I got over a hundred emails after my series on making the business case for NFV. A few didn’t like it (all of these were from the vendor community) but most who contacted me either wanted to say it was helpful or ask for a bit more detail on the process. OK, here goes.
You have to start an NFV business case at the high level. Hosting functions is a major shift. It demands operators shift from a familiar device model to a software model, and it comes along at a time when operators are trying to make systemic changes in cost and revenues to accommodate the crunch they’re experiencing in revenue-versus-cost-per-bit. There’s risk here, and you have to be able to demonstrate that benefits scale with risk.
The best place to start is to define specific benefit targets. You have to reduce costs, increase revenues, or both, so that means “cost” and “revenue” are the high-level targets. For either (or both) these targets, you’ll need to assess an addressable opportunity and forecast a penetration.
Cost targets are relatively easy. As I pointed out in a past blog, most operators are judged by the financial markets based on EBITDA, which measures earnings before capital spending and depreciation is considered. This focus means that unless the operator is relatively small, it’s going to be harder to make a pure capex business case. In any event, the problem with capex-driven changes in profit per bit is that you’d have to make a massive infrastructure change to address most of the cost, and that’s just not going to happen in an industry with a trillion dollars of installed infrastructure. Operators also say their own estimates are that you can save 20% or less with hosted functions versus custom devices; they’d rather beat vendors up on price for that amount than risk new technology.
Operators spend about 12% of their revenue dollars on operations costs, about a third of which is network operations and the other two-thirds service operations. The big question to ask for your cost targeting business case is the scope of the impact of your NFV deployment. For example, if you propose to target a service that accounts for one one-hundredth of the devices deployed, you can’t expect a revolutionary benefit. If your NFV impacts the service lifecycle for services that account for ten percent of service operations effort, that’s the limit of your gains.
Even if you have a target for cost control that you can quantify, you may not be able to address all of it. The best example of this is the network operations savings targets. Most NFV deployment will demand a change in network operations to be sure, but that change may not be a savings source. For example, if you’re selling virtual CPE that will reduce truck rolls by letting people change services by loading new device features, you can only consider the truck rolls that are necessitated by service changes, not total truck rolls. You still have to get a device on premises to terminate the service, and you can only save truck rolls in cases where feature additions would be driving them.
The service operations side is the hardest one to address. If you think you’re going to save service operations effort you have to first measure the effort associated with the service lifecycle, from order through in-service support. How many interactions are there with the customer? How many are you going to eliminate? If carrier Ethernet is a service target, and if it represents 30% of customer service interactions, cutting its cost by half will save 15% of service operations effort. You’d be surprised how many NFV business cases say “Service operations is 12 cents of every revenue dollar and we’ll eliminate that cost with virtual CPE” when the defensible vCPE target is only a tenth of customers.
On the revenue side, it’s more complicated because you have to consider the addressable market. Again, the “new” versus “established” customer issue can bite you. If you reduce time to revenue, you can claim x weeks of new revenue per new customer or new feature for a reduction of x in deployment time. That won’t apply to customers you’re already earning revenue on, only ones that are having a new service rollout. And it doesn’t happen every year for the same customer, so don’t multiply that “x-week revenue” gain by the total number of customers!
Truly new services are also complicated because of the difficulty in assessing total addressable market. Most operators don’t have good numbers on opportunities in their areas, but most could get it. How many business services could you sell? You can get demographic information by location and SIC/NAICS to estimate the population of buyers. You can use market data from other areas, other providers, to estimate optimum penetration.
If you go through the motions of a business case, you’re going to end up realizing that the primary challenge in making one for NFV is that improvements in operations or agility are difficult to secure without making a systemic change in practices. Unless your service target for NFV is very contained, you may be introducing a new set of operations requirements to all network and service management personnel but gaining efficiency for only a small percentage of their interactions. Thus, the fact that you have to start small with NFV works against creating a big benefit up front, and that makes it hard to justify a big up-front cost.
The easiest way to make a business case for NFV work, as I’ve said, is to first target the orchestration and optimization of service and network management tasks through software automation. This can be done without deploying any NFV at all, but it can also obviously be tied to an early NFV task. The operations automation will easily generate enough savings to not only make the early NFV business case, it will probably generate enough to fund considerable future growth in NFV deployment.
If you can’t target wholesale changes in operations/management activity, then the easiest approach is to target opportunities that have very contained operations/management teams. If business Ethernet services are sold, supported, and managed by an independent group, that group can be targeted because you can identify the costs and limit the impact/scope of your changes to the place where benefits are available. If the same service is supported by a general team that does all manner of other services, it will be harder to isolate your benefits and make them plausible.
The watchword is think contained targets. Managed service providers who lease transport from third parties and integrate services with CPE or across carrier boundaries are probably the easiest early NFV targets. Virtual CPE may be their only real “equipment” and operating it their only operations cost. MVNOs would be easier targets than real mobile operators for the same reason, and mobile operators easier targets than operators who mixed mobile and wireline services in the same metro area.
NFV as an evolution and NFV as a revolution are hard to reconcile in a business case. In trying to do that, many vendors and operators have either manufactured savings by distorting numbers, or presented something so pedestrian in terms of value to profit-per-bit that operators yawn instead of cheer. You can get this right, but you have to think about it more and take the process seriously.