Interconnect Isn’t What it Used to Be: Accounting Systems Need to Change in Competitive Europe

Interconnect accounting in Europe, once needed to only handle agreements between a couple of nationally owned carriers, has grown more complex as more network operators enter the market, offering a growing sophistication of wireline, wireless, ATM, frame relay and other services.

Competition—or “liberalization,” as it is known in Europe—is altering interconnect accounting in unpredictable ways. When a new service provider enters the arena, it spawns more agreements in all directions; new business models take root in the mushrooming environment.

Traditional methods worked well

As in the United States, interconnection costs are traditionally based on minutes of use (MoUs), either delivered to or received from another service provider. Increasing scale and sophistication of telco services have put new strains on traditional billing systems and enlarged the role of the interconnect accounting system. That role, of course, is to invoice calls received from other operators and validate invoices produced by other operators for calls delivered to them.

The International Telecommunications Union (ITU) endorses the Accounting Rate System (ARS), the traditional form of interconnect accounting. ARS was sufficient during the era of monopolistic national carriers and is used to account for international, intercarrier traffic via direct billing. It is based on the premise that carriers know and agree in advance which route the call will take and where it will terminate. A value is placed on the call, often based on what the originating subscriber is willing to pay for it. The carriers involved in delivering the call then agree on what percentage of the payment is due each party.

Settlement was informal

Though carriers relied on formal contracts in the past, settlement agreements tended to be informal. Carriers would reconcile their accounts either monthly or quarterly, and when large discrepancies occurred, it was frequently difficult to prove the exact route the call had taken. Therefore dispute resolution took the form of splitting the difference and getting on with business.

That is quickly changing. With competition and new services, interconnect agreements are becoming more complicated, and carriers are using imaginative ways to create interconnect agreements.

New patterns emerge

Two accounting patterns emerged in the competitive market. On one hand, new entrants took advantage of the incumbents’ relaxed settlement culture and delayed paying interconnect fees as long as they could. On the other hand, some national carriers started engaging in the sport of arbitrage, which allows a carrier to undercut the price of another service provider to capture the call revenue. Many in Europe don’t like it and consider it a poor way to do business, analysts say. But many carriers seem to be doing it.

Here’s how it works:

? Operator A pays Operator C for delivering a call.
? Operator B pays Operator C a much higher rate for delivering a similar call.
? Operator A offers Operator B a cheaper rate for traffic to Operator C. Both Operators A and B benefit from this arrangement, but they must conceal the true origin of Operator B’s calls.

This is also known as a refile agreement. As carriers play the interconnect agreements strategically, the old system, based on fair play rather than strictly business principles, becomes less sustainable.

Accurate data is vital

The interconnect business now requires strategies that offer accurate and auditable figures for amounts payable and receivable. Companies must track and rate calls and other services accurately, or the loss of revenue can be tremendous. Strategies in this new game include least-cost routing; forecasting and trending; developing relevant summaries of critical information; and performing margin analysis. The carrier must cope with the dynamics of an industry where agreements, routes and rates change daily—or even hourly.

More than 1,000 network operators do business in Europe. The number of interconnect agreements is becoming unmanageable for carriers and driving simpler and more business-oriented settlement models.

Direct or cascade settlements

As for traditional wireline services, nearly 90 percent of carriers use two common interconnect settlement methods: direct and cascade. Direct settlement requires that all parties involved in carrying a call are explicitly known and supported by formal agreements. The operator that receives payment from the subscriber calculates the money due each carrier involved in the call—as defined in the agreement.

The first problem with this approach is routing. Because of routing and configuration errors in switches and unforeseen overflow conditions, the call does not always follow the path stipulated in the interconnect agreement, making it impossible for the originating carrier to calculate his revenue from that call. Not only that, the operator might not have formal interconnect agreements with other carriers handling the call.

Finally, an operator receiving incoming traffic doesn’t know the routing of the call—only which carrier handed it the traffic and possibly where the call originated, making it impossible to verify and reconcile invoices from intermediary carriers.

Cascade settlement simpler

Cascade settlement requires only that an operator enter into agreements with adjacent operators involved in carrying the call. Figure 1 illustrates such an arrangement, whereby Operator A charges the customer X and correspondingly pays Operator B, who in turn pays Operator C the amount charged by Operator C.

