Driving Profitability Through Network Cost Intelligence

The CFO’s job is becoming more difficult because of the push for low-cost operating models that are considered critical to profitability. A plethora of factors, such as ineffective direct cost controls, revenue leakage and the inability to identify specific products’ margin contributions, all plague operators. Inefficient network cost management has become an endemic disease. Network costs generally rank among a service provider’s two greatest expense areas. Typical network operators spend 40 percent of their revenue on network costs. Service providers continue to use inefficient network cost-control mechanisms, despite the fact that the error rate associated with intercarrier and supplier invoices is significant. Legacy invoice management processes and disparate billing and accounts payable systems make proper auditing difficult. That fact leads to multimillion-dollar losses.

According to PriceWaterhouseCoopers, 70 percent of carriers experience error rates between 2 to 10 percent. When a service provider lacks a unified and detailed view of its costs, spend-management practices are rendered ineffective and the synergies intended as a result of mergers and acquisitions can be undermined.

To engender more efficient cost controls and auditing practices, service providers must gain visibility into their costs and revenue through more sophisticated network cost intelligence practices.

Looking at Losses

A mix of paper, unstructured data and manual processes around invoicing and payments is what most often leads to cost inefficiency. Carriers terminate calls on numerous networks and buy capacity from many suppliers. They need to reconcile and audit thousands of invoices each month. A typical large service provider has a staff of more than 70 people processing more than 15,000 invoices per month — 40 percent of which are received in paper or other "manual" forms such as Adobe PDFs and Microsoft Word documents. Even smaller players who don’t handle nearly as many invoices as AT&T Inc. or Verizon Communications Inc. will find it difficult to spare the human resources and time necessary to manage the thousands of invoices they receive. The result is a loss of visibility into network costs, an inability to obtain a unified view of expenses, and an overall lack of proper reconciliation between billed and provisioned circuits.

A recent study from Analysys Research found that the average revenue leakage among North American carriers is roughly 13 percent, with non-fraud losses accounting for a whopping 86 percent of all revenue leakage. The primary causes continue to be poor processes and procedures for billing-quality management and a lack of detailed visibility into the order-to-cash cycle due to unstructured content and legacy data silos. Next-generation platforms and services are only exacerbating these problems.

Realizing Synergies

Communications companies depend on M&As to drive growth and they must be able to realize the synergies these deals promise on paper. Achieving efficiency goals can be an uphill battle. Half of all mergers fail to create shareholder value, and less than 30 percent create value that is noticeably higher than industry average returns.

Recent research from Accenture estimates that in the communications industry, 30 to 50 percent of the savings generated from a merger or an acquisition can come from supply-side synergies, a fundamental cost decelerator. However, service providers that actually realize these synergies are the exception, though they often are the primary drivers behind mergers. Though due diligence relating to cost management is performed in most cases, it isn’t enough. A unified, detailed view of the combined entity’s revenue and expenditures, with a focus on product line profitability, is necessary.

Understanding Margins

Many telcos have established revenue-assurance departments to deal with revenue leakage. However, having visibility into revenue without detailed visibility into costs and usage does not help in understanding customer and product profitability. Poor data capture and lack of a unified view across BSS, OSS, CRM, accounts payable and accounts receivable systems result in service providers suffering from a litany of issues. Issues include customers who are not billed according to contract or tariff rates, incorrect billing for ordered services, discounts and credits that are not applied properly, insufficient bill adjustment controls, and incorrect billing elements for services sold. An inability to capture 100 percent of billing or contract data from paper or non-standard media is also a significant contributor to ineffective profitability analysis.

Product-line profitability analysis becomes especially difficult in an NGN scenario with integrated services. Service providers are in various stages of executing their next-generation strategies, so most service providers’ legacy billing systems do not yet possess the functionality required to support multiservice offerings completely. Unless a consolidated view of receivables, payables and usage, and rate information is obtained, service providers will have to compromise on margin analysis and management because their billing, contract management and contract compliance will be weak.

