The people asking that question are generally interested in determining a benchmark against which to measure an individual company, identifying potential revenue capture opportunities, or simply determining the level of focus and investment to devote to revenue assurance in their businesses.
However, after conducting numerous revenue assurance reviews, one sees that this question is a distorted way to look at the revenue assurance challenge. In fact, the question itself presumes there is “average” leakage, which is generally not the case. More often, there are specific trigger events that can cause leakage to spike and, if not rapidly detected, will cause losses far above any likely “average” until they are corrected. Some other crucial points are:
• Actual leakage events for certain companies, based on analysis of available data, reflect peaks and valleys of leakage rather than a steady flow.
• Expected leakage varies dramatically and is based on variables such as customer segment, organizational maturity and major changes to network or revenue systems infrastructure.
• Findings of low leakage can create a false sense of security and may result in potential under-investment in preventive controls.
• It may not be practical to have an accurate measure of leakage at any given point in time, but once detected most leakage is correctable. The challenge lies in its initial detection and identification.
• Although industry averages can be estimated, they are rarely applicable to any individual enterprise, considering the sector-specific nature of many revenue assurance risks.
The organizations that do achieve a constant and controlled level of leakage consistently are those that have the best level of end-to-end balancing controls, from point-of-sale to the general ledger. As described by Guy Gunther, Qwest’s director of revenue assurance, “We have found that the ability to detect and prevent the trigger events that cause leakage spikes is directly related to an increase in the ability to perform end-to-end revenue balancing controls, from ordering to collection.”
Estimates of industry-wide revenue leakage do have useful applications, such as understanding the approximate amount of revenue at risk, and supporting the need for a disciplined and broad revenue management group. However, misapplying a benchmark, particularly an invalid one, can result in both an incorrect understanding and a flawed approach to managing revenue. Some of the hazards of such faulty analysis include:
• Not performing an apples-to-apples comparison. Regardless of whether average leakage is 2 percent or 12 percent, it is important to compare parallel metrics. If an industry average only considers billing-related leakage, that isn’t comparable to a specific company’s overall program, which may be a more robust revenue assurance program, including both service, order assurance and billing. It is important to consider the entire spectrum of leakage opportunities from product development through billing and financials, as well as other variables including product mix, level of revenue assurance program maturity, current risk levels, and market and customer segment.
• Not adjusting revenue assurance priorities to manage high-risk events. Actual leakage experiences show significant and random peaks and valleys. Over time, the goal is to reduce the peaks and overall leakage levels by implementing improvements. However, the cycles and peaks may remain, due to activities such as new product launches, system conversions, and network upgrades and maintenance.
• Implementing sub-optimized approaches. If a company doesn’t understand how and where leakage originates, it may focus attention on only certain areas, such as billing, or on areas where the risk is not the greatest. It may not fully consider the organizational processes and procedures that need to be tackled as part of implementing system improvements. Or, it may miss systemic issues that affect current revenues and that could affect future revenues, with new product introductions and use of third-party content providers.
Perhaps most importantly, relying too heavily on industry benchmarks can detract from creating a culture of continuous improvement to revenue control monitoring and risk management.
Separating Myth from Reality
A recent review of actual leakage at a sample of telecommunications providers offers significant lessons for revenue assurance investment.
Figure 1 below illustrates the actual patterns of leakage experienced by a sampling of telecommunications providers, including traditional as well as wireless providers, and a recent entrant into the telephony market (a cable system operator offering telephony services).
In looking at this chart, two items become fairly obvious: the rate of leakage across companies is not constant, and the range of leakage can extend from a small to a significant percentage of revenues,—which can be much higher than expectations and above “average” estimates.
The leakage peaks can be traced to a variety of specific incidents, such as a customer conversion from one system to another, the result of M&A activities, or an upgrade to a new system. Ideally, over time, the peaks should become less severe; however, given the continuous changes in the telecommunications industry, companies have not been able to focus on driving down leakage.
