The Delta Perspective

October 2008

The Rise of the Enterprise:

Right time for telecom operators
to focus on ICT in the Middle East?
Author Andrew Snead - associate partner: asn@deltapartnersgroup.com
Antonio Carvalho - partner: ac@deltapartnersgroup.com
Andreas von Maltzahn - manager: avm@deltapartnersgroup.com

The Enterprise sector is

taking off in the Middle
East, buoyed by continued
economic growth and
extensive Government
development initiatives.
Is this now the time for
operators to refocus?

Information and Communication The Enterprise ICT market definitely

Technology (ICT) is a popular topic
of conversation amongst telecom
executives within the Middle East at
the moment and for good reason.
The region is continuing to experience
rapid growth within the Enterprise
warrants attention and there are
significant opportunities to create
value. However, this market is also
extremely challenging, as evidenced
by the low margins of BT Global
Services and T-Systems. Most critically,

sector as local businesses expand and the market demands a cultural

the influx of international companies
seeking a local presence in the
area continues.
Having been focused on rapid
Consumer growth, fuelled
predominantly by mobile, operators
are starting to wake up to the
growing opportunity within the
Enterprise segment. The market is
reaching a tipping point in a number
of countries, catalyzed by ambitious
Government ICT infrastructure
projects and the connectivity
requirements of the burgeoning real
estate market.
transformation with a shift in mindset
towards customer centricity and multi-
faceted solutions.
How should operators address the
opportunity? Dependent on their
relative capabilities, scale and market
share, there are generally two options:
1) A pro-active and “aggressive”
strategy focused on getting into the
market early to drive incremental
ICT revenues.
2) A more cautious “defensive”
strategy focused on partnering
and protecting the traditional
connectivity end of the value chain.
 As an indirect indication of such growth, Enterprise Internet connections are
predicted to grow at 9% CAGR over the next four years.
Exhibit 1: GCC Enterprise internet connections (000s)
Source: IDC
Managed service providers from
around the globe are starting to
target what they also consider to
be an increasingly attractive sector.
As examples, IBM is rumored to
be reinforcing its affiliated SBM
operation in Saudi Arabia and
Cisco recently opened its regional
headquarters in Dubai, pledging to
invest US 1BN in the UAE over the
next five years. In parallel, investment
in the market is being made by
local funds as evidenced by Dubai
Holding’s recent deal with the Voice
over IP specialist, Interoute.
Furthermore, the telecom giants from
Europe, North America and Asia are
also looking for a piece of the action.
BT, AT&T, Orange Business Services,
Verizon, PCCW and Vodafone are just
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a few of the experienced global players
establishing a presence, and they
are not here to simply make up the
numbers or to serve the local needs of
their global customers. They too see
the opportunity arising from the local
business growth and the likely need for
more sophisticated ICT services.
So what does this mean? Is the
Middle East market ready for an
ICT revolution or are we at risk of
extrapolating parallels with western
markets too quickly?
This paper aims to clarify the
opportunity and relevance to telecom
operators in addition to highlighting
the likely challenges and outlining the
potential strategic options.
 What’s the opportunity
and why the fuss?
ICT managed services generally refers to the
transfer of responsibility for the delivery of
specific network-centric services (or elements of a
service) from the client to a service provider.

These services include managed connectivity (i.e. wide area and local area networks)
IP-VPN, desktop, collocation and hosting.

Managed services is distinct from outsourcing in so far as it excludes the transfer

of people and assets. In addition, whilst not a rigid rule of thumb, outsourcing
frequently includes the transfer of responsibility for a particular function (such as
IT) or end-to-end process (such as order-to-cash) whereas managed services usually
involves the transfer of responsibility of more discrete elements of processes and
functions (e.g. LAN management).

Due to the blurring of the IT and telecoms boundary, there is no clear consensus on
exactly what constitutes ICT managed services. Market analysts and consultants alike
have different perspectives on what is “in” and what is “out” and consequently
deliver markedly different forecasts on the opportunity size. Some forecasts include
all IT and communications spend whilst others include those elements perceived to
be in the overlap i.e. net-centric IT. We also believe the latter represents the most
logical demarcation and include managed connectivity, such as IP-VPN within the
ICT bracket.