Overcoming Challenges

Since the common source of the aforementioned challenges is a lack of visibility, the CFO’s "wish list" should include 100 percent visibility into cost and revenue, coupled with actionable business intelligence. This is tough to achieve right away, because most service providers have unstructured information spread across hundreds of disparate legacy systems. Proper application of certain technologies can facilitate intelligent data capture, automation and business intelligence — all of which can contribute to a consolidated and detailed view of cost and revenue.

Leading service providers increasingly use intelligent data capture technology to capture, standardize and structure cost and revenue data. This data particularly includes invoice, contract, inventory and billing data, and comes from a range of electronic sources like CABS, SECABS and EDI, as well as various manual sources like paper invoices, PDFs and Word documents. Using a centralized database, this data can be consolidated and structured to be fed into upstream audit, reporting and analytics software tools and systems. The resulting process automation and 100 percent cost visibility helps companies set benchmarks for cost efficiency and operational flexibility.

Web-enabled, on-demand software-as-a-service (SaaS)-based solutions that interoperate with and leverage existing application infrastructures can be applied. These solutions typically provide a relatively rapid ROI. They do not require massive capital investments and tend to reduce total cost of ownership, risk and time-to-value.

Controlling Direct Costs

Service providers’ two greatest expense areas tend to be network costs and headcount. According to Razorsight’s observations, in North America alone, service providers spend approximately $155 billion annually on network costs. In a hypercompetitive world where sustainable revenue growth is uncertain, tight cost controls are necessary. Next-generation network cost-management solutions should combine data capture, process automation and automated validation workflows and audits. Line-item level visibility into 100 percent of costs, coupled with analytical capabilities, can help save 3 to 5 percent on network expenditures, annually.

Implementing an automated audit and net-work cost workflow solution also can reduce labor costs and make better use of human resources. Processes that don’t add value, especially those that are manual, incomplete, or prone to error, should be eliminated. Invoice management — both payables and receivables — should be automated to enable people to refocus on activities that add more value, such as auditing and analytics that ultimately impact the bottom line.

Revenue leakage can be found anywhere along the entire order-to-cash cycle, but billing is the primary culprit. Bill-quality management and rate-contract management — especially for interconnect billing — are key areas that provide significant scope for process efficiency and savings. With increased consolidation and the growth of IP-based services, current revenue-assurance programs that focus on traditional high-level process audit reviews are becoming increasingly inadequate. Intelligent data capture technology should consolidate and provide visibility into 100 percent of the revenue data that resides in multiple systems — including unstructured data in paper and paper equivalents. Analytics then can be applied to perform detailed analyses of huge volumes of usage, billing and reference data from multiple sources. The key is to earn support from executives to overcome any resistance or inertia from departments that fight to protect the sovereignty of their data silos.

Linking Cost/Revenue Data

Revenue and cost data should not be analyzed in isolation. The greatest benefits are realized when data is freed from silos so that receivables, payables, usage and rate data can be linked to provide detailed insight into profitability and margins. To perform correct cost allocation and product-line profitability analysis, service providers need to have complete, detailed line-item information or data about universal services ordering codes.

Margin management and product-line profitability, in turn, require high levels of process automation and high-performance analysis engines. Service providers that excel at understanding all of their costs tend to be power users of decision support systems. These systems provide operational reporting, dashboards, scorecards and actionable analytics. Decision support systems make use of automated audit and validation rules, as well as leverage built-in alerts to identify problems and opportunities proactively. Such systems aggregate the data for an entire network into one central repository, and then run audits and analytics across vendors, customers, accounts and services. Service providers that harness this kind of network cost intelligence often achieve and sustain an edge in business performance, management and profitability.

Charlie Thomas is CEO of Razorsight, a provider of on-demand financial business intelligence solutions for communications, media and entertainment companies.