Obviously it’s important to identify the root causes behind revenue leakage. What’s less obvious, though, is that these root causes are increasingly outside not just billing, but even what was formerly considered the arena of revenue assurance. For example, a carrier recently recorded significant losses when it failed to charge taxes after a conversion. As another example, recent FCC enforcement actions have targeted a growing number of carriers, especially new entrants, that have under-collected regulatory fees. According to Carol Mattey, director of Deloitte’s Telecommunications Regulatory Consulting practice, yet another example involves phantom traffic and intercarrier compensation. As she points out, “One of the major regulatory issues currently pending is whether to reform the current system of intercarrier compensation, and specifically whether to impose new requirements on entities to transmit call origination information. Doing so would address the problem known as phantom traffic, which is call traffic that is missing essential origination information for which the receiving carrier is unable to bill.”
Understanding Reality: Sources of Leakage
What does this reveal about action steps to detect and prevent leakage? Clearly, it is important to develop guidelines for pinpointing investment in controls, testing and revenue monitoring.
First, a key lesson learned is that the typical focus on usage events—which make up a single component of the revenue cycle—only enables the detection of an average number of leakage incidents.
Second, reviews of the end-to-end process and risk assessments should be used to establish areas of high, medium and low risk. Any change in the revenue process should be evaluated against these categories as part of determining priority and next steps. Changes could take the form of reference table revisions, pricing updates, system conversions, new code releases or modifications to organizational responsibility.
Third, there must be an organization-wide charter for revenue management. Treating revenue assurance as the sole responsibility of a single group is unlikely to provide sufficient breadth of attention.
Fourth, implementing controls over the major parts of the revenue cycle is essential to detecting at-risk revenue. This is especially true for finding appropriate balances between the ordering process and billed revenue, ordering and provisioning, and the perspectives of billed and G/L revenue.
Fifth, a testing program is essential for detecting revenue leakage that originates in the network. It is important to periodically challenge your system, by asking questions such as, “If every 20th call event were not recorded, how would we know?” Controls such as balancing and trending would likely fail to capture this type of leakage, demonstrating the importance of testing as well as why no single control type is sufficient.
And lastly, the carrier’s market segment must be factored into risk assessments, since revenue assurance risk varies substantially across segments. For example, test call verification is especially important for MVNOs, to confirm that usage is being passed accurately from the MNO to the MVNO. This validates the network-based process, which is out of the MVNO’s control.
Adopting a Revenue Management Mindset One of the key shortcomings of the mindset that presumes a constant level of revenue leakage is that it encourages the view that leakage is a constant opportunity for revenue recovery. In some extreme situations, this can create an incentive to focus only on detective rather than preventive controls, so that more revenue can be “recovered.” While this is admittedly not the norm, it occurs often enough to say that it is not unusual. Rather than a stream of revenue to be tapped, revenue assurance is better viewed in the context of an “insurance” model: a small investment can prevent a catastrophic loss.
The typical revenue assurance investment cycle begins with heavy investment in response to a significant loss resulting from leakage. This is followed by a gradual reduction in attention until another major loss occurs. The cycle then repeats. A less expensive and more effective approach emphasizes end-to-end balancing, revenue projections based on trending, and selective testing. An additional benefit of this approach is that it can be substantially automated, which creates a limited requirement for labor to maintain its effectiveness.
The culture of the revenue assurance organization and its specific criteria for measuring performance are also key factors in determining its expected long-term effectiveness. Figure 2 identifies many of these criteria. Although numerous other criteria can be applied, this model gives a constructive evaluation of an organization with the goal of reaching an optimized state of control, when combined with the expected control types.
