The OSS Cash Box:Justifying OSS Expenditure in a Competitive Market

Ask 10 different carrier executives how they justify OSS expenditures, and you're likely to receive 10 very different answers. As global spending on OSS continues to escalate, there doesn't seem to be a single rule for how these costs are accounted for, justified or recovered. There are, rather, as many answers as there are carrier business models. Some carriers consider OSS the core of their business, the key to differentiation. Other carriers know they need OSS to do business and, looking at the big picture, figure it'll be paid for as they sell service. Still others simply build out their networks, keep OSS expenses minimal, and hope to be acquired so management can retire to the islands. The economic justifications therefore cover the entire spectrum, from prudent return on investment (ROI) analyses to hype which aims to grab Wall Street's attention.

The Global Market for OSS

The OSS market, in general, is being pushed and pulled by major technological, economic and regulatory forces. Consider that OSS represents one of the fastest growing segments in two of the fastest growing industries on the planet - IT and telecommunications. In order to meet the time-to-market requirements of a competitive telecom environment, systems vendors are applying more general-purpose information technologies, such as UNIX, Internet Protocol (IP) and CORBA, to problems that were once tackled with expensive, homegrown, proprietary systems. The overall OSS market is growing in step with an increase in the number of new carriers clamoring for systems. A recent report by G2 Research estimates the global market for OSS software and services in 1998 at about $17 billion.

Breaking down the numbers

The G2 report estimates the total global market for back office systems in 1998, including planning and engineering, provisioning, inventory management, workforce management, message collection and network management, at roughly $5.9 billion. Provisioning and inventory management represent the largest segments, at 24 and 19 percent respectively. Network management stands at a close third, representing 17.5 percent of the back office market; 16.8 percent goes to message collection, 11.3 percent to workforce management, and planning and engineering combine for about 11 percent. (see figure 1) This market is expected to grow to $6.5 billion in 1999.

Spending changes

Statistics show (see figure 2) that in 1977, 80 percent of a carrier's overall expenditure was devoted to operations systems and the people they supported. By 1997, as total expenditure per carrier dropped 40 percent, operations dropped to 50 percent of overall spending, with sales and marketing, research and development, customer service, and other various expenses splitting the other 50 percent almost evenly. It is projected that by 2017, overall expenditure will be only 30 percent of what it was in 1977, with the percentages split evenly among all five categories.

As system costs fall telco spending is decreasing, per carrier due to the influx of general purpose IT, increased competition among vendors and a decrease in the size of staff needed to manage operations. The numbers suggest that, as technology proliferates, carriers are becoming more efficient and more cost effective because of it. This assumes, perhaps dangerously, that technology will be applied appropriately and successfully..

Minimum Bet: Automation

Up to this point, IT in general, and especially OSS technology, has been adopted to automate previously manual tasks. Why pay five people to do a job that a machine can do better, faster and cheaper? This is typical industrial-age thinking, but it may not apply to a future where automation is table stakes and process, or where the maximization of technology becomes the differentiating factor. Many CLECs today may be doomed as they repeat history. A growing CLEC will in many cases have started out very small, with a manual operations process. Naturally, as the CLEC grows, the manual processes, such as order management, can't scale to support large volumes. Management then decides to invest in an order management OSS, figuring it can cut payroll, increase efficiency and keep most of the standing processes intact so as not to create internal turmoil. As Steve Metzger, acting CEO of Dallas-based, Waller Creek Communications a Specialty Local Exchange Carrier (S-LEC), says, "Why take the long route in a faster car, when you can just build a shorter route to get where you want to go?"

