Enlarging the managed network services opportunity through virtual CPE

Michael Kennedy is a regular FierceTelecom columnist and is Principal Analyst at ACG Research

Michael Kennedy

Virtual business CPE has the potential to create a win-win situation for small and midsize businesses and network operators. Small and midsize businesses are trying to develop network-centric business models, but networks present challenges that are beyond these businesses' managerial and technical capabilities.

Service providers, on the other hand, would like to offer managed network services to smaller businesses, but they are struggling to drive service delivery costs down to a point where services are both attractively priced and profitable. Virtual CPE can resolve this dilemma by increasing network service velocity while reducing initial and recurring service costs.

A new network-centric business model is emerging. As a result of increased user network dependency, barriers of time and distance are being eliminated and customers, partners and suppliers are being brought together into a broad business ecosystem that accelerates business processes and innovation.

Although it offers many benefits, moving to a network-centric business model presents new management and technical challenges. Security challenges are increasing as the boundaries between private networks and the Internet are blurred. Bandwidth requirements are increased, as are varying quality and performance requirements.

Large businesses can internally deliver network management services. They can staff the network function to ensure around-the-clock service delivery and coverage. Staff must have multiple technology certifications for networking equipment, including routers, Ethernet switches, firewalls, intrusion detection systems, content filtering, VPN devices, Wi-Fi, mobile devices and server, desktop and mobile operating systems. Each staff member also requires continuous technical training to maintain skills in this rapidly changing field.

Small businesses rarely have the scale to employ any full time IT staff, let alone network specialists, while even midsize businesses typically cannot support the many specialized skills and staffing coverage required to operate a network-centric business.

Managed network services allow businesses to outsource the day-to-day operation of network links and equipment and ensure network security. The service provider can deliver comprehensive, high-quality service because it has a large, experienced staff that specializes in router and security technology. Managed networks are bigger and more robust than in-house networks, leading to greater reliability and resiliency with industry-average service-level agreements promising 99.95 percent availability. Service provider managed networks are monitored 24 hours per day, yielding the benefit of continuous review and fast response to network events.

Though managed network services eliminate the need for a large specialized networking staff, small and midsize businesses view today's managed network services offerings to be too costly and hard to customize to their needs.

Network services are implemented today using hardware-based CPE and service provider-housed physical appliances. Once the CPE is in place, there is a strong cost disincentive to replace or upgrade it. Consequently, different types, ages and versions of software and hardware have proliferated. For similar reasons, a wide range of dissimilar service provider-based hardware and software also exists. The embedded equipment base, therefore, is difficult and expensive to modify and maintain. This also inhibits service and feature upgrades and downgrades.

The CPE equipment stack is the root cause of the high cost, inflexibility and long installation intervals. Adds, moves or changes frequently require replacement of the CPE with associated truck rolls and several manual updates to databases and network elements on site, at the network operations center and at the customer services center.

Virtual CPE leverages a simple Network Interface Device (NID), and the CPE software is moved to a virtual function located in a cloud data center. The service provider-based network appliances are replaced by virtual network functions (for example, firewall or application acceleration) also located in the data center.

The NID is a simple network element with minimal support requirements. It is shipped to the service subscriber in a plug-and-play configuration. This eliminates truck rolls, on-site customization and is standardized across all customer locations. Similarly, a consistent software version is used for all subscribers, and it is operated and maintained in a controlled cloud data center environment. Orchestration and automation capabilities eliminate costly and slow manual processes, seamlessly and dynamically scale resources and support a service portal that gives subscribers control from any location.

In two recent studies, I found that the service provider's upfront CPE costs are reduced by about 60 percent, which exploits the better scale economies of the data center. Virtualization also produces many operational savings, including 50 percent sales labor reduction, 75 percent service fulfillment reduction, 60 percent shorter time to repair, and 80 percent less maintenance expense over five years. One recent study showed a 118 percent return on investment on the investment in virtual CPE, while another found a 36 percent net present value (NPV) increase over five years.

Big cuts in service providers' upfront and recurring costs when reflected in much lower service prices make managed network services affordable to many more small and medium businesses. In addition, customer portals and dramatic reductions in service delivery transform network services from a barrier to change to a dynamic tool that aids the creation of a network centric business.

Michael Kennedy is a regular FierceTelecom columnist and is principal analyst at ACG Research, www.acgresearch.net. He can be reached at [email protected]