Just as Ericsson’s Telcordia acquisition was perhaps 2011’s biggest BSS story, NEC-NetCracker’s acquisition of Convergys’ BSS business was 2012’s. The BSS/OSS sector’s future is playing out before our eyes as large network equipment providers scoop up significant BSS/OSS assets to chase down massive, long term managed services contracts with big operators. What’s different in this case, however, is that NEC never assimilated NetCracker. It acquired the company, left it intact, merged its own assets under it, then bought Convergys’ BSS business and added it to NetCracker’s portfolio. In almost every other network equipment player’s software acquisitions, we’ve seen a complete absorption of the acquired entity, but not here. NEC’s big bet on NetCracker’s brand and expertise may hold the key to debunking an old truism; hardware companies struggle to succeed in the software business.
NetCracker Remains Independent
When companies like Ericsson and Cisco Systems make major acquisitions, they typically assimilate acquired companies into their culture, product portfolio and brand conventions. The acquired entity usually vanishes, in terms of its brand, and often its management team goes with it. But NEC made a big bet that NetCracker’s brand strength in the IT arena, particularly in North America and EMEA, will help to fuel its global aspirations as an end-to-end hardware, solutions, and services provider.
Historically, it seems that many hardware players have failed to recognize that the software and solutions business is radically different from infrastructure hardware. These differences encompass everything from organizational management and consultative sales to R&D and delivery. Further, the groups within telcos with which software companies interact are completely different, if not completely separate, from those with which NEC and its peers traditionally transact.
Culturally, these businesses tend to be very different as well. In the case of NEC and NetCracker, there’s not a whole lot of cultural overlap between a Boston-based, entrepreneurial, organically-grown, independent company and a corporate giant from Japan. But sources say NEC recognized and embraced these differences. Its ability to understand the nuances of the software business probably goes back, at least, to 1977 when its legendary Chairman, Dr. Koji Kobayashi, coined the phrase “C and C” – for computing and communications. Kobayahsi-san understood that while these two areas inevitably would converge, they are distinct and very different in how they are developed and brought to market
More practically, sources say that NEC leadership realized that if it forced NetCracker into its mold, it would hurt the company, not benefit optimally from its expertise in software and solutions, and therefore would fail to maximize its value. Clearly it still holds this opinion; NetCracker remains operationally independent four years later and NEC continues to have assets added under its roof.
The Convergys BSS Play
NEC and NetCracker leadership put their heads together and made the move for Convergys’ information management business, which had been on the selling block since 2008. Not only was this an opportunity to pick up an underperforming asset which, according to inside sources, was treated as a red-headed step child within its former parent. While it may take NetCracker up to a year to turn around the Convergys information management business due to all the challenges that come with an underperforming asset, it gave NEC and NetCracker a chance to lay the foundation to cover the entire network, operations, and revenue management spectrum needed for the big poker game.
This deal, however, also created a unique entity in the BSS/OSS sector – an end-to-end business backed by a $40 billion powerhouse – because Convergys Information Management didn’t become an NEC entity, it became part of NetCracker. With NEC in the background, NetCracker has the resources to drive new product innovation and delivery capabilities into that asset and – forgive the cliché – create a whole that is (and needs to be) greater than the sum of its parts.
The Big Managed Services Game
The shift among operators toward long term managed services deals began several years ago. It pretty much started out at the network level. Telcos are under constant pressure not only to manage their networks but also to expand and upgrade them, especially in light of mobile’s rapid evolution. Over time, they moved generic IT applications and billing into the managed services domain as well. The key drivers were to push as much of the cost, effort, innovation burden, implementation risk, and operational management onus over to the vendor. Ultimately, it gives the telco “one throat to choke” in key areas of the business and makes the day to day implementation, operations and maintenance headaches someone else’s problem. It should allow operators to focus on services and customers (though often they just fall back to bean counting…which is a story for another day).
But if the managed services trend started down at the network layer, it moves up the stack pretty quickly. Network leads to performance and network management, which pulls in analytics and connects to service and policy management, which directly impact customer experience, which leads to charging, billing, and payments and ultimately to all-things-revenue- management. So, if you want to win in the big, long term, winner-take-all, managed services poker games that will play out over the next decade, it stands to reason that you need to be pretty darn good at both the network and IT sides of an operator -from wiring boxes together to supporting strong customer experiences to running billing transactions and collecting payments.
This is why I think the NEC-NetCracker-Convergys acquisition was such an important story that unfolded in 2012. Right now, there may not be another group in the BSS/OSS space that has all three legs in this stool: independence, market power, and an end-to-end play that gives it access to the multi-billion dollar managed services deals. I think we will see more of these moves. Some will succeed and others will fail spectacularly. In 2013, I look forward to seeing what might happen with the remaining, big stand-alone BSS players as more deep-pocketed network equipment players seek marriages that give them top shelf capabilities from down in the network to the top of the BSS stack.
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