A new system might make an old process a bit smoother, but the old process is most likely limiting or eliminating the potential benefit of the newly applied technology. There is thus a large opportunity cost associated with the misapplication of technology. This is what happens when OSS is looked upon as an afterthought and as little more than a way to cut staff and replace sticky notes on an order manager's bulletin board. Further, automating a process doesn't mean eliminating mistakes. Deloitte & Touche research (see figure 3) suggests that, at best, only about one quarter of a carrier's entered orders will flow through cleanly. Service orders are extremely detailed and complex. One simple typographical error can set off an entire chain of error messages. For example, if a customer submits an order for a dedicated T-1 circuit, but the order taker enters one wrong letter on an 8-11-digit common language location identifier (CLLI) code, a provisioning system won't understand what two locations need to be connected. The order will have to be dropped out, examined, fixed and resubmitted. This results in rework, possibly an annoyed customer and, worst of all, more time between order initiation and billing-where there should be less.

When OSS is the business

Waller Creek is an example of a new breed of local exchange carrier that sees OSS as much more than a vehicle for back office automation. Waller Creek, operating in most metropolitan areas in Texas, calls itself an S-LEC because it really doesn't fit into any of the standard CLEC categories. The company's approach is to provide telecom retailers, mainly CLECs and IXCs, with everything they need to enter local markets. They lease the loops from the ILEC, provide switching and transport and, perhaps most importantly, handle interconnection to ILEC OSSs. The company also provides OSS-based services such as customer usage reporting and analysis. Waller Creek is investing significantly in electronic bonding technologies that will allow it to communicate seamlessly with ILEC back offices and hopefully enable true, flow-through provisioning. The company's strategy is to capitalize on this kind of connectivity, a point of contention well known in local competition circles.

It works, but does it pay for itself?

Where does Waller Creek fall in the general realm of OSS spending, and how does it justify its costs? Most carriers spend somewhere between 3.5 and 4 percent of revenue on OSS, not including customer care and billing. According to Metzger, Waller Creek falls in the mid- to upper-level of that range. This number may appear low, given the attention its business model requires Waller Creek to give to its OSS infrastructure. Without giving away too many secrets, Metzgers states, "It just doesn't cost that much more to do it right, and sometimes it doesn't even cost as much, period." He goes on to explain that Waller Creek will not make an investment in OSS unless hard numbers that show a one-to-two year payback period. Waller Creek looks at every candidate system, determining possible revenue generation on a function-by-function basis, before making any investment.

How can a carrier derive hard ROI numbers from something so seemingly abstract as OSS? Waller Creek knows what it needs to spend on strong order management and provisioning capabilities, just to provide basic service. That number can be compared against projected overall revenue. Incremental margins can be gained with efficiency, cutting down on activation periods-anything that reduces the time between an order received and billing. Spread that margin over thousands of orders and the impact on the bottom line becomes remarkably significant - i.e. realized ROI and then some. As for added functionality, such as data warehousing, customer profiling and usage analyses. Metzger says they simply ask their customers if they want a service or not. If the customers want the added service, it will generate revenue; thus, added investment in the appropriate systems can be justified.

Metzger says some breeds of OSS can be effective risk management tools. A large part of OSS spending is starting to go into data analysis systems that help paint a picture of the customer and thus help carriers allocate resources most effectively. A simple example of this can be seen in Metapath Software International, a company whose system uses wireless customer usage profiles to determine network build-out spending strategies. Whatever piece of a network brings the most revenue is the piece that justifies the most investment. In cases such as this, where a system analyzes customer data and makes intelligent resource allocation decisions based on that analysis, OSS drives the budget, rather than vice versa.

A More Common Scenario

CLECs, the companies most responsible for driving the growth of the OSS market, are still in the manual-to-automated process stage. According to Keith Morris, vice president of business development, and Deborah Strong, vice president of management consulting, DMR Consulting Group, CLECs don't perform granular analyses of their OSS expenditure. For the most part, they wing it, deriving OSS budgets as a basic percentage of revenue - back to the 3.5 to 4 percent range. Their business plans tend to focus more on building their networks and grabbing as many corporate customers as possible. Thus far, the capital markets have been generous, so these companies generally have had the cash to spend on systems. They see what they need, what fits their business model best out of what's readily available, and they buy it. They don't worry much about price or payback; they worry about winning customers and providing them service. This loose model may collapse. When the stock market was skyrocketing, investors were bullish on technology and free with their cash. More recently, however, investors have begun to expect results, real return on their investments, and they aren't doling out the greenbacks quite so liberally anymore (see "Financial Watch", Billing World, Dec. 1998).

