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April 2012

From Risk to Robust: Turning the Big Picture Into a Real Agenda for Change in Telecoms

From Risk to Robust: Turning the Big Picture Into a Real Agenda for Change in Telecoms

I admit it.  Nassim Taleb is a hero of mine.  I defy you to point to a better agenda for risk management than the one espoused by this best-selling author, former trader and Professor of Risk Engineering.

And yet, I live in a world of parallel realities: one where the ‘black swan’ has become a popular phrase because of Taleb’s efforts to popularize risk management, and one where people stubbornly refuse to adapt to its key message: stop trying to be so clever.  Yes, I just wrote that.  To avoid doubt, I will write it again: stop trying to be so clever.

Bad things happen: we know they will occur, but we are poor at predicting them -- and always will be.

Whether it’s the Titanic, volcanic ash clouds, the Space Shuttle accidents, or the Fukushima nuclear incident, we are prone to being fooled by our intelligence.  Ironically, we even fool ourselves when we think our new-found knowledge has prepared us well for the next catastrophic event.

Overconfidence occurs at all levels, not just with disasters.  The only difference is whether the pain is acute and indisputable, or chronic and barely recognized.  Sarbanes-Oxley was a response to corporate governance failures, accounting snafus, and massive internal frauds... yet nobody really believes that Sarbanes-Oxley guarantees an end to such scandals.

On the upside to risk, you can compile as much marketing data as you like, but only a man like Steve Jobs has the confidence to assert: “a lot of times, people don‘t know what they want until you show it to them.”

When preparing for the future, we will always tend to be somewhat blind and foolish, failing to admit to the unknown unknowns, overestimating our knowledge and resilience.  As much as we pretend to escape risk, in a competitive landscape, risk is inevitable and even desirable.

Okay, about half of the readers who started this article have given up by now.  That does not bother me — I was not writing this for them.  Good luck to them as they set out constructing sophisticated rulebooks and standards that enable them to quantify all risks.  Remember Basel II?  It was a set of standards devised by enormo-brains and super-paids to ensure the world banking system would not collapse under any foreseeable circumstances.  Needless to say, Basel II did not cut the mustard, so the enormo-brains and super-paid have since come up with Basel III.

Let those people amuse themselves; I want to reach out to the rest of you, and remind you that not everything can be predicted, but you can still make your business robust, by following ten principles that Taleb offered in the wake of the banking collapse.  Here are the Taleb’s ten principles, as published by the Financial Times, and how I relate them to telecoms.

1 What is fragile should break early while it is still small.

Deal with risk by letting things go wrong early, before you scale everything up to the scale of a potentially massive calamity.  There are a lot of tactics to do this in telecoms.  Soft launch new products with internal and friendly customers, let it run for a while, and iron out the kinks before you promote the product widely.

When going public, try innovative ideas on only a subset of the market to see how they respond — this will help you refine the pricing and marketing pitch when offering it more widely, or allow a flawed offering to be quickly and quietly removed from the range.  Prototype internal system changes, and make sure you can roll them back.  And when making changes that require people to do new things, you can apply a similar approach by trying out training on a small group to see how well it was understood.

2 No socialization of losses and privatization of gains.

Problems may be suffered in places that are removed from the root causes.  Ensure that costs are where they belong, and if a department — like Customer Services — is suffering increased burden because of failures elsewhere — say due to installation problems — make sure the adverse variance is correctly reflected against the performance measures of the department most responsible for the root cause.

Similarly, recognize where the root causes of leakage lie, and incentivize the responsible department to be proactive and address them, rather than generating a faux ‘business case’ to pay people to fix the mess later on� even if that means the Revenue Assurance department’s business case gets chipped away because there is less leakage left for them to identify.

3 People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.

This advice is obvious but also the hardest to achieve in practice.  A blame culture is a big obstacle to improvement.  When the business suffers, there’s a tendency for people to blame the system and/or ‘play the game’.  Faults occur because employees or managers act selfishly: they seek to be measured on narrow, easily achieved work goals and ignore feedback on adverse consequences elsewhere.  Step back and ask yourself seriously:  it is it worth trusting those people with similar responsibility in the future .  So how do you cure a blame culture?  Well, one way to regain balance is through techniques like balanced scorecards.  This allows you to construct a business that keeps true to its overall interests, and those of its customers.

4 Do not let someone making an “incentive” bonus manage a nuclear plant — or your financial risks.

If narrow measures were not bad enough, rewarding people based on narrow measures is especially dangerous.  It’s easy for people in telecom organizations to merely “tick the box”.  For instance, you can cut corners when installing a service, not take a customer order correctly, or rush through a project or product launch to meet a deadline.

A better approach is to base personal incentives on the real benefits received by the business down the line.  Otherwise people will risk quality to improve the nominal measure that matters to them, and here the lack of “quality” is a euphemism for accepting knock-on consequences typically suffered some time later, and elsewhere in the business.

5 Counter-balance complexity with
simplicity.

Keep the business manageable and understandable, so the connections between cause and effect can be seen and appreciated.  So if you need a complex technology architecture, make sure there is a simple way to compare inputs to outputs overall.

Creating a complex tariff structure for a certain range of services may be entirely justified, but remember: you pay a penalty in long term maintenance.  So as you add complexity, are there ways you can ease the burden, say, by removing some unwanted or unnecessarily complicated tariffs from your historic catalogue?

6 Do not give children sticks of dynamite, even if they come with a warning.

If the relationship between costs and revenues is too complicated to understand and monitor, then avoid creating such a complex relationship.  The closer the relationship between the drivers of costs and the drivers of revenues, the less risk to the business.

