Eaton’s procurement priorities

Thomas Jonell has been a CTO in African telecoms for more than ten years. He served as Celtel’s CTO in Nigeria and DRC before spending the last five years at the helm of the technology side of Eaton Towers’ business. TowerXchange wanted to know which categories of partner selection merited the most attention from the CTO, and to understand how one of Africa’s ‘Big Four’ towercos define their requirements, select partners and evaluate performance of key equipment and service partners.

TowerXchange: Thanks for speaking to us today Thomas. Please tell us about Eaton’s procurement processes.

Eaton Towers puts a lot of emphasis on procurement – deploying capital effectively is critical to our ability to create value for our customers, our investors and ourselves.

We’re always very specific in defining and writing up the scope of our requirements before we go to market. We think it’s critical to establish what we want and how we want it, including specifications of work and material use, expectations of rollout and internal rate of return (IRR).

We typically use two official rounds. First, we send our RFP to at least ten vendors. Responses to that RFP are scored on quality of submission, compliance with the specification, and adherence to guidance pricing. By the second round it’s usually down to two or three suppliers, with whom we’ll exchange a framework agreement for the product and related rollout requirement.

TowerXchange: Tell us about Eaton’s procurement decision making unit.

Eaton Towers has a Planning Board Committee that approves all O&M subcontracting and capex deployment. Decisions are made based on our requirements and on our annual budgeting and reforecasting processes. I chair the Planning Board Committee, which also includes our CFO Peter Lewis, our Group Technical Manager and our Financial Business Planner. We review the capex that each of our local OpCos want to spend based on the budget and the expected IRR on that specific build out.

In order for the Planning Board to grant permission for a new purchase, we require at least three, sometimes as many as five quotes from approved suppliers contracted under our framework agreement. So we secure firm quotations based on volumes and lead times, and we select not just on price but on ability to deliver and over the lifetime of the equipment.

Assuming the selected supplier’s presentation matched up to their quotes and our expected IRR, then the Planning Board’s approval is granted.

TowerXchange: What are the most strategic investments on which you spend the most time – which categories of equipment and service provider are most critical?

The answer differs according to the needs of each market and depending on the timing within a tower transaction.

If we close a new deal where a number of existing assets are taken over then the number one priority is identifying the right O&M service partner to maintain these assets. Can they execute? Do they have a clear scope? Our second priority is often the immediate rollout of a management system so we can understand how the O&M subcontractor is delivering against our expectations and SLAs.

TowerXchange: Do you often inherit legacy O&M contractor relationships?

We may be asked to maintain existing O&M relationships with some tower transactions, and we usually don’t have any problem with that. Our thinking is that if things are working well, we are unlikely to have any issue with maintaining that relationship. However, the mobile network operator’s relationships and requirements may be very different compared to those of a towerco. For example, when we came into Uganda the operator’s O&M contractor had 30 people. As towercos have fundamentally different processes this has increased to nearly 70 since we’ve taken over.

We like to encourage healthy competition by having at least two, maybe three or four, O&M partners in each country to make sure they are benchmarked, that they can flex their muscles, fight for the business, and receive more sites or lose sites according to their ability to meet KPIs and SLAs.

TowerXchange: Do you have a preference to work with pan-African O&M contractors who can replicate service levels in multiple countries?

Yes. In the next country in which Eaton will operate, we will maintain our existing contractor relationship formed in Uganda and Ghana. We know their management team, they know what we expect, and we have pre-agreed price lists.

TowerXchange: How long are your typical O&M contracts?

We’ll often award a three to five year agreement to give our O&M partners a longer term view and sense of security. This enables them to make investments in fuelling trucks, tracking systems and training, and ultimately to see Eaton as a bit more serious than the other clients who might offer only a six to twelve month contract.

TowerXchange: What are your key performance metrics for O&M contractors?

We prefer to use the same KPIs and the same expectations of optimised opex in multiple markets, which is why establishing relationships with pan-African partners with local expertise is so important.

