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Burn After Reading

My favorite parlor game these days is speculating on the shape of things to come out of the current economic cycle. The one safe predication is that things will be different coming out of this period than they were going in. Predicting what the differences will be is the tricky part.

Prognostication can be a fun and safe pastime, as long as no one remembers what you said. Just how dangerous it can be when people do pay attention to industry soothsayers was illustrated by the reaction to predictions of sustained double-digit network growth due to the emergence of the Internet a few years ago. After that experience, it's a wonder that anyone in this industry dares to include market projections in their business plans.

Let's start with a couple easy observations. Without going very far out on a limb at all, I am willing to state that we will see outsourcing of network management from network operators to their vendors accelerate. At the same time, deployments of new network technologies-and even growth in legacy technologies-will slow down.

Like I said, these are a couple easy ones. We only have to track news reports of Sprint considering an outsourcing arrangement with Ericsson for management of its mobile network to validate the first one. The second is easier still given the announcements of capex reductions from various quarters.

It gets more interesting when speculation turns to the consequences of these observations. Taken together, these two trends add up to a dramatic shift in revenue sources for certain companies away from equipment sales and toward services. My predication is that for some of these companies, this will mark a permanent departure from a predominately manufacturing enterprise to one that mostly delivers services.

What does it mean for a traditional equipment maker when an increasing share of its revenue comes from services? For one, the proportion of its assets tied to manufacturing will decrease. Along with this, there will be a significant shift in the make-up and location of its work force.

A company that manufactures less will need fewer workers dedicated to designing and building equipment for sale and more focused on delivering services. This will tend to shift the geographic distribution of the work force away from manufacturing locations and toward customer locations or service centers that remotely support many customers.

We have seen this shift play out elsewhere. Consider the changes at IBM as it has evolved from a company that primarily manufactured of computers and related technologies to its current profile with a strong emphasis on services. It has gained flexibility in meeting its staffing needs, but has also attracted criticism recently for moving jobs to lower-cost labor markets.

Here is my ultimate prediction. Telecommunications equipment will follow computer equipment in terms of where design and manufacturing takes place. We will also see telecommunication equipment manufacturers broaden their business to include more network management services for their carrier customers. In time, this will lead some equipment manufacturers to evolve into service companies, much as we have seen in the computer industry.

The current economic situation will tend to accelerate this process. Carriers needing to reduce costs are more open to outsourcing operations at the same time that manufacturers are seeking new sources of revenue. The existing relationships between carriers and their established suppliers will also tend to favor the leading manufacturers as providers of outsourced network management services.

All of this suggests big changes in the industry landscape. To the extent that the changes reflect my predictions, I will be happy to take credit for them. Should things turn out completely different, forget I said anything.

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