evaluation: Total Address Market of the managed services portfolio is a function of the target markets of the enabling vendor technology. To evaluate the TAM for the managed services portfolio, the service provider should assess the range of models in that vendor offering and map to the service provider's target horizontal market segments.
The Cisco Solution: The Cisco ISR product line, from the 800 Series up to the 3800 Series, gives service providers the opportunity to use a technology that covers the maximum addressable market. From the SOHO to the SMB, the mid market, and the small enterprise and large enterprise branch office, the Cisco ISRs give the service provider maximum market reach, enabling offers to many different end market segments and verticals.
Customer Affinity
Definition: Customer affinity is the measure of the loyalty of customers to their service provider and is a function of the quality, value, and number of managed services they receive from the service provider.
Importance: Increasing commoditization threatens service providers as competitors look to distance the provider from its customers by relegating it to a commoditized transport provider. When seeking to maximize customer affinity, the service provider must look at the rate and range of complementary services that are sold and delivered to the customer base.
Approach for Evaluation:
• Evaluate the proposed managed services portfolio through customer focus groups and pilot customers to determine the value, financial and otherwise, the customer places on the specific managed service being offered.
• Evaluate the value placed on a standalone service (such as managed connectivity) and then determine how that value increases when combined with a complementary services such as managed firewall.
Typically results will show that two or more services have a greater combined value than the individual service. The goal of the portfolio design should be to maximize this "multiplier" effect so that linear incremental services offer exponential value.
The Cisco Solution: The Cisco ISR is the platform on which to build a range of comprehensive, relevant, high-quality services for end customers that will help increase customer loyalty, repeat business, growth, and profit. The portfolio of complementary services enabled by the Cisco ISR creates exponential value as the services are combined together to address your customers' needs while driving growth, profitability, and brand relevance.
Conclusion
Total Lifetime Profit is the comprehensive way to comprehensively evaluate all the components that determine the viability and ultimate success of a managed services portfolio. Evaluations of these portfolios must go beyond simple assessments such as revenue from one service, or initial capital expenditure, to achieve a true understanding of the long-term success and profit contribution.
The Cisco Integrated Services Routers are designed to optimize each variable in the Total Lifetime Profit calculation - whether it is maximizing revenue from multiple complementary services or minimizing operational costs. With the Cisco ISR as a platform for the managed services portfolio, the service provider will have a foundation for success.