Exhibit 2: ICT is the growing intersection of IT and telecommunications

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 Exhibit 3: 2008 KSA Telecoms and IT Market

• IT services includes hardware and software install and design

• LAN/WAN management includes managed security, wide area and local area network design, installation and management
• Managed corporate connectivity includes Internet, and IP-VPN
Source: IDC; Delta Partners analysis

According to Ovum,
the global ICT managed
services market (excluding
connectivity)1 is set to
reach $66bn by 2012,
driven by a compound
annual growth rate of
around 18% over the next
four years
Unsurprisingly, a large proportion of
the historic growth of ICT Managed
Services has been in North America
and Europe, but attention is now
turning to the emerging markets,
including the Middle East.
As an illustrative example, the KSA
Enterprise IT services and connectivity
market is estimated to be worth around
$1bn in 2008. Whilst the true ICT
managed services component will be
less (i.e. factoring out non net-centric IT)
this spend is sizeable and growing fast.
offerings into new domains such as
network consulting and infrastructure
type services, the core motivation has
been one of strategic positioning with
two principal reasons in mind.
1) Protect core revenues: i.e. resist
competitor threats arriving from the
opposite end of the value chain.
Such threats are coming from traditional
and non-traditional players, due to the
delayering impact of the IP revolution.
The implication is a collision of telecom
and IT players at the ICT divide.

Why the fuss? The casual observer
might well remark on the market
still being relatively moderate when
compared to other elements of the IT
and telecommunications sector.
Key players such as T-Systems have
struggled to deliver cash flow positive
results whilst BT Global Services has
only recently delivered double-digit
EBITDA margin, and yet both have been
relentless in their pursuit of global ICT
managed service deals.
It’s all about strategic positioning
It’s not purely the current absolute value
that is of importance, it’s also about
strategic positioning. Whilst operators
1
Forecast includes IP-VPN carrier connection have been able to expand their service
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2) Prepare for IP growth: i.e. positioning
for the expected future growth of net-
centric applications & services.
It’s the expectation of growth in IP-
enabled products and services that
is capturing the imagination, such
as convergent applications, unified
communications and niche business
solutions (such as security offerings
targeted specifically at financial
services companies). As these products
and services proliferate, the size and
attractiveness of the ICT space will
continue to increase, making it evermore
important to IT service providers,
equipment manufacturers and telecom
players alike.
 Key growth drivers
Government, construction and new competition
is catalyzing the market
The ICT managed services market is services (e.g. security products for
being driven by a number of regional post-pay transactions); (b) a lack of
and global factors. local skills to perform many of the
tasks internally; and (c) the desire
Local ‘pull’ factors are stimulating to lower cost and refresh legacy
growth: equipment.
1) ICT government agendas:
3) Burgeoning real estate boom:
Government e-enablement initiatives
Development of new Corporate and
such as eLearning, smart city
Residential property is continuing to
developments and the modernization
generate ICT infrastructure projects
of Governmental departments are
across the region. This is particularly
catalyzing markets. In some cases,
true in the UAE where developers
Governments are mandating the use
seek new avenues to differentiate
of B2B gateways for the interaction
their offerings from their competitors,
between commercial companies and
in some cases promoting connected-
ministries, thereby coercing businesses
home and future-state business parks.
to adopt new ICT capability.

A number of construction companies

2) Growing ICT sophistication within
also view the ICT component of their
the Enterprise sector: Enterprise
developments as business opportunities,
demand for ICT managed services is
thereby further enlarging the
growing due to (a) the need to serve
competitive field.
growing Enterprise and Consumer
populations with more sophisticated

Exhibit 4: Casting an eye across the region and assessing a number of factors, such as relative managed connectivity
and IT spend, it’s not surprising that the UAE and KSA markets are attracting most of the attention.

