Financing The Network

The Important

• Functional budgets can be sticky and rigid, impacting architecture/design optionality and innovation.

• The companies with the most flexibility to shift money between operations and network spend, are going to be the companies with the most potential to innovate.

• A simplification of business goals can be quality/performance goals, framing the role of network architects, engineers, and operations.

• Cannot reduce complexity for the same demand curve (speculation)

Discussion

Budgets are a huge impact on what happens in networks. Whether capacity and capabilities are weighted towards the network or operations, the scope and scale of services, and ultimately overall quality.

Before diving into some of the critical aspects of budgets, it is worth revisiting the top of the martini glass and considering what factors drive budgets.

Outcome

Every strategy starts with the question, what the heck are we trying to achieve. You know the old saying, if you don’t know where you are going, any road will get you there. In more formal strategy literature dealing with business strategy, there is this idea that a company puts a stake in the ground, and says, this is what we stand for, this will be differentiate the company, and then after communicating that often enough, the employees self-organize around it, and develop a way of doing business that derives directly from that focal point, and it is the way of doing business that ends up differentiating the company. That focal point could be anything, but for the sake of argument, let’s call it the “value proposition”.

That kind of value proposition clarity is not always present in a company of course. In fact, I suspect it is rare, especially as companies become more like each other as industries mature. So a network architect and business planners, may focus on something at a lower level of abstraction, for example what services, and the overall quality of the network. I suspect many networking professionals think about quality a great deal, because that impacts customer churn and also impacts the viability of some services. A great deal of work is done by equipment vendors, standards bodies, and network operators, in the name of quality.

Quality is one of the determinants of demand. Sometimes it is explicitly called out in economics literature, sometimes it is not. However, it is not hard to understand, even from everyday experiences (if we still trust such things) why quality is a determinant of demand.

Figure 1. Quantity demanded and quality as a determinant of demand.

For a given level of quality, that stays constant, as price changes, the quantity demand moves up and down a single demand curve, for example, D1 in Figure 1. However, when the quality (and other determinants of demand) change, the demand curve shifts. So for example, if a network operator was operating at one level of quality, it might have demand curve D1. If the same operator improves the quality of the network, the demand curve might shift to D2, so now the network operator can charge more (in theory) for a given quantity demanded.

Likewise, if a competitor improves quality, and the network operator does not, then the demand curve may shift in the other direction. Other determinants of demand include number of customers, overall economy, financial health of customers, tastes and preferences. In the traditional telecommunications industry, long-term contracts have also made pricing sticky. So there is more going on here than quality, but I suspect, quality is one of the top-of-mind outcomes that many network architects, engineers, and operations people work towards. Disruptors to an industry sometimes worry about other things, like enabling a completely new experience, and are sometimes willing to sacrifice a little quality as they pursue that new experience / value proposition.

To simplify the thinking around this subject, this discussion aggregates (reduces information) the quality of all services, and the value of individual services, into one determinant of demand. Which is not such a leap of faith, given that the same physical infrastructure, often delivers multiple services.

Two other points about demand curves. One network operator might decide to have a demand curve to the left of another. That’s OK, maybe they have a strategy that taps into a large market of customers that are not willing to pay a premium price for a premium service, or maybe the network operator might have a special insight on how to lower operations costs. That’s OK, that is what competition is about. An ongoing conversation about what customers really want, and what they are willing to pay for it. What is important in the context of this discussion is that decision may have implications for network architecture/engineering, maybe some set of network features and complexity are not required to deliver that business model.

Previously, I have asserted a position that you cannot reduce complexity for the same level of capability and certainty. In the context of this discussion, I would speculate, based on intuition, without proof, that you

• Cannot reduce complexity for the same demand curve.

Whether that is true or not, I don’t know, it is just a hunch. It is something I will be thinking about though, in future work.

Return

When a company thinks in terms of return on investment (ROI), return on invested capital (ROIC), or return on assets (ROA), is not so much the focus here, even if the they have different implications. The point is, there needs to clarity of assumption around how much is a company willing to invest, in a given year (annual budgets), and over multiple years, to achieve an outcome, at a given return, whether that be measured in operating margin, cash flow, or something else.

Many companies will at least have an idea of what they want their P&L (profit & loss) to look like, so that setups a somewhat easy formula: the outcome desired, will bring in R revenue, at a cost of C, so P is achieved on the P&L.

R - C = P

R is often a forecast, P is the desired financial outcome (one measure of return), so C is the cost that a company is willing to have. Then the internal haggling begins…

Budgets

Which brings us to budgets, where the rubber hits the road; where the management team gets to allocate resources to achieving desired outcomes, or not.

There are many nuances in the budgeting process. This discussion is not concerned with all of them. This discussion is only concerned with what the optionality of a network is. That is, does an organization have the ability to shift money from one pot to another, to make tradeoffs.

If budgets are rigid, within well-defined silos, then that is going to reduce the options an organization has, as well as a network architect. A network architect can not freely consider the option of switching complexity from the network to operations, if there is no ability to shift budget from network spending to operations, all a network architect can do at that point, is make the case that operations needs to increase its budget, and hope someone will care. In the real world, that is sometimes going to be a dead end.

In the real world, budgets are sticky, people who own budgets are very protective of them, and budgets often do not change much from year to year, unless there is a collapse in the market / economy, or something of that nature. Why is this important?

The companies with the most flexibility to shift money between operations and network spend, are going to be the companies with the most potential to innovate.

If you look around the companies that build networks, you can probably already see this dynamic at play. Large Telcos often have huge barriers between their CAPEX and OPEX budgets, enshrined in organizational constructs. As technologists, we often think about the differences between hyperscalers and telcos in terms of the former having significant software expertise, especially in the new paradigms of CD/CI. I would argue, that the budget rigidity of many telcos, is another major factor in the ability to change, and the optionality they have with respect to network architecture. it may even be a factor that is causal to whether they can shit to new paradigms. There are of course other factors.