Telecoms is already an inherently risky business because the profile of costs does not match the profile of revenues, especially retail revenues.  A telco may spend billions rolling out a network in one big committed spend to: insert new technology, acquire rights to use land, and buy spectrum licences.  On the other hand, a retail customer may or may not make any individual call.  So a big, long-term and one-off expenditure is matched to the impulsive spending habits of millions of people.

The behaviour of millions of people can ‘average out’ somewhat predictably, but if a disruptive alternative comes along (like social network messaging in the Netherlands, or Free Mobile in France) then forecasts are blown away because of the unexpected price competition.  On the other hand, telcos are somewhat insulated from competition — let us be honest about this — by governments intervening in the market.

However, government intervention is not predictable or controllable either.  Whichever way you look at it, the more operators can lay off risk in order to earn lower but more secure margins, the better for the telco, and this trend is behind trends towards network sharing and outsourcing.

7 Only Ponzi schemes should depend on confidence.  Governments should never need to “restore confidence”.

This rule, as stated, does not easily apply to telecoms, because it is based on the observation that there is a baseline of trust between institutions that borrow and lend to each other.  In the financial crisis, that baseline was brought into question, challenging the functioning of the system as a whole.  Could such a baseline of trust be violated for telecoms?

On one hand, telcos already rely on each other with great success — hence calls get connected from anywhere in the world to anywhere else in the world, and the internet works brilliantly!  On the other hand, trust could be undermined due to fraudulent behaviour, and increasingly due to the interdependencies inherent to security and information privacy.  One weak leak in the chain undermines trust in the whole chain.  If telcos cannot keep customer trust, then governments will try to intervene — but we do not want that.

8 Do not give an addict more drugs if he has withdrawal pains.

Taleb’s point is about debt and leverage; reducing debt and leverage is painful, but it is preferable to keeping businesses over-extended by giving them ‘cheap’ alternative sources of debt.  Eventually the debt has to be unwound, and that is painful.  Is there a parallel for telecoms?  Yes, in the form of presumed future returns.  In short, promising lots of money in the future is a way to underpin high stock valuations, and this is especially evident with businesses that focus on social networking.

The dotcom bust helped to clean out some of the bad behaviours.  After all, the Worldcom collapse was caused by an accounting fudge that was an over-extended equivocation between current cash costs and the prospect of future revenues, which in turn was used to prop up an unsustainable stock market valuation.  Investors need the transparent truth that it takes time to convert today’s capex investment into future incomes, and that the further into the future we look, the less reliable those income predictions will be.

9 Citizens should not depend on financial assets or fallible “expert” advice for their retirement.

Taleb pierces the illusion that markets are a guaranteed storehouse of value.  In other words, he reiterates the cautionary maxim that investments can go down, as well as up.  But are investors sometimes engaged in similar speculation when putting their money into telcos?  Sadly, the answer is yes.

As telcos have matured in some markets, we sometimes see them put piles of cash into their own special kind of speculative investments.  An investment is not speculative if the management team has good reasons to believe they will add value by managing any businesses they acquire.  But if they know nothing about running the businesses they acquire, they are gambling on behalf of their shareholders.

Telefonica understood what it was doing when running operations in Latin America, and had a strategy to make the most of those investments.  But other groups have been badly burned when venturing into new geographical markets they did not understand and which delivered no synergy.

The same kind of speculation can also occur when buying into new kinds of products and services.  Cable & Wireless bought into a rising ’star‘ in the UK’s retail ISP market, then spent a lot on ramping up customer numbers, only to make a painful exit some years later because the acquisition never properly complemented the business of the rest of the group.

The same could happen when dabbling in other new areas, like the supply of content or ICT services.  Partnering with businesses that have the necessary management skills is a safer route to success.  And if management really does not know what to do with its cash, it should return it to shareholders and pay down debt, which is exactly what Vodafone Group did when it finally received a dividend from its investment in Verizon Wireless.

10 Make an omelette with the broken eggs.

When eggs get broken, the solution is not just to get more eggs and stick to our original menu.  If the business model is fundamentally broken, do not try more and more patches over the cracks.  That is not risk management, because sometimes you should avoid and exit risks, not merely layer on more and more controls in a bid to limit them.

Black Swan, the Book

When things go wrong, we can learn a lesson and make something that will not break.  For example, if a telco is struggling to make headway in a retail market, perhaps it is best to refocus on a wholesale service and do deals with others who own the retail customer relationship.

We are better off accepting human nature and its frailties, and being prepared to do a quick u-turn when we find we are headed down a down-end (whilst minimizing the embarrassment for the individuals concerned).

In telecoms that means being clear about the value we can generate from the assets we already have: our technology and our people.  If we misjudged them, we can still reuse them in innovative ways, because even a mistake can lead to productive innovation if you respond adroitly.

Or as I prefer to put it: when life gives you lemons, make lemonade.

Copyright 2012 Black Swan Telecom Journal

 

About the Expert

Eric Priezkalns

Eric Priezkalns

Eric Priezkalns is one of the editors and founders of talkRA, the revenue assurance blogging site.  He is the lead author of ‘Revenue Assurance: Expert Opinions for Communications Providers’.

Eric splits his time between freelance consulting and his various passions, which include creative writing.  Eric has specialized in the field of risk and assurance for communications firms since he qualified as a chartered accountant in 1999.

During that time, he has served as Director of Risk Management at Qatar Telecom, Head of Controls for Cable & Wireless Group, Best Practice Manager for Revenue Assurance, Billing and Carrier Services for T-Mobile UK and Billing Integrity Manager for Worldcom UK.   Contact Eric via

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