In this way, bilateral interconnect agreements define the applicable wholesale charges between adjacent carriers. Each carrier is responsible for charging adjacent carriers for incoming traffic and paying them for the traffic it passes on. Carriers using the direct settlement model also may use cascade payments when convenient.

Some carriers prefer cascade settlements for several reasons:

? Settlement between carriers is simpler. Adjacent carriers are required only to rate the traffic passing across their common point of interconnect (POI), not to monitor traffic traversing multiple networks.
? Each carrier can rate calls independently. For example, the originating carrier may decide to route a call to its destination via whichever adjacent carrier offers the best rate, or a different carrier may be selected if the preferred carrier’s network is down.
? Each carrier requires an interconnect agreement only with its immediate neighbor.

But cascade agreements can tie a carrier to set interconnect rates with its direct neighbors, limiting its ability to shop around for better rates elsewhere. Such agreements are less flexible than the refile agreement, for example.

Grappling with poor data

New operators must have systems that quickly get a handle on incorrect billing data. Poor data comes in several forms:

? Inaccurate rates—Rates specified for rating of interconnect calls can change monthly or even weekly. If technicians don’t update the interconnect accounting system correctly, the carrier can be left with incorrect rating tables.
? Inaccurate reference data—The reference data retained by the interconnect accounting system includes all POIs, all possible destinations, and other information applicable to a certain interconnect partner. If this data is not accurately recorded and maintained, the incorrect rate could be applied.
? Rating complexities—The telco’s mediation platform may not be sophisticated enough to validate all calls before delivery to the interconnect system, resulting in the delivery of duplicate calls. Carriers may want to charge for the carriage of unsuccessful calls.
? Rounding variations—Variations could be significant, depending on the rounding rules applied, such as rating per second or per specified unit.

Other accounting barriers

New operators without their own interconnect accounting system are at the mercy of what the incumbent operator declares it is owed based on MoUs on the new entrant’s network. Settlement is usually based on contracts that may streamline dispute resolution if the difference in MoUs does not exceed 1 percent to 5 percent.

A new carrier must have an accounting system to verify the bill received from the incumbent and accurately invoice other operators for the traffic it carries if it wants to capture all of its revenue. New carriers do, however, have some advantage, because new entrants aren’t burdened with legacy accounting processes and procedures that require analysis and improvement, tasks which bedevil incumbent operators. Also, new carriers can build or install newer data collection and interconnect accounting systems into their networks before they launch.

Retail systems won’t do it

A good strategy based on the applicable interconnection pricing model can influence the success of new entrants and incumbents alike. Carriers must have a suitable interconnect accounting system to deal with the vagaries of the market.

That, however, is not as simple as it sounds. Existing retail billing systems often don’t have the mediation systems or other functionality required for managing interconnect accounting. Software vendors have systems capable of handling numerous interconnect agreements based on a variety of different charging strategies and business models. The system must be flexible enough to cope with complexities, and powerful enough to prevent errors before they show up downstream.

Companies such as Savera Systems Inc., Saville, Kenan Systems and Amdocs have developed interconnect products for the European arena (see sidebar).

What does the future hold?

Many analysts in the industry agree, for instance, that interconnect accounting systems must rapidly evolve to satisfy some manner of unbundling as a fundamental element in the future. The complex calculation of prices of unbundled elements and charging for interconnection purposes continue to be a thorn in the side of carriers. For example, in the process of delivering voice traffic, operators face an escalating number of foreign SS7 messages on their networks—which may require unbundling and pricing for interconnect purposes.

Fueled by competition, new and more sophisticated services are being introduced all the time. But operators find it difficult to charge for these new services, because many of the legacy billing systems can’t handle the charges.

Agreements in Europe may have to be written to incorporate spot transactions per call, or per specified traffic volume. The emergence of network brokers could fuel the growth of spot markets, but those could be 3–5 years down the road.

About the Author:

Kevin Turner has an electronic engineering background and 8 years’ experience in the telecommunications industry, 5 of which he served with a European carrier. He has held the position of product manager for billing solutions at BSW Telecoms for the past 3 years.

A member of the BSW Group, BSW Telecoms’ partnerships are within South Africa and elsewhere around the globe.