Making the IP-VPN Decision in Latin America
16 September 2003
Marta Kindya, Charles R. Carr
Document Type: Dataquest Perspective
Note Number: TELC-WW-DP-0596
Decisions on network services increasingly will be based on the bottom line. Scalable and cost-effective network connectivity is a strategic imperative in making the IP-virtual private network decision.
Table of Contents
Strategic Market Statements
IP virtual private networks (VPNs) using Multiprotocol Label Switching (MPLS) offer the best network solution for large enterprises' international network reach/extension, flexibility, network integration and cost-effectiveness requirements in Latin America among a host of potential providers at the local, country, region and global levels.
Latin American businesses' top network selection criteria during the next five years will be understandable and readily measurable end-to-end service-level agreements (SLAs) that are backed up with significant penalties for nonperformance.
Strategic Market Assumptions
By 2007, IP-VPNs using MPLS will comprise at least one-quarter of Latin America's large enterprise data transport revenue (0.7 probability).
Small and midsize businesses (SMBs) will lag the enterprise market adoption rate by at least two years because of their general inability to leverage enough IP-VPN/MPLS network capabilities to justify current price points (0.7 probability).
Latin American SMBs' principal applications, such as e-mail, have had relatively simple network requirements to date. By 2005, more-complex applications, such as voice, supply chain management (SCM), enterprise resource planning (ERP), customer relationship management (CRM), SAP and Oracle, requiring multiple classes of service (COS) will become widespread in the SMB market, providing the business case for rapid penetration of IP-VPN solutions in this sector (0.8 probability).
Connectivity Challenge for Latin American Businesses [return to Table of Contents]
Current economic conditions in Brazil, Argentina and, to a lesser degree, Mexico and Chile, including high inflation and continued devaluations, put intense pressure on businesses' bottom lines. In this business environment, management views reliable access to corporate applications and resources for staff, suppliers and clients as a strategic imperative. As remote and international connectivity requirements increase and end-user expectations of "anytime, anyplace connectivity" grow, businesses must eliminate connectivity "dead zones" in their market to remain competitive. The latest solution addressing the ongoing remote connectivity challenge, IP-VPN, is receiving a great deal of attention from the Latin American business community. However, the universal application of this solution may be a ways off for all sizes of business or market verticals. What are the criteria that should be considered before committing to IP-VPN solutions under current economic conditions?
The number of providers in many Latin American countries is limited. Generally, each country has a single national incumbent carrier providing in-country connectivity, and no competitive local exchange carriers (CLECs). There are a few intraregion entities, such as Impsat and AT&T Latin America, and even fewer multinational or multiregional carriers, such as Equant and Infonet.
The majority of Latin American businesses provide connectivity to only a few remote locations, mostly within the country of origin or between a few other countries in Latin America. Remaining businesses require true global connectivity and account for almost half of the Latin American data traffic. Gartner Dataquest estimates Latin American business connectivity requirements can be broken down as follows:
In two years, data traffic transported from Latin America to North America (predominantly the United States) is expected to grow by as much as 10 percent over present levels, while overall data traffic growth in Latin America will grow by as much as 20 percent. The Latin America-EMEA and Latin America-Asia/Pacific data traffic shares are expected to remain steady for the next five years.
The Migration Has Begun [return to Table of Contents]
Staying competitive guides business toward improving productivity and cost-saving solutions. This simple truth has been accelerated recently in Latin America by the poor economic environment. The result has been a significant uptick in the search for performance equivalent (or better) and more cost-effective alternatives to established network solutions that can address near- and longer-term traffic and SLA requirements. The trends underlying a decision to find the next-generation network are pronounced, including:
Generally, businesses considering an IP-VPN solution are dependent on various combinations of WAN technology, such as private line, asynchronous transfer mode (ATM) and frame relay, with private lines and frame relay being the most ubiquitous. It is this range of technologies with their inherent performance limitations, scalability/provisioning/operation complexity, interoperability issues and cost structure that provides the growth opportunity for IP-VPN products, service providers and ultimately the end user. Starting in 1999, this environment has resulted in the migration trend to IP-VPN service from frame relay in Latin America. Carriers indicate that up to 15 percent of multinationals are asking for IP-based services, and nearly 50 percent of multinationals throughout Latin America have expressed interest in IP-VPN/MPLS service.
Gartner Dataquest believes that MPLS-based networks will become the preferred WAN service for migration from frame relay and private-line services and new network growth in Latin America during the next five years, accounting for at least a quarter of the large and multinational enterprise data transport revenue. For the SMB market long-term, IP-VPN penetration is expected to significantly increase, beginning in 2005, but will remain small during the next few years (between 10 percent and 15 percent of data transport revenue). The SMB network refresh cycle is two years out, and then local or intracountry providers will be the main beneficiaries in this segment. Most local providers in Latin America are deploying MPLS networks to the exclusion of other architectures but have aggressively targeted primarily the large businesses.
