Owning the Revenue Stream

Posted: 10/2003

Owning the Revenue Stream
Preparing for Profit Assurance in a Partner- &
Content-driven Communications Market

By Guy Alon

Communications service providers are
gearing up to play a significant role in the distribution of content. The expectation is that delivering content to customers will
compensate for lower subscriber growth rates and falling prices in basic voice
and data services. Sounds good, but whats involved in making money in this
new environment? Is it possible for service providers to maximize profits and
differentiate themselves at the same time?

In this multipartner scenario, who will control the revenue?
Interconnect operations any transaction that occurs between two service
providers typically account for 15 percent to 60 percent of service provider
operating costs. For many service providers, this figure represents their
largest single annual outlay; conversely, for many it represents a significant
source of revenue. Indeed, network providers whose primary function is to carry
traffic on behalf of other operators rely on the margins made transiting
interconnect calls as their main source of revenue.

The large volumes of data involved in interconnect billing
mean that even a small error, such as the incorrect loading of a tariff into an
interconnect database, can lead to large-scale losses. For example, consider how
a small rounding difference (0.001) can significantly alter revenues when
applied across millions of calls. A June 2001 industry study found that 17
percent of total revenue lost by service providers is directly attributable to
inaccurate interconnect billing.

Just as the evolution from voice to data added another layer
of complexity to interconnect billing for example, the percentage of revenue
sharing for dial-up calls to ISPs the move to content will vastly increase
the complexity of interconnect billing. Consider a simple retail transaction,
such as the delivery of a video clip to a handset. In addition to taking payment
from the consumer, a service provider will have to make payments to the content
provider, the content aggregator and other network providers involved in
delivering the video clip, while receiving receipts from advertisers and other
operators whose video clips it helps deliver. The service provider must
configure each transaction independently as a receipt or a payment at the same
time that it monitors the profitability of the whole transaction.

In short, the incorporation of content distribution into
service providers business models is rapidly blurring the traditional role of
interconnects. Properly understood, interconnect billing is now part of a
broader mission partner billing and partner relationship management with
its more frequent rate changes, numerous players and accelerated settlement

Partner billing involves a complex and interchangeable array
of billing relationships, demanding very agile billing processes. In contrast to
the linear revenue chain of days past, the constellation of partners that
service providers need to manage in order to offer a new service form a content
value web (see graphic below).

Image: The Content Value Web

In the mobile sector, the first examples of revenue sharing
for content delivery services between service providers, third-party content
providers and ISPs already have appeared. If content services prove to be as
popular as predicted, the numbers of players in the value web will grow
exponentially, and managing revenue sharing among these players will prove far
more complex than the more straightforward billing relationship with the end

If, in 2001, 17 percent of revenue lost by service providers
was due to faulty interconnect processes, just imagine the potential for
problems in this new non-linear, web-like environment, especially if youre a
big carrier with 40 million subscribers and 100 million transactions per day.

However, its not all doom and gloom. Smart service
providers will see the bright side of complexity and move strongly to
differentiate themselves by developing innovative revenue-sharing agreements
that vary according to type of content and/or volume of traffic, incentives for
high-performing partners, etc., all of which maximize revenue and profits for
the service provider and partner. Such a service provider would become a
preferred partner, able to attract the best content and motivate everyone
involved to better brand and make sure the right type of content reaches the
right type of end user.


Revenue and profit assurance (RPA) is the process through
which service providers can work to maximize profit. Most service providers have
established some form of RPA department to audit organizational processes and
ensure that they comply with company policies and expectations. In todays
mature global market, where new services (particularly content-based services)
are being developed, tested, deployed and re-configured at increasing rates, RPA
is an absolutely critical function. It not only controls outgoing costs,
increases profits and enhances margins, but, at its ideal best, also influences
pricing models, revenue-sharing agreements and even business models by
demonstrating where revenue is being lost and changes carriers can make to
improve their systems.

The first step to success and continued executive support of
any RPA program is demonstrable results, quickly. RPA focused on interconnect
operations can have a substantial effect on the bottom line,
demonstrate solid return on investment in a reasonable time period, and help
position the company for future change. Focusing now on revenue assurance among
interconnect operations can provide both a boost to the bottom line and a
platform for the deployment, monitoring and enhancement of new services in the
ever-changing communications and partner environment.

Any future and current RPA approach will have to adapt to
emerging revenue models and operator and partner demands for profit enhancement.
The backbone issues that should be considered when beginning
or evaluating a partner interconnect RPA program margin analysis, least-cost
routing, the balancing of cost-effectiveness with performance, contract
negotiation and monitoring, fraud and bad debt, and business reconciliation
arm the service provider with the right knowledge to navigate and capitalize the
emerging business environment.

Margin Analysis. The first step to
improving profit margins for interconnect is accurate margin analysis, which
requires daily verification of all incoming and outgoing traffic combined with
the ability to highlight areas where traffic derives clear profits or incurs
significant losses. Armed with this information, service providers can make
quick decisions regarding the efficiency of traffic patterns.

