International banks seeking to divest themselves of the arduous task of
managing their voice and data networks have a confusing array of
services to choose from. Monica Horten
trawls through the options.
Many banks which consider themselves global businesses are looking at ways of shedding the work load involved in operating their tele communications networks. And now is probably a good time to do so because the phone companies are desperate to establish market share in the emerging area of international network services. JP Morgan, for instance, signed an $80 million contract in April with US telecomms company MCI for the management of the bank's international voice telephone network over the next five years. MCI will take over the bank's existing network facilities and sell services back to it. `With increasing globalisation, our networks grew rapidly in the past few years.
We took a decision two years ago, to contract out, rather than build our own,' says Tom Hynd, vice- president of global network services at JP Morgan. The services offered by phone companies fall into three brackets: virtual private networks, global outsourcing, and managed data networks. A virtual private network (VPN) offers banks a way to link the switchboards at different office sites, without the expense of installing and running their own private network. In its most basic form, a VPN means that staff can use short code internal phone numbers to any of the sites which are connected. Those sites could even be in a different country. More sophisticated VPNs also permit the system to call back when an engaged number becomes free, or to display the number of the person calling. Calls may also break out into the public network - these are known as `off-net calls'. Different tariffs are charged for each.
Global outsourcing services offer to do everything from designing the network - voice or data - to obtaining and maintaining the lines. The strategic importance of global outsourcing to the telecomms industry was reinforced last month by British Telecom's decision to take a $4.3 billion stake in MCI and set up a $1 billion joint venture to eventually replace Syncordia, BT's US-based global outsourcing operation.
A managed data network will manage the lines and the data traffic, ensuring that the network is available when the customer needs it. Usually, the service operator is responsible for obtaining the lines from the phone companies - their unique selling point always has been that they cope with the difficulties of obtaining lines, so that the customers are spared the headache. The leading international managed network services include Infonet, Sprintnet and BT Tyntnet, with some newcomers to watch such as Sita/Scitor and Cable and Wireless.
In the US, VPNs have existed in some form since 1986 and are regarded as a mature technology. They represent a growing form of revenue for all three long-distance phone companies - AT and T, MCI and Sprint. A report last year by the Yankee Group market research company said revenues for 1992 and 1993 would increase by 90 per cent and that by the end of 1993 they could be as high as $3.9 billion.
VPN services were at the heart of a recent tender by the Bank of America for telecommunications services. The contract, worth more than $250 million over four years, was awarded to MCI. Johnathan Crane, MCI president of national accounts, says banks are increasingly asking for virtual network services for both voice and data. One reason concerns their ability to keep up with new technologies, such as frame relay, asynchronous transfer mode and switched multi-megabit services (where lines are available on demand in larger chunks than the traditional 64Kbits/s or 2Mbits/s).
Another reason is mergers and acquisitions: `The larger banks are aggressively acquiring and merging with other banks. In the past, you had to re-design the network for voice and data in order to absorb the new entity. When in a virtual environment, you literally enter a software database and you can open up new locations, move locations, and so on. It gives you a heightened flexibility,' says Crane.
In Britain, BT and Mercury both offer a VPN. Barclays Bank was the first organisation to sign up for BT's Featurenet in late 1991. John Grtnimett, chief executive of Barclays Network Services, wants to use the VPN to expand the private network facilities to many of the bank's smaller branches where a private line is not viable.
But international VPNs are where the greatest interest lies. The most advanced of these is GVPN (global virtual private network). Originally, a Cable and Wireless joint venture across the UK, the US and Hong Kong, it now includes Canada, Australia and the Netherlands, with Sweden and Singapore soon to sign on.
GVPN runs on the C and W `global digital highway' fibre optic cable that links the UK to Hong Kong. The claimed advanta ge of GVPN is that it can provide a full set of telephony features across all locations. This is because all shareholders install the same Northern Telecom switching technology. Other international VPNs at present rely on bilateral agreements between phone companies: difficulties can arise when they try to interwork incompatible switching equipment.
The GVPN shareholders between them have spent some $100 million on the network infrastructure, including customer service centres in London and Virginia.
Cable and Wireless' UK arm, Mercury, has additionally launched a separate International VPN, called IVPN, as well as its own national VPN. Both compete with BT's International Featurenet which can connect to VPNs in the US, Australia (Customnet), France (Colissee) and Japan (Vimet).
Hynd wants to move JP Morgan's internal telephone facilities onto a VPN, but says there are issues of functionality and cost that have to be resolved first. He wants to see a fast call set-up facility that would give him an alternative to the direct leased line connections used today on dealerboards. The US phone companies are working to provide this on their domestic VPNs. He also believes VPN tariffs are not yet cost competitive against private networks, although he acknowledges that his last full review of pricing was carved out a year ago, and that some tariffs have been reduced since: `Today, our internal network is cheaper.'
Tarriffing of VPNs is a contentious issue. In many cases, deals are individually negotiated, but customers can usually reckon on getting a discount over international public telephone network tariffs. On GVPN, for example, they could pay around 20 per cent less.
But often the level of tariff depends on the regulatory situation and what the phone company wants to achieve. Telstra, Telecom Australia's offshore trading arm, for example, made its Customnet VPN service very attractive to corporate customers, offering them a substantial discount on PSTN call charges. It was an attempt to tie them in and pre-empt any attack from its fledgling competitor, the Bell South/C and W consortium, Optus. Telstra claims to have exceeded sales expectations.
In the US. VPNs have been heavily promoted as a means of volume discount, with discounts as high as 38 per cent on five year contracts being possible. Further deals are offered to customers interested in calling card or free phone facilities: for example, sales reps could be given a calling card and PIN, so they can call the office from anywhere, and the call travels via the VPN. The call tariff should be cheaper than PSTN rates.
Similar tariffing issues arise with global network services and managed data services. None releases a tariffing schedule and all deals are done behind closed doors, and often under the extra cover of a confidentiality agreement.
Banks should be aware, however, that all the service operators are battling for customers, and that it should be possible to negotiate a very good deal. At the upper end, global network services are seen as the way for the future: those which can sign up customers now will be the successful global phone companies of the 21st century.
BT and AT and T are aggressively spending huge sums on global network infrastructures and are cut-throat in going for clients. C and W and Unisource are more quietly working towards the same goal.