Before I took off on my vacation (just completed), I asked a bunch of my CFO contacts to review a document I prepared that outlined potential sources of NFV (or SDN) benefits. They came back with some suggested changes and additions, and the result was a document with about 20 categories. I’d also outlined some comments on the methodology for developing a business case using these benefits, and they had some views on that as well.
The first point the operators made was that of my 20 categories of savings, none could be considered valid except within a specific context of operations/management that could be costed out versus current practices. Even capex reduction and all classes of revenue augmentation demand operations cost validation, because operators are interested in infrastructure TCO and not just capital cost and because revenue augmentation only happens if you generate net revenue after costs.
The reason my contacts thought this was the most critical point is that they tell me there are well over 80 NFV-related trials underway (that they are involved in or aware of) and that slightly less than ten percent of those have adequate engagement of operations/management and CIO-level people. Of those, the CFOs think that perhaps half actually explore the operations practices sufficiently to create a cost model.
The second point I found interesting was that operators said operations cost reduction was the most credible, essential, benefit. Based on my first comments here, you can see that the CFO organizations don’t think there’s much credible work on opex being done at present, but they had an additional point I found quite interesting. They said that they had yet to have a vendor present them with a document that outlined their current cost sources and quantified each, even for a category of operator.
At the high level, the financial industry tells us that operators spend about 20 cents of each revenue dollar on capex, about 20 cents is returned as gross profit, and about 60 cents is operations and administration—expenses. Some vendors take this whole pie and say they can reduce it, so CFOs say. Well, one example the CFOs give is roaming charges for mobile operators, which is their largest single cost category. How does NFV reduce that?
The CFOs say that there’s a specific subset of “opex” that I’ll call “process opex” which relates to the operations processes that could be influenced directly and indirectly by NFV. They put six cost categories in this group. How many NFV business cases had they been presented that outlined these six credible areas? Zero.
One reason for the shortfall in useful opex data is that when you break down opex you’re forced to ask how your strategy would actually change it. Here’s an example. What’s the largest component of process opex? Customer acquisition and retention. Imagine yourself as the product manager of some NFV strategy, asked to tell the world how much your product will reduce marketing costs and churn, or help operators eliminate incentive programs?
Well, OK, you can see the issue there and perhaps you think the answer is to drop that category, which is OK as long as you want to kiss off a major benefit source. What about the rest of the process? CFOs point out that at least initial NFV deployment would increase costs in IT operations (because it requires deployment of data centers, which have to be run). It would also likely increase the cost of service operations where VNF-based services had more distributed components to manage than discrete box strategies. Offsetting this is the improvement that might be made in service operations through automation.
How much is that? Most vendors who tout NFV don’t have a management/operations strategy (five, perhaps, do). Even for those who do have an approach, would the conversion of an NFV lab trial to a field trial realize the savings, or prove them? In order for operations to get more efficient, you have to automate all of it, not just the NFV pieces of it. Otherwise your best outcome is to present the same costs as you had before, meaning no opex benefit.
On the revenue side, things aren’t much better according to my CFO sources. Service revenue gains, as I said, have to be net of cost to be meaningful. We can’t easily determine the operations costs of NFV for hypothetical new services because the focus has been on individual trials and PoCs and not on a broad new operations model. Every new service might thus have new impact on operations, demand new features. How do you get them?
Then there’s the issue of what exactly the service is. Vendors, say the operators, are presenting them two “new services” in almost every presentation. One is improved time to revenue achieved through improved deployment times. The other is “on-demand” services—firewall-for-a-day, dial up your bit rate, etc. Are these justified?
Time-to-revenue improvements are certainly achievable if you are talking about a new service or a new site within it. Otherwise your customer is already provisioned, and what you’re really saying is firewall-as-a-service. Is that credible? Sure, but most operators say their users will buy as-a-service features when they connect a site and then hang in with those features. How much revenue can really be created with this depends on how many suitable feature-enabling changes are made, and how many new prospects can be sold. Those qualifications don’t seem to be working their way into business cases.
Elastic bandwidth is nothing new; we’ve talked about it for ages in fact. Operators have long believed that if customers were offered a mixture of static long-term services and the ability to dial up capacity at time of need, there would indeed be a revenue gain from exercising the latter. There’d also be a revenue loss for traditional leased services because all customers would game the pricing to get the lowest total cost. Thus, operators say, they’re likely to lose money in the net.
At this point you probably think that the CFOs believe NFV is never going to prove out at a significant level, but that’s not the case. Nearly every CFO thinks NFV will succeed eventually. On the average, CFOs think that by 2018, SDN and NFV will have impacted about 20% of all network infrastructure investment. That number is quite consistent with my own modeling of SDN/NFV opportunity.
We can do better than this. Light Reading has published interviews with operators who said quite openly that the industry’s hype was hurting the business case, and they’re right. That business case can be made, but it’s not easy to do and it requires broadening the presumed scope of NFV and SDN deployment from diddling at individual projects or services to building toward a systemic shift in infrastructure spending and management. Hundreds of billions of dollars are at stake. We could have proved out a strategy by now, and all we’ve proved is that there’s no easy way to get to one.
Well, maybe it’s time to try the hard, right, way.