Outsourcing on the Rise

Working Assets, Inc., a San Francisco-based telecommunications reseller, is outsourcing more of its business operations these days. For the past three years the company has outsourced all aspects of its billing operations, and last year decided to outsource its customer service as well.

Working Assets is not alone. More carriers than ever are deciding to outsource billing and customer service operations, say industry experts. Big-name vendors such as IBM, Ericsson, MCI, AMS and AT&T have picked up the scent of this expanding market and are starting to offer customers billing and customer care outsourcing solutions.

The potential market for outsourcing billing alone could be roughly between $200 million and $600 million per year in total revenue, one industry analyst extrapolates. (This presumes that the market for outsourcing billing is between 10% and 30% of the total telecommunications billing market, the total number of bills sent out each year is approximately 960 million, and the cost of producing and sending each bill averages about $2.)

The market for outsourcing customer service is also expected to grow. "Presently about 11% of all call center operations are outsourced," says Mark Anderson, regional director of Call Center Services, MCI. "By the year 2001, we project that 22% of all call centers will be outsourced." Other industry analysts estimate the potential to be even higher.

"Everyone is interested in talking [about outsourcing], but everyone -of the tier one carriers at least -is a little nervous about it," says Jim Starks, Customer Service and Billing executive at IBM. (IBM considers the tier one carriers to include the seven RBOCs, the four major IXCs and GTE.)

IBM's Integrated Systems Solutions Corporation (ISSC) has already secured approximately $35 million in outsourcing contracts, including Ameritech, Pacific Bell, Bell Canada, Hong Kong Telecom and Telestra of Australia, according to the company. Under ISSC's 10-year, multimillion dollar agreement with Ameritech, the RBOC outsourced 26 of its data centers. In a seven-year contract worth several hundred million dollars last year, ISSC agreed to manage 28,000 desktop computers for PacBell.

Vendors also have their eyes on the SBC/PacBell merger. "When the merger is complete, that company will issue a little more than 30 million bills per month. If they want to come to the [outsourcing] party, we will try to make the party however they want it to look," says a spokesperson at one company that specializes in outsourcing arrangements for telecommunications carriers.

Vendors are offering much flexibility in their outsourcing arrangements, say outsourcing experts at Ericsson, IBM and MCI. Most agree, however, that there is no set package of offerings that will appeal to every carrier. "We may handle the billing for a new customer from our own large data processing centers, or we may run it on a billing system and equipment the customer already owns on their premises," explains Starks. AMS signed a contract in November 1996 to provide U S West Wireless, the RBOC's new PCS provider, with billing services.

As for the tier two and three carriers, the outsourcing market is a bit different, say vendors, but the opportunity exists. Also, these companies usually pay higher costs per bill than tier one carriers. "The higher cost is due to a lot of human intervention and manual processes involved in tier two billing," says Starks. Sometimes, the companies already use a service bureau for billing. In other instances, these carriers have purchased billing systems from Amdocs, Saville, ITDS or any of several billing system vendors. But having one's own in-house billing system does not necessarily mean a carrier does not need an outsourcer. More and more outsourcers are offering to work with carriers and third party vendors such as ITDS, Amdocs and Saville and others to create a "total billing and customer care management solution," say industry experts.

In some situations, carriers that own an in-house billing system need extra help from an outsourcer to support a new offering that the carrier did not foresee growing so quickly. "Some cellular companies bought separate billing systems from their parent land-line company to keep distance between themselves and the regulated part of the business," explains Starks. "Some bought small billing systems and never anticipated how fast the market would grow. Now those systems are hitting the wall at between 400,000 and 600,000 subscribers."

Customer care should also be considered. "Outsourcing has become the latest cost-cutting buzzword in call center management. It may not be a strategy of choice for every company, but it should be considered carefully for all types of situations, especially customer service, which consumes a significant share of most communications company resources," wrote John Goodman, industry analyst at TARP, a research and consulting firm in Arlington, Va., in the November 1996 issue of Billing World.

Looking at the Plus Side

Reasons to consider outsourcing billing and customer care abound, according to both carriers and vendors. Lower cost per bill, more flexibility and rapid time to market are among them. The development of a new billing system has proven to be both risky and expensive, argue outsourcers. "As far as we can tell, the success rate is only about one in three, and the cost of a new billing system for tier one carriers runs somewhere between $100 million and $150 million development from scratch -and that's just the development cost of the software, which basically comprises the normal functions you think of in a billing system: rating pricing, taxing, formatting, printing, distribution, interfaces to the accounting systems, interfaces to the service order systems, as well as treatment, collections, cash administration." "We have discovered that telephone companies are most interested when they believe you are talking about a savings of 15 cents to 25 cents per bill," says Starks. IBM makes its offering to a potential customer based on price per bill, he says. "We include in that the cost of enhancing and maintaining the billing system and support."