Most carriers have progressed to having a permanent revenue assurance function, yet the legacy of error correction and/or short-term focus on only certain portions of the revenue cycle—which extends from a call event to the production of the bill—still persists. This approach leaves the critical order functionality unexamined and does not translate well to non-usage based (e.g., circuit-based) products that consist primarily of non-metered, recurring charges. Worse, it creates a narrow focus within the revenue cycle, rather than a broad-based view with end-to-end balancing at its core.
How Revenue Assurance Winners Do It Right Companies with successful revenue assurance programs have shown the following traits:
• An approach using continuous improvement-based controls. High-quality enterprises, especially outside the telecommunications industry, have increasingly created a culture of continuous improvement, which has yielded well-publicized, positive results. Within telecommunications, the essence of this culture has been to establish sufficient visibility into revenue performance so that leakage is rapidly detected, and risk points are aggressively tested. In turn, this both prevents and monitors leakage wherever it may occur.
• A holistic, end-to-end approach. All facets of the organization are involved, not just finance or IT-billing. All core revenue processes, from product development to billing, from collections to financials, are considered within scope. Authority exists across functions to enable changes to be pursued. The organization defines coordination of cross-functional efforts and responsibilities. It integrates fraud and credit risk groups with the overall approach. Similar to testing, in which integration testing catches issues that passed unit testing, review of the full revenue life cycle will capture more leakage events and risks than separate and disjointed assessments.
• A risk-based investment model. The company assesses revenue areas to understand the likelihood and impact of leakage as part of targeting mitigation efforts. It develops self-funding business cases. It identifies and monitors internal process measures and investment returns. It directs goals and measures more toward preventing leakage than recovering it. And, most importantly, the organization tailors investment to the least controlled or highest-risk portions of the revenue cycle.
• An independent and dedicated team. Responsibilities are not divided by business or IT area, with each owning its area independently. The teams avoid conflicts of interest, so they are not responsible for checking their own work. A separate department or team is defined outside traditional areas, such as finance and IT, to focus on revenue assurance. Effective communication and coordination are keys to managing relationships with all relevant parties.
• Tools provide the opportunity to achieve sustained, significant improvement. Beyond improving system edits and business rules, revenue assurance vendor-point solutions as well as end-to-end tools are useful for reducing and managing leakage risks. The organization evaluates and implements tools based on their ability to automate, monitor and analyze. It uses automation to remove redundant or manual activities, such as swivel-chair processing or system reconciliations. It uses monitoring and analysis tools to capture and report on trends.
Focus on Benchmarks That Matter
So what characterizes the best revenue assurance organizations, if a standard average is not a valid performance measure? Though organization-specific considerations always exist, the maturity model shown in Figure 2 can be very effective in evaluating a carrier’s revenue management characteristics. Further, we have consistently found that the carriers scoring the highest on this scale have the lowest levels of revenue leakage.
As Kathy Foley, director of revenue operations for Verizon Business, explains it, “Our experience has shown that the potential for revenue leakage cannot be defined by a stagnant percentage or industry average. Rather, it’s inversely related to the maturity level of the operational control infrastructure. As the control environment becomes more comprehensive and preventive in nature, the potential for finding sizable revenue leakage declines. The optimal revenue assurance program is one that relies on timely data from the revenue generation process to manage risks, and leverages repetitive and reliable controls to prevent under-billing from occurring.”
About the authors
Vincent Shaw is a director in Deloitte’s Technology, Media and Telecommunications (TMT) practice and also leads Deloitte Consulting’s TMT Revenue Assurance practice for North America. He specializes in Revenue Operations and Systems including, sales, order-entry, billing, and provisioning systems and processes for telephony providers. He can be reached at vshaw@deloitte.com.
Michael Ravin is a manager in Deloitte's Technology, Media and Telecommunications (TMT) practice, and he supports Deloitte Consulting's TMT Revenue Assurance practice for North America. He specializes in revenue cycle (order-to-cash) processes, including sales, order-entry, customer care, credit and collections, billing, and financial controls for wireless and wireline telecommunications providers. He can be reached at mravin@deloitte.com.