This near-term restraint on IP-VPN growth in the SMB market is because of a lack of universal drivers, including a relatively high switching cost, when taken in the context of the lack of incremental benefits that can be generated from the typical SMB's smaller, localized networks and limited application requirements. Price advantage over legacy services, such as frame relay and private line, while important, is one part of the decision that includes an assessment of direct, intangible and hidden costs and benefits, such as migration costs, equipment reuse, new purchase, management costs, staff requirements, additional training and so on. Several other factors contributing to this cautious SMB uptake are the present flat economy, tight capital markets, sluggish business growth prospects, and SMBs' limited intraregional and international reach requirements.
IP-VPN in Latin America [return to Table of Contents]
IP Choices [return to Table of Contents]
IP-VPNs are managed Layer 3 (network or consumer premises equipment (CPE)/EDGE-based) offerings, providing a full range of metropolitan-area network or WAN networking functionality using IP backbone transport technology, used for remote access, internal enterprise networking (corporate intranets), or business-to-business networking (corporate extranets). Common feature sets include any-to-any connectivity, fault management, configuration management, security management, edge device management, edge-to-edge SLAs, possibly some project management/professional services, management tools, and dynamic bandwidth provisioning. IP-VPNs are possible in many flavors, including:
Latin American Competitors [return to Table of Contents]
While not attracting a large number of providers that are not already operating in the region, the emergence of IP-VPN in Latin America has moved most incumbents to introduce IP products to compete and divert capital expenditure (CAPEX) to enhance their networks with MPLS. Currently, providers offering IP-VPN services in Latin America are varied, but not extensive, as indicated below.
Assessment More Than a Leap of Faith [return to Table of Contents]
The First Step [return to Table of Contents]
Planning is difficult but necessary to avoid costly decisions based on a partial picture of a company's true needs. Planning to substitute a mission-critical, reliable, proven and familiar frame relay service for an IP-VPN solution requires more than a leap of faith in the technology or a hit-or-miss direct-cost evaluation to develop a solid foundation for a change. Latin American businesses of all sizes are very interested in IP-VPN services as a replacement network and are proceeding steadily but cautiously, after spending the necessary resources to assess future requirements.
Real-world proof of touted benefits, both tangible and intangible, for IP-VPN/MPLS is still developing. Larger networks are being migrated to these solutions. Not all implementations have outright, immediate success from direct cost savings standpoint, and, in some cases, operational expenditure may increase by as much as 100 percent during early operation phases (maintenance of redundant networks and additional staff training). Even in these situations, businesses can often justify an IP-VPN solution through substantial intangible benefits. A comprehensive assessment and analysis will discover and highlight indirect benefits (unrecognized synergies, simplified network problem identification and resolution, risk reduction, bandwidth optimization and so on) and additional or hidden costs (upgrading the skill level of remaining staff for an IP-VPN operation) that impact the bottom line. The clear lesson is that no matter how complex the present network may be a business should perform a comprehensive precontract cost-risk analysis based on a complete, forward-looking assessment of its network and performance requirements.
What's in a Decision? [return to Table of Contents]
IP-VPN MPLS allows more flexibility and scalability and easier or quicker provisioning of new locations through its meshed network, vs. a hub-and-spoke architecture of frame relay. Conversely, if voice, video and data traffic need to be handled on a single network, mission-critical traffic needs to be prioritized. If the goal is cost-effective scalability and site provisioning, then the clear cost advantage is with an IP-VPN/MPLS solution.
Most early adopters of IP-VPN services did a poor job of assessing network requirements and the cost basis analysis, during precontract stages suffered including mostly easy-to-identify, quantifiable costs. Expectations were set long before it was prudent to talk about specific SLAs or traffic priority schemes for specific applications. While a straightforward cost analysis, using identifiable cost reductions, is appealing, consider the budget and time constraints most telecom managers are experiencing. There are many other considerations that should be assessed before making the decision on IP-VPN service.
Network and Business Reach
Gartner Perspective: Not a Proper Fit for All [return to Table of Contents]
Multinationals and large businesses are the prime customers for IP-VPN solutions currently in Latin America. The primary Latin American candidates for these services are the ones currently most heavily invested in frame relay and private-line networks. A breakdown of sector spending in telecommunications and IT based on Gartner Dataquest research follows:
Obviously, selection of an appropriate network option must be based on the actual long-term needs of the business. Enterprises are excited about IP-VPNs but cautious about jumping in without a clear exit strategy in case benefits don't materialize. Finding the right IP-VPN solution can be initially bewildering, time consuming and expensive. A business must consider many providers at the local, country, regional and global levels, and a wide range of significantly different products and options. Choices are further complicated by the need to work though the hype. However, IP-VPN/MPLS will rival all other network alternatives in Latin America during the next five years, when it will become widely deployed in Mexico and Brazil, and, to a lesser extent, in the rest of the region. It will be offered principally near-term by major incumbents and global providers, such as Infonet, Equant, AT&T and MCI.
Recommendations for the Business [return to Table of Contents]
Gartner Dataquest recommendations include the following:
How important are managed data services and value-added services in this market?