An ugly turn of events

Say, for example, that a CLEC has invested in a number of OSSs for ordering, provisioning, fault management and network inventory. The systems come from different vendors, but they're only loosely tied together with a middleware product. The sales force is doing well, the orders are flowing in, but once a certain volume is achieved, flow through fails. The exception and error rates are out of hand, and the middleware begins choking on the processing demands. Productivity drops, additional staff is needed to handle the orders that fall out, and thousands of days of billing are lost to process failures because service activation due dates aren't met. Suddenly, management's expectations of the OSS backbone aren't realized, and overhead rises, because of the added staff, as revenue shrinks. The existing OSSs need to be fixed, and what was once a promising technology base is now a legacy problem. What was a wise investment is now a liability that in hindsight lacks justification. Added expenditure for consultants or systems integrators is almost inevitable, and perhaps management loses its focus, worrying more about how to fix its internal processes than about selling and growing. The quarterly report comes out, earnings have shrunk, the stock takes a dive. To fix the problem, new systems are added and perhaps new process models are adopted on a consultant's recommendation. This carries added training expenses and a learning curve that will affect productivity at least in the short term.

This is a simplified worst-case scenario, but it exemplifies a problem that few managers seem to be able to solve. How does a company balance its need to gain market share as quickly as possible with its need to develop stable, scalable systems and processes that can manage the small carrier as well as the large? In the end, it's a gamble, but the winners are those who plan and budget for such eventualities. A carrier can't just throw money at OSSs, but it must expect to take some lumps along the way.

The best way to avoid this type of scenario, says DMR's Strong, is to focus on basics, such as scalability of systems and scalability of integration technology that may keep OSS one step ahead of the demands placed upon it. This can be tough in a market where, according to Waller Creek's Metzger, take rates are often several multiples higher than initial expectations. Of course, most companies, and perhaps their Wall Street investors, would love for their biggest problem to be the inability to keep up with their sales force.

Waiting on the Acquisition Line

Some CLECs act like elementary school kids in PE class - they hope the big kids will pick them so they can win the game. Many carriers out there exist merely to be bought by some larger player such as MCI-WorldCom or British Telecom. The strategy is pretty simple: start building a network with flashy technology, and when that doesn't make news anymore, pick OSS vendors that will. DMR's Strong and Morris both agree that systems are often selected more for hype and show than for any real operational purposes. The thinking goes like this: if a new entrant can build a network in some high profile areas and select the sexiest vendors for its operations, it can attract investment or acquisition dollars with its public relations and never really have to invest thought or cash in a long-term operations strategy. Again, great successes in the capital markets have made cash easy to come by, and industry consolidation trends are hard to miss. In this scenario, how does management justify its OSS expenditure? By the size of the houses they buy in the Bahamas after the IPO or acquisition goes through.

Where the Costs Fall

There are basically five cost elements that go into the purchase and implementation of an OSS:
( Purchase/Licensing: Generally OSS software is licensed from the vendor, with the fee dependent on the number of users.
( Implementation/Integration: Once software is selected and licensed or purchased, it must be worked into a carrier's existing infrastructure, or simply implemented in a green field scenario. This cost can vary greatly, depending on the carrier's existing environment and the complexity of integrating systems from multiple vendors.
( Training: Once a system is in place, the organization must change its processes and train to use it. Vendors generally offer training programs as part of the license fee, but there is a cost associated with the learning curve for a new system and set of processes.
( Cost of Operation: There is a basic cost associated with keeping the system running, including technical support from the vendor and hardware repairs.
( Enhancements: Any upgrades or modules added to the system will incur added licensing, integration, training and operation costs.
Acknowledgment: The author would like to acknowledge and thank Kim Lewis for her contributions of research and advice to this article and many previous articles.