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From the editor:
Is revenue assurance considered “yesterday’s program” at your company or the purview of one particular department? When you sit around the conference table, do you hear executives say things like:
Well, if that’s the take on revenue assurance at your company, I know a couple of guys who beg to differ. And they want you to break the mold of in-house approaches by drawing inspiration from Columbo and a few other surprising sources.
Curtis Mills (founder/CEO) and Van Howard (revenue assurance expert) of ProCom Consulting not only believe RA’s best years are still at hand, but they also make a strong case as to why every board and senior management team needs to put RA back on the front burner.
Their analysis is delivered in a three-part series called RA: Sweeter the Second Time Around. Here’s a quick preview of what’s in store. . .
Curtis and Van’s rousing defense of revenue/cost assurance programs is a must-read for executives eager to earn that elusive second round of RA savings. Enjoy. . .
Revenue assurance programs have been active at most telecoms for a decade or more. Because attention and sophistication have increased, it’s tempting to believe that the current staff and software monitoring tools have already captured the lion’s share of revenue leaks and cost savings.
Contrary to this conventional wisdom, it’s our observation that there is still a great deal of money to be found. The real challenge is that revenue assurance programs at many telecom organizations today are designed to fail.
Now “designed to fail” is a pretty harsh assessment, but bear with us for a moment: We’re going to explain the reasons why this claim isn‘t as over the top as it appears and why it isn’t the fault of any one person, department or vendor.
Before we do that, let’s first look at why revenue and cost assurance is so crucial to corporate success and revisit the scope of what it should include.
Many companies are being valued these days on free cash flow and EBITDA (earnings before interest, taxes, depreciation and amortization). In fact, boards are often highly focused on these metrics. Yet making money is very tough today, particularly for wireline and cable companies whose profit margins are being squeezed by the recession, commoditization and aggressive competition.
The good news about revenue assurance programs is that every dollar of found revenue added or invalid cost eliminated has a direct impact on EBITDA and free cash flow. Any CSP -- particularly tier 2 and tier 3 service providers -- can typically identify 1-3% or more in EBITDA and free cash flow lift in as little as six weeks.
Improved EBITDA and free cash flow, in turn, translates into stock price growth. Consider U.S. cable companies as an example. They trade at 6-9 times earnings. Add a dollar to earnings, and you’ve added $6-9 to the stock price. The leverage is dramatic. On a net basis, each $1 of revenue or cost leakage addressed equates to at least $3 in sales growth (due to cost of sales and incremental direct costs) through regular channels and multiples of that in terms of market capitalization.
This translation of EBITDA and free cash flow into market cap is what makes RA programs so profoundly powerful: they usually identify issues that are relatively inexpensive or easy to fix, which means the cost savings from RA initiatives drop straight to the bottom line and have an immediate effect on corporate performance measures and stock price. This is why boards should move RA to the top of the agenda.
Over the last 10-20 years, the industry has undertaken what we would call “first generation” revenue assurance initiatives, which focused on rating, billing, and collections. Carriers commissioned audits, fixed their processes, improved controls, and then implemented software monitoring tools with dashboards, that continue to watch for anomalies and send alerts on an ongoing basis.
Many carriers also established dedicated revenue assurance or internal audit departments; others spread that function throughout the organization. These efforts were very successful in finding egregious forms of leakage that had previously gone undetected. Common examples include rejected call detail records never recycled and rated, lack of correlation between usage revenue and costs, and long-distance and cellular usage rate calculation errors. When industry competition heated up in the ‘90s and companies needed to improve margins, there was big interest in RA at the board level. However, once the high-volume, easy money was found, executives and boards shifted their attention.
With margins now razor thin and competition even tougher, we believe boards should turn their attention back to revenue assurance, with a new scope of definition and a more holistic approach, as opposed to a siloed focus. This “second generation” of revenue assurance should include the entire range of processes from quote to cash, as illustrated in the figure on the right. As you can see, this is a range that spans numerous organizations, processes, procedures and systems.
The challenge lies in how to monitor that flow of information from order entry through to network transactions and billing systems, and tie that together with related costs. This is a very complex thing to do. The goal, of course, is to ensure the accuracy of service delivery, billing, collections, and complete financial recognition of retail and wholesale revenue.
And this brings us to why many revenue assurance programs are designed to fail.
Unfortunately, it’s ProCom’s observation that, because of how most small- to mid-sized telecom/cable operators in the U.S. approach RA, they fail to catch some pretty glaring areas of revenue and cost leakage. There are three systemic reasons for this, none of which are about the competence of any particular organization, person or vendor.
The irony is that the very people you need are already overburdened. Operations staffs are thin from years of cost cutting, and it takes everything they have to simply keep operations going. Even if they had the time, they probably wouldn‘t have the inclination to identify leakage in their own areas of the business. There is an understandable aversion to material problem discovery that could make them vulnerable to blame or create a perception of suboptimal performance. And even if they had the time and inclination, they lack a third critical requirement — cross-industry perspective. The most effective revenue assurance experts have worked at numerous CSPs and have an awareness of the common pitfalls and areas where lost money hides.
For a board and senior management team that wants to preserve and grow its EBITDA, commissioning periodic forensic analyses is essential. We use the term “forensic,” not in the criminal evidence sense, but to describe an intensive hands-on, detail-oriented investigation using a heuristic method that analyzes a variety of technical --- and often esoteric -- data. Usually one finding leads to a subsequently deeper layer of exploration - a “peeling the onion” exercise. It’s like CSI: Crime Scene Investigation meets Columbo — part science and part art, derived from years of experience and a nose for detecting leakage.
There are four key success factors to a good forensic program:
After recovery opportunities are identified, it is important to develop work plans with specific objectives, responsibilities and incentives. Executive management should then ensure that recovery opportunities are realized by requiring regular status reporting until completion.
Forensics are key, but investments in revenue assurance monitoring and analytic tools are also part of a winning program. Software tools enable day-to-day vigilance. You just need to understand the limitations of software and learn how to compensate for those.
Part 2 of this series will discuss what these tools can and can‘t do for you in the ongoing battle to protect your margins. In Part 2, we’ll also describe why the most elusive forms of leakage require a forensic approach.
Copyright 2012 Black Swan Telecom Journal