Source: UN, World Economic Forum, Delta Partners

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 Global ‘push’ factors are driving
increased competition:
1) New non-traditional players are
arriving: The arrival of IP networks has
allowed non-telecom service providers
to offer network independent products
and services that can be delivered
directly to customers as illustrated by
“over-the-top” offerings from Google,
Microsoft and Yahoo.
2) Existing players in pursuit of
growth: IT integrators, equipment
manufacturers and global Telcos are
all looking for new revenue growth
opportunities. Traditional IT growth
has slowed across North Africa and
Europe to around 5-6% whilst the
large global telcos continue to struggle
against increasing competition, voice-
over-IP erosion and mobile substitution
in their domestic markets. Many of
these global players are now focusing
on the Middle East for growth
Exhibit 5: IP is enabling the opening up of the value chain
Example: KSA
Source: IDC and Delta Partners analysis; 1 Non-exhaustive
2
(ABQ Zawya Ltd Private Equity Monitor 2007)
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opportunities, thereby increasing
awareness and publicity.
From the Consumer perspective,
Internet take up has historically been
limited due to high prices, poor quality
and a lack of Arabic content. This is
starting to change as competition
increases and alternative access
technologies stimulate demand through
additional devices such as laptop
computers and PDAs.
A lack of compelling local content
has, in part, been the result of a
comparatively low level of private
investment as evidenced by $1.6bn
of private equity investment in
technology/communications/media
compared to $2.3bn in real estate.2
However, this is potentially starting to
change with a number of large players
rumored to be developing syndicated
content plays.
Where should operators
focus from a products and
services perspective?
The region remains relatively immature in terms
of Enterprise connectivity services.
Many countries still have reasonably
low broadband penetration, partially
due to relatively slow liberalisation
in some markets. Even in the more
developed markets, there is a lack of
full carrier grade offerings e.g. many
operators are not able to provide basic
Quality of Service (QoS) for MPLS or
point-to-point Ethernet connections.
Operators need to get the basics right
first and foremost
On the assumption that competition
will increase in time, the initial
priorities for most operators should
centre on:
1) Get the basics right: Such as
delivering quality of service to secure
the connectivity heartland. Whilst
many incumbents continue to enjoy
privileged last-mile access, this will
inevitably change in time through
increased competition, alternative
access technologies and wholesale
line rental regulation.
2) Drive Internet take-up: Drive the
uptake of connectivity and Internet
services, particularly in the SMB
market, thereby creating a foundation
layer of customers to whom
additional products and services can
be sold.
3) Establish simple managed
connectivity propositions: Such as
managed IP-VPN, managed security
and managed Wide Area Networks
(WAN) to develop internal skills
through lower risk propositions.
In time, Enterprise Voice over IP (VoIP)
may be significant due to the high
volume of green-field business parks
coupled with the concerted efforts of
hardware and software manufacturers
(such as Cisco) to push ‘office in a
box’ type solutions at more acceptable
price points.
Beyond this, operators need to decide
how far down the value chain they
should proceed
There is no single approach and the
answer will depend on the relative
opportunity, competitive market
and ambition of the organization.
However, as we highlight later, the
ICT market requires new capabilities
and operators will find it increasingly
challenging the further they move
away from their connectivity heartland
towards IT services. Many European
operators have attempted to move
into the systems integration (SI) and
business process outsourcing (BPO)
markets too quickly, burning their
fingers in the process.
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 Which customer segment
should operators prioritise?
One of the key questions many executives are
asking is “which segment should we focus on?”
Whilst the volume of Small Medium
Business (SMB) companies outweigh
those within the large Enterprise
segment (as highlighted - Exhibit 6)
the more sizable revenue opportunity
lies within the latter. As an example,
approximately 67% of the 2008 KSA
ICT managed services spend is estimated
to reside within the large Enterprise
segment.
There exists two main clusters:
a) Local enterprises growing quickly
and looking to expand (in some cases,
internationally).
b) Arrival of global conglomerates
such as Reuters and Goldman Sachs
seeking a local presence.
It’s the latter who are perceived to be
catching the attention of big global
players (such as Orange Business
Services and BT Global Services) but
they too see the opportunity of growth
within the local ecosystem.
The SMB segment is interesting due
to the volume of businesses and
potential for some of them to grow
into large enterprises with more
sophisticated needs. However, it’s
also a very challenging segment to
serve profitability due to the need for
Exhibit 6: Number of SMB and Large Enterprises by Country
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a sufficiently strong touch point across
a high volume group. Even within
the more mature markets, operators
have struggled to serve this segment
successfully.
Initial priority for most operators should
be on the large Enterprise segment
For the more sizable operators, it
makes sense to prioritize the large
Enterprise segment from a threat and
an opportunity perspective. However,
parallel focus should also be applied to
driving internet penetration in the SMB
sector, thereby creating a foundation
layer for future products and services.
SMB offerings should be highly
standardised
For smaller operators with a
predominant SMB/Consumer customer
base, an ICT proposition might still make
sense although it is imperative to focus
on one-to-many standardised offerings
(e.g. software-as-a-service).
Incumbents should focus heavily on the
Government sector
In terms of verticals, the key sectors
are likely to be Government, Financial
Services and Oil and Gas.
Incumbents continue to enjoy a
privileged position with Governments
through continued ownership or
through informal relationships. As such,
they’re extremely well positioned to
take advantage of such opportunities as
prime contractors and should therefore
prioritize Government as a key sector.
However, given the intense public
exposure these programmes often
have, incumbents need to ensure they
have the sufficient capability to execute
accordingly. Failure to do so could
tarnish their brand and inhibit their
ability to win future work.
What capabilities are
required?
So where should operators start? We’ve
touched on the characteristics of the industry
and the ensuing challenges, but one of the key
questions surrounds building capability.
It’s all about solutions not products
From a people perspective, operators
need to ensure they have access to
resources that understand what’s
required to win and deliver managed
services contracts. The market demands
a consultative and solutions-style
approach and rewards trusted advisors
that demonstrate an understanding
of the client’s problem, rather than a
one-size fits all strategy. From a skills
perspective two of the most important
elements which operators frequently
fail to give sufficient prioritization are
progamme management and partner
management. These are important since
they act as the glue that keeps the many
moving parts together.
Partnering is difficult to get right and
not a panacea for all ills
Whilst partnering with another
organization can provide much
needed skills quickly, there are
inevitable challenges that require active
management, including channel conflict
(and lack of trust) and ambiguity over
responsibilities, resulting in finger-
pointing and contractual dispute when
things go wrong. Whilst cooperating
models and prime/sub contracts can
minimize potential fallout, there will
inevitably be shades of grey that require
careful management and resolution.
Changing the culture is the biggest
challenge – change the people or
