In a research note issued Tuesday, Leopold states that, when the carrier first held meetings to discuss the new purchasing policy in mid-May, AT&T's approach, which involves reducing the number of vendors it deals with, didn't look anything out of the ordinary, as all major operators are looking to simplify their procurement strategies and increase efficiencies.
However, feedback from Leopold's contacts suggests the move, which will see AT&T "identify two primary suppliers in each of roughly 14 technology domains" is not just driven by the procurement department, but "has senior level management support."
That's important because, in the past, the analyst writes, attempts by carrier procurement departments to restrict the number of technology suppliers has met with resistance from the networking and operations teams, which have insisted on deploying the most appropriate technology available in the market. This time, though, Leopold believes the move has the backing of AT&T's CTO, John Donovan, who, with a background at VeriSign Inc. (Nasdaq: VRSN) and Deloitte Consulting, "did not follow a more typical career path in the Bell System."
As a result, Leopold believes, the new policy will increasingly favor large, diversified vendors like Alcatel-Lucent (NYSE: ALU), Cisco Systems Inc. (Nasdaq: CSCO), and Ericsson AB (Nasdaq: ERIC), and, potentially, "complicate business for smaller players such as Adtran Inc. (Nasdaq: ADTN), Ciena Corp. (NYSE: CIEN), and perhaps Juniper Networks Inc. (NYSE: JNPR)," though he stresses it's "premature to panic."
Further details of AT&T's plans are sketchy, however. The new strategy will involve "identifying roughly 14 technology domains and selecting two vendors for each. We suspect the domain definitions have yet to be finalized." Where a dominant vendor in a particular domain can't supply the required capabilities, partnerships will be encouraged.
That would give AT&T a maximum of 28 principal vendors, though that number would likely be somewhat lower, as some large equipment suppliers would likely feature in multiple domains. The analyst estimates that AT&T currently deals with about 40 key vendors.
The main objectives of the new procurement policy, according to Leopold, are:
- To cut costs as a result of reduced administration, and more favorable pricing from vendors winning a bigger slice of the overall pie;
- To reduce risks by working with the most financially stable suppliers -- "We suspect Nortel Networks Ltd. ’s bankruptcy filing sounded an alarm on this topic," notes the analyst; and
- To streamline projects, as having fewer points of contact should speed up processes. Leopold believes using AlcaLu as the systems integrator for U-verse was a test case for this. (See Nortel Files for Bankruptcy Protection and Nortel Appoints EMEA Administrator.)
However AT&T decides to arrange those procurement domains, the "winners may gain more sources of revenue, greater control and inertia; however, this comes with added responsibility and costs," states the analyst. Smaller, more specialist vendors face increasing risks, because having to work through larger partners could lower their margins, though it could also enable those smaller players to cut costs by reducing sales and marketing teams.
For the winners, the spoils are potentially great. Even with a reduction of up to 15 percent in its capital expenditure budget this year, AT&T is still planning to spend up to $18.3 billion this year. (See AT&T Cuts Capex by up to $3B and AT&T Plans $1B Global Spend.)
That capex reduction, and a more cautious approach by the operator towards spending in 2008 (particularly towards the end of the year), has already had a direct impact on some of the mid-sized equipment companies that could feel the greatest impact of AT&T's new plans. (See Ciena Cuts 200 Jobs as Sales Plummet and Sonus: So Tough to Call.)
AT&T declined to comment.
— Ray Le Maistre, International News Editor, Light Reading