When we first acquire assets, the scope of maintenance requirements and frequency of visits will be high. In order to achieve the cost reductions critical to our business plan, we invest in a refurbishment program that upgrades access control, RMS, power equipment and control systems. Our refurbishment program drives efficiencies in partnership with our O&M subcontractor who will also deploy most of this works.

Africa’s maintenance subcontractors need to progress into this long term service environment, with its focus on partnering to reduce opex, rather than living on a month to month basis. Ultimately there are a limited number of strategic partners who understand how the African tower industry works, who qualify when you overlay all the different capabilities we require, and who we can talk to about this kind of deal. There are perhaps a dozen such companies with a pan-African footprint.

TowerXchange: Going back to your priorities after acquiring new assets, you mentioned that the second priority is often the immediate rollout of a management system. Do the assets you acquire usually have a good quality site management system in place to collate alarms from Remote Monitoring Systems (RMS)?

Unfortunately operators seldom have a system in place specifically for site management. Some operators have basic site management systems monitoring passive assets, but typically that might include only five or six basic temperature and generator failure alarms, and those alarms are not always functioning. Our due diligence will identify which alarms are working and where we have to rectify the ones which are not. The use of our own robust trouble ticketing system will have a tremendous and immediate effect on controlling opex.

TowerXchange: What site management solution does Eaton Towers use?

We have a full blown NOC which utilizes a robust trouble ticketing system able to handle significant complexity. The system the NOC utilizes is used for more than just reporting of problems; we use it for incident management, asset management and access management.

Our O&M contractors have presence in the NOC, so they’re very much part of the process of seeing and managing any problems.

TowerXchange: Getting back to site level, what’s your view on the key requirements from RMS systems?

When it comes to RMS, you’re not just buying black boxes; it’s critical that alarm systems are displayed correctly in the NOC. We’re particularly focused on power management. We have a good historical relationship, an agreed price and deployment plan with our selected supplier for rollout in Uganda, but ultimately we’ll use whatever RMS system best suits the requirements of a specific portfolio.

TowerXchange: How does Eaton source energy equipment and services?

We source energy equipment a little bit differently from how the other towercos do it. We use Vendor Managed Inventory (VMI) partners to do the dirty work for us. One VMI partner company in each country has to keep stock of equipment and spare parts from a selection of suppliers in their warehouse, which they supply to us at an agreed margin.

Our VMI partners are not a generator resale agents, but rather they’re site construction companies whose management has taken a long term strategic view at getting beyond the business of building sites into buying, managing and servicing passive infrastructure equipment. They’ve built the facilities to store couple of hundred gensets and spare parts for us, which eases a lot of our challenges around planning and forecasting. VMI is especially important in battery replacement, as it can take up to three months to ship in replacement batteries.

Through our RFP process we have selected two VMI partners who currently support our business in Ghana and Uganda. Going forward and depending on their presence and understanding of the other markets Eaton move into we could possibly expand their business, however as we all know each market has its own unique requirement and the selection of our VMI partner is key in understanding these unique conditions.

TowerXchange: What are your key performance metrics in energy opex?

For hybrid systems, Power Interface Units (PIUs) and passive cooling, Eaton has two basic criteria: first we want an IRR of over 25%, taking all costs into consideration; and secondly when we evaluate specific products the opex over a five year period must not be more than double the initial purchase cost.

Selecting the right investment in hybrid systems can be particularly challenging. There are more than two hundred companies! Many look cheap when you buy them, but much depends on the battery replacement cycle. We often find it’s better to incur a higher initial capex if the battery lifecycle is longer, particularly for systems that have little or no need for cooling. This is also why it’s important for hybrid energy systems to have a demonstrable track record of success in Africa – so we can see proof of the IRR in a comparable market.

Eaton’s VMI partners are responsible from a service point of view, so we might give them a couple of potential replacement batteries, get them trained up so they report monthly on whether they meet our requirements. If a battery fails, our O&M partner contacts our VMI partner to replace the battery at the initial supplier’s cost, so we’re passing on responsibilities paying for a fixed service level as much as we can.