Margin analysis involves a number of variables (see graphic below). As tariffs and interconnect rules tend to change frequently, traffic
that shows a good margin one day may not make sufficient margins the next. These
variables include:

  • Peak and off-peak times change daily
  • Time-band
    e.g., the billing system needs to be notified when weekend tariffs apply
  • Rounding service providers need to check rounding variations and verify that
    the system is billing by agreed upon rules, usually by the second or another
    special unit
  • Interconnect setup times In some regions, including North
    America and the Far East, there are large interconnect costs payable for call
    connection regardless of call duration. A high volume of ineffective or short
    calls can be very expensive for the originating or transiting operator.

Image: Margin Analysis: Payment Direction

Least-cost and Best-cost Routing. In
todays interconnect environment, interconnect partners are also likely to be
competitors. Least-cost routing (LCR) is the process through which service
providers analyze the cost-effectiveness of partner interconnect services,
compare tariff rates and devise least-cost routes through the network to a
calls destination. Even small adjustments and improvements in routing
efficiency can generate significant savings. An international provider of
long-distance calls in the Asia-Pacific region earned an additional $1 million
per month by improving its LCR processes, for example.

One must note, however, LCR is a difficult practice to
implement, requiring comprehensive information regarding tariffs and rates of
all partners and carriers over the selected routes. These numbers change
frequently, and the process as a whole requires extensive processing power and
advanced algorithms.

For example, if the LCR mechanism continually finds lowest
cost routes that on a call-by-call basis avoid the use of routes with bulk
volume discount agreements, the operator may find itself open to contractual
volume shortfalls at the end of the month and thus responsible for financial
penalties that are a greater than the sum of individual call savings.

Best-cost routing a step beyond least-cost routing
aims to find not only the cheapest route but also a route that meets the
specifications of the end-user. By analyzing partner network capacities and
interconnect points, the provider has greater control over quality of service
(QoS). When using leastcost routing, operators must remember to balance
cost-effectiveness with performance requirements.

Contract Negotiation and Monitoring. Service
providers that do not incorporate partner and contract audits as part of a
complete RPA audit may find themselves financially exposed due to the poor
billing practices of their partner/competitors. In Europe, there already is a
movement to introduce a maximum settlement period of 90 days. The widespread
adoption of maximum settlement periods will ultimately have severe financial
consequences for operators with inefficient billing practices. Operators should develop a method to assess their history of
financial dealings with individual partners: tariffs charged, typical margins, overall value of the
partner, etc.

Fraud and Bad Debt. There is a
culture of trust in most interconnect departments. To settle bills without
querying them or to not perform adequate background checks on new partners is
not uncommon. Service providers must begin to recognize that fraud and bad
debt need to be taken seriously and that the expertise theyve developed from
their retail fraud control operations can be used to great effect.

The main difference between fraud and bad debt is that fraud
is intentional whereas bad debt is not but this distinction is often
blurred. An operator that is in financial difficulty but decides nevertheless to
run up interconnect bills that it is unlikely to be able to repay would sit on
the dividing line, for example.

The telecom market is littered with high-profile cases of
large telcos filing for bankruptcy. Most of those operators that collapsed under
heavy debt loads were heavily involved in the wholesale and interconnect
markets. Such carriers leave behind large unpaid and typically unrecoverable
interconnect bills.

Fraud typically takes one of several forms in the
interconnect/partner environment:

  • In a wholesale relationship, a reseller or enterprise buys
    bulk minutes or capacity and promptly folds or disappears leaving an
    unsettled bill for services supplied Incorrect invoices sent by a partner or
    unsettled bills in an inter-carrier relationship;
  • Fraudulent calls terminated by a serving operator that
    originated on another network in the interconnect agreement;
  • Fraudulent roaming calls carried by a serving carriers

Business Reconciliation. Like other
organization processes, partner billing should have proper data integrity
reconciliation in order to detect and recover revenue leakage throughout the
entire revenue stream. This includes end-to-end data reconciliation from
mediation to final bill production for the partner; rating and reference table
audits; a compensation, disputes and claims audit; and usage control, comprising
trending of usage and errors and monitoring unbilled traffic (suspense files).

Indeed, simple periodic trending of inbound and outbound
traffic and payments per partner, per service and per time-period can
yield great business improvements, from the discovery of unprofitable services
and partners to the more mundane tracking of missing records and payments. A
potential problem, for example, might be that an operators tariffs do not
differentiate on price for international calls even though overseas carriers
charge higher rates for calls that terminate on mobile handsets. Another might
be a reference table error that results in dropped calls. This seemingly minor
error could cost an operator millions of dollars in unbilled international
calls. Such errors can be avoided by applying reconciliation between
interconnect and retail billing.

Looking at the big picture, its clear whoever has the
most insight into a revenue stream, controls the revenue stream.

In a multipartner, content-driven environment, the
organization that can paint the deepest and most detailed picture of the revenue
web will be able to drive not only the contract negotiation process and,
consequently, the partner-group business model, but also will be in an excellent
position to secure additional revenue by providing billing services on behalf of
partners. Were only at the beginning of the shift to content-driven business
models perhaps 5 percent to 10 percent of service providers revenue today
comes from content but the content business model is already clear. Want to
get ahead of the curve? Taking a good look at interconnect operations may be the
place to start.

Guy Alon is revenue assurance product marketing manager for
Amdocs Ltd.

Amdocs Ltd.

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