change the people
A cultural transformation is required
in terms of mindset and behaviour,
requiring a shift from the relative
bureaucratic and regimented approach
of the traditional operator towards a
more agile and entrepreneurial outlook
of a service provider. A key consideration
is a realignment of performance
management and incentives. Too
frequently, the sales team is rewarded
on sales order value (SOV) which results
in prioritization of revenue over margin
and closure of deals the organization
cannot realistically deliver. To change
behavior and culture is the hardest
challenge of all and takes time. An
acquisition can help expedite this
process although only if managed
effectively.
Resist the temptation to over-engineer
every solution
The principal issue is the industry
hasn’t yet fully matured from a process
perspective, and as such, many providers
(including the experienced ones)
have not industrialized their sales and
delivery cycle or established the right
balance between standardization and
personalization. The implication is an
overly high cost-to-serve.
As an industry, the telecoms sector
still lags behind other industries (such
as manufacturing and retail) from a
customer-centricity perspective and
whilst incumbents are very adept at
industrializing the creation and delivery
of standard products (such as ATM and
frame relay) they struggle to translate
the same characteristic into managed
services. Part of the answer lies in the
highly automated nature of the former
when compared to the latter.
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 The implication is that managed
services contracts are often over
engineered and too bespoke, rather
than relying on standardized and
reusable components, with a layer of
appropriate personalization on top.
It’s not that highly bespoke solutions
So what? - What strategies
should local operators adopt?
The ICT opportunity is significant and all operators
need to have a clear strategy for how they respond to
it. Given the variation in competitive dynamics, market
opportunity and regulation across the region, there isn’t
a one-size-fits-all strategy.
The situation for the incumbent is,
as always, different to that of the
challenger. For some incumbents, the
relative lack of competition at the
access layer affords an opportunity to
expand down the value chain towards
IT services without the immediate
threat of traditional connectivity
disintermediation. Alternative access
technologies are less effective for
Enterprise services whilst digging new
ducts for independent fiber access
takes time (although the Data Service
Providers (DSPs) are progressing
with increasing speed within KSA).
The implication is that some local
incumbents can benefit from the
opportunity of the ICT revolution
without necessarily experiencing
an immediate threat, especially
when compared to their western
counterparts. This will however,
inevitably change in time.
For those incumbents facing intensifying
competition, they need to respond
quickly to avoid heavy losses of
traditional revenues.
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are wrong, they are fine for complex
situations where the client recognizes
the complexity and is willing to pay the
premium. However, a high proportion
of clients require far more standardized
solutions and only willing to pay
commodity prices.
The key question for incumbents is
therefore ‘when’ and ‘how’?
1) Should they pro-actively expand
into ICT services in advance of the
competitive threat?
2) How should they establish the
required capability?
There are probably two strategic options
from a ‘When’ perspective:
a. A largely reactive strategy that
focuses on expanding into ICT
services once the competitive threat
becomes significant. A number of
incumbents appear to be adopting
this strategy, although not always
consciously.
b. A pro-active strategy that focuses
on building a compelling ICT offering
in advance of the competitive threat
to get in early and drive the industry.
 Exhibit 7: Operator Strategies for the ICT Market
There are two principal approaches from
a ‘How’ perspective:
Approach 1: Tactical defender strategy.
A tactical defender strategy has the
principal objective of protecting core
connectivity revenues – i.e. building
an ICT offering to protect traditional
revenues with less focus on generating
new ICT net income.
Such an approach is unlikely to warrant
significant investment and is appropriate
for those operators with insufficient
scale to make the economics work
for an expansive play. Instead, such
operators should focus on partnering
with experienced players, entering
into consortia deals as the prime
contractor, leveraging their local brand
and relationships. In this instance, the
operator maintains its core connectivity
revenues and presents itself to the
market as an ICT player, yet allows the
experienced solutions players to take
on the more complex elements. Given
the size of the operator, it makes sense
to limit the expansion down the value
chain to avoid the more challenging and
scale-based IT services end. Naturally,
the operator might expand its own role
in time.
Incumbents opting for this approach are
likely to be smaller operators, potentially
operating in a duopolistic market and/
Not likely
or with heavily Consumer centric focus.
It is likely (yet not always the case) that
the more “reactive” operators will adopt
this approach.
Approach 2: Aggressive ‘Market-
Maker’ strategy. This strategy has the
principal objective of both protecting
traditional revenues and generating
incremental ICT net income. Such an
approach is likely to be adopted by
larger incumbents with both scale and
a sizeable corporate customer base,
seeking to establish a market leading
position that can contribute positive
shareholder returns. They will also view
an attack as the best form of defence.
Such players are likely to have the
means to warrant a more adventurous
expansion down the value chain,
potentially including data centre and
application management, with a view
of eventually building on-demand
computing offerings in line with their
western counterparts. However, as
highlighted earlier, the IT end of the
value chain presents many pitfalls for
operators and should be approached
with great caution. It is likely (yet not
always the case) that the proactive
operators will adopt this approach.
The key question is how to establish
the capabilities to execute this strategy
successfully. Partnering can provide
short-term skills but unlikely to provide
long-term sustainable capability if
the objective is to generate bottom
line contribution (i.e. partnering is
predominantly pass-though revenue
with little margin).
The second option is an acquisition of
an experienced player. This could add
capability quickly and help catalyze the
cultural shift although the challenge
comes from identifying a suitable target
and managing the integration. Due
to the nascent state of the market,
it’s unlikely to be populated with a
proliferation of experienced players,
rendering a local acquisition possible
but challenging.
The third option is a transformation
programme focused on building internal
capabilities across the three principal
dimensions (e.g. process, people and
systems). Such a programme can build
sustainable capability although requires
time, investment and prolonged senior
management dedication and focus.
These options are by no means mutually
exclusive and the likely answer is a
blend of all three, with the emphasis
dependent on the specific aspiration and
market conditions.
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Conclusion
The Enterprise segment offers operators a new wave of
growth in the face of a maturing Consumer business.
The ICT market is reaching a tipping point in a number
of countries presenting operators with significant
opportunities to augment their top line.
Irrespective of the adopted strategy, operators need
to ensure they approach the ICT market with a
clear understanding of the challenges and pitfalls.
Fundamentally, it’s a different type of business to
traditional telecoms, requiring a shift in culture,
capabilities and focus.
Operators should therefore filter the facts from the
hype and consider their approach carefully. This is not
a one-size-fits-all market and only some operators will
create positive shareholder value. As such, operators
should stand back and consider their options before
they proceed.