TowerXchange: Do you buy in to the ESCO (Energy Service Company) business model – that energy providers need to progress from selling equipment to selling a service?

Personally I’ve always found the business of buying generators somewhat absurd. Given that so much of the complexity is in maintenance and refueling, I would like to buy energy as a service. I feel that service should be a fixed SLA for a fixed price per kWh. The ESCO model has been talked about for years, but I still don’t see a credible ESCO proposition that looks after refueling and service as well as equipment supply.

Will it happen? I don’t know if anyone has the capability and the cash to do it right. In my opinion, too many vendors still take a short-term view, with the initial capital outlay high, and a reluctance to buy in to shared energy risk on anything beyond a small scale.

TowerXchange: What can towercos like Eaton do to maximise use of Africa’s unreliable grid power?

Tower operators’ hunger to stablise the grid is massive. We use grid power as far as possible, and recently invested in 400 PIUs to ensure the right level of grid quality. The PIUs provide three critical functionalities: AVR, line conditioning and a phase selector. This enables us to run on mains as long as possible.

TowerXchange: How big a priority are access control systems?

It varies from country to country.

In Uganda the number two problem with fuel is theft, so we’ve invested in a “Rolls Royce” of access management systems. When we took over the sites, we felt there were too many keys with ex-contractors, and when things were moved or stolen from a site, there was a lack of accountability. So we opted to install electro-mechanical locks, for which keys are only given to designated people, and the ability to activate selective regions’ sites on each key. When our subcontractors go to a site they receive a unique code over the telephone. They input that code into a key, only then can it open the locks which it has been preprogrammed to, and for a limited time only. The system allows us visibility if someone tries opening a lock without the right code or with appropriate access and we can act appropriately.

We would look at installing the same solution in our next country if the condition of that country requires it; Ghana for example does not have the same problem and priority for access management as Uganda.

TowerXchange: What can towercos do to reduce the burden on cell site energy consumption caused by cooling?

We’re working on managing cooling requirements now. Many operators have containers on sites with active cooling systems, window shakers or split units. When you use active cooling, every genset start and stop requires you to re-dimension the power requirement.

Installing passive cooling can free up the energy capacity to add one GSM tenant without doing anything else with the power on a site, so the cost per tenant goes down quite dramatically. But one solution doesn’t fit all; you’ve got to assess requirements site by site.

Intelligence requires good analysis, so we’re in the process of analysing data from our management systems to derive tailored solutions to optimise the cost of running each individual site; from power availability and genset start and stop, to the installation of PIUs. We’re currently exploring the option of installing NiCd batteries with a view to adding renewable (solar) energy in the next phase. Our objective is to achieve a 40% saving in energy costs.

Our choice of hybrid system was a good example of Eaton’s focus on IRR. Candidly, this system is initially expensive, but the total cost of ownership over the lifetime of the system and the project management skills of the supplier make it a good medium to long-term investment.

TowerXchange: Finally, what’s your view of the role active infrastructure sharing could play in the future of African telecom networks?

Eaton are starting to explore areas where an infraco can continue to add value to market beyond passive infrastructure sharing.

TowerXchange: Is active infrastructure sharing almost the enemy of the tower business?

Only to people who don’t understand it. From the tenants’ point of view, active infrastructure sharing in Africa now would be like walking before you can crawl. Before that there is a major need for much better backhaul to support the growth in data traffic. But I think in due course towercos would be able to provide ducting for fibre, maintenance of active equipment, even work with the OEMs to provide active antennas that look like single tenant solutions on the outside, but support up to three tenants. Towercos are used to such changes: rooftops cannot be shared without changing the lease agreement.

We’ve been talking to numerous telco equipment vendors about potential models of active infrastructure sharing involving the towerco, and we’re interested in exploring whether we can get operators to buy-in to active infrastructure sharing. We saw an initiative along these lines in Kenya six months ago, where the regulators issued one wholesale LTE license. It would be useful for TowerXchange to stimulate open discussions around the evolution of infrastructure sharing and the effect of sharing active equipment – it’s certainly a hot topic!