On one hand, customers outsource to cut costs, concentrate more on their core business, get competitive technology they otherwise may not be able to afford and have access to alternate distribution channels, says MCI's Anderson. On the other hand, more vendors are offering outsourcing services to "form partnerships both with suppliers and with customers and to bring new resources and experience to customers," he says.

Reasons for outsourcing may differ according to the size and type of carrier. "The more mature RBOCs and IXCs take a totally different approach to outsourcing than do CLECs," says Joe Farrell, vice president of marketing, EUR Data Center, Mechanicsburg, Pa. Large carriers are more interested in greater access to skills, industry expertise and applications expertise, while many small carriers care only about cost, he says. Large carriers, however, are more likely to outsource support for strategic new initiatives than the billing and customer for their core products and services.

Within the telecommunications industry as well as related industries where IT outsourcing is an option, IT executives identified access to technology skills, industry expertise and application expertise as the top benefits of contracting, according to a survey of 250 IT executives conducted in August 1996 by Dataquest, a Massachusetts-based research and consulting firm.

The Down Side

Experts are quick to point out that outsourcing, however, is not always a bed of roses. Vendors have their troubles: "it's a long sales cycle, especially with tier one companies," admits Farrell. Some get nervous because they see billing as a strategic advantage-a process that brings in tens of millions of dollars each day at a tier one carrier. "Even if [the executives we are negotiating with] do not like their billing service people, often who have been in the carrier's own billing department for 30 years or so, it's a devil they know. If they miss a billing cycle, they know who they can yell at," says Farrell.

Another obstacle to outsourcing vendors is displacement of employees. "Eventually, you run into someone that thinks the carrier should not outsource simply because they do not want to displace all those people," says Starks.

In contrast, potential outsourcing customers have different concerns. Some worry that the cost-saving price structures within some outsourcing contracts could hinder their ability to develop the capital for research and development of new technology, say sources. Corporate spinoff and mergers can ruin an outsourcing arrangement, as well. For example, AT&T Global Information Solutions' venture with Delta Airlines fell through in 1996 when AT&T spun off its computer unit. Customers identified loss of control, costs that were higher than expected and loss of in-house expertise as the worst drawbacks to contracting, according to the Dataquest survey.

Rules for Outsourcing Success

For the vendor who wants to succeed in the growing outsourcing market, the statement of work is key, says Farrell. "This document contains what you plan to do for the potential customer and how you will do it, the costs, time frames and who is responsible for what," he explains.

Generic elements of a statement of work include a product overview and a system overview and sections on assembly, rating, transaction processing, bill print, stuff and mail, cash collection, customer service, collections, revenue reporting, archiving and bill formatting. A billing cycle schedule and fee schedule should also be part of the document.

"One of the most critical things is to clearly define what you mean by billing and customer care in the statement of work you present to your potential customer," says Farrell. For example, does the customer's definition of billing include handling the legal action necessary to collect bad debt on an account? Does billing include doing research on an address when a bill is returned to sender? Defining whose responsibility each detail is, the vendor's or the carrier's, is extremely important, agree sources.

To be successful, vendors must be willing to allow customers management control, says an analyst at Dataquest. "Identify early-on customer preferences for contract structuring and respond accordingly," she says. Carriers are deciding which vendors to partner with based largely on their abilities in systems management. Flexibility is second in importance only to technical competencies, according to the Dataquest survey.

Past experiences, word-of-mouth references, industry analysts and the trade press are just a few of the ways customers learn about vendors. It may be useful to understand where customers are getting their information about vendor services. (See chart on page 24.)

The Changing Landscape of Outsourcing Arrangements

The typical nature of outsourcing arrangements is changing from bilateral agreements between carriers and a vendor to multilateral agreements, say industry experts. When acquiring IT professional services from an outside provider, most customers prefer multiple vendors, managed by their in-house IS staffs, according to the survey. "We outsource to several companies," says Melina Linder, vice president of Billing and Systems at Working Assets. "We want to outsource parts of our business to companies that do the best job in that area," she explains. "That is the benefit to outsourcing-you get to go to the best in each area."

"No longer is outsourcing a simple customer-outsourcer relationship," says EUR's Farrell. "Instead, companies want to create new businesses through outsourcer partnerships in which risk and profits are shared and all parties count on big financial gain."

Rules of Success

Here are some other general pieces of advice from MCI's Mark Anderson, regional director of Call Center Services, to carriers who outsource.
1. Talk often with your vendor.
2. Hold your vendor responsible.
3. Put someone on-site at the vendor's location.
4. Make outsource provider part of your company.
5. Conduct employee round tables with vendors.
6. Demand pro active actions by your partner.
7. Demand timely reporting and feedback.
Source: Mark Anderson, MCI