Delta Partners is the leading integrated management advisory and investment firm specialized in the Telecoms, Media and Technology

(TMT) sector in high growth markets, with more than 100 professionals operating across the Middle East and Africa from its offices

in Dubai and Johannesburg, and through its three highly synergetic business lines:

Advisory: Delta Partners, as the largest advisory team specialized in telecoms in the Middle East and Africa, operates in more than

25 markets in the region, partnering with C-Level executives in telecom operators, vendors and other TMT players to help them

address their most challenging strategic issues in a fast-growing and liberalizing market environment.

Private Equity: As a fund manager, Delta Partners manages a $75M private equity fund, targeting investment opportunities in the

TMT space in the Middle East and North Africa. Delta Partners private equity business unit leverages the Group’s unique TMT industry

expertise to create value for its investors throughout each stage of the investment cycle, from deal sourcing, to opportunity analysis,

and support to portfolio companies.

Corporate Finance: Delta Partners provides corporate finance services and has been involved in several telecom transactions in the

region. As true industry specialists, the firm offers a differentiated value proposition to investors and industry players in the region,

either to the seller or buyer side of the transaction. Delta Partners actively leverages its close link to Delta Partners’ private equity arm

to access the investor community as well as top-level financial talent.

At Delta Partners we deliver tangible results to clients and investors through an exclusive sector focus, and a unique approach to

services, combining strategic advice and hands-on pragmatic approach.

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