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October 2012
Margin analysis is one of the hottest trends in business assurance and telecom analytics.
As a product manager for cVidya’s soon to be released margin assurance module for our MoneyMap platform, I’d like to share some perspective and explain what the excitement is all about.
To be honest, while margin analysis is hot, it’s not exactly new. For years people have been performing margin analysis using Excel spreadsheets. And in the early 90s, margin analysis was also a key benefit of owning a data warehouse.
So why are these approaches less than optimal? I think the answer is they either take too much time or the results are not granular enough. In a data warehouse approach it generally takes a good 15, 30 or 60 days to fully collect and analyze the data. That’s pretty slow if your objective to manage your business in real-time.
Excel spreadsheets are great for producing periodic monthly, quarterly, and annual financial reports, especially where the inputs are aggregate (“coarse grain”) numbers. But as soon as product categories are mixed and you need to segment results across “fine grain” customer groups and geographic regions, the Excel model becomes clumsy.
I’d like to delve into the spreadsheet issue a little more to better explain why the Excel approach breaks down with added complexity.
Pretend you’re CFO at a mobile operator. The overall costs of supplying an on-net service like SMS are very well known to you. But a problem arises when you consider a bundled service where SMS is mixed, say, with the services you are buying from third party partners.
For example, let’s say I have a plan of 100 minutes of voice calls, 500 SMSs, 10 movies, and 20 ringtones. The first two services are internal. I know my SMS cost and the average cost of a voice call being dialed to various regions of the world. But let’s suppose the subscriber makes a call to Russia and the call is routed through several international carriers who bill you for usage. A case like that is much harder to model in a spreadsheet.
The same goes for content services like movies and ringtones that I buy from another provider. First of all, the cost of a one particular movie could vary across different content providers. Not only that, the way the movie is sold may vary. One provider may charge $2 a movie; another provider charges you $500 for an unlimited number of downloads of the same movie.
So through this example, you begin to see how hard it is model such complexity in a spreadsheet.
But in our forthcoming margin analysis product in MoneyMap, we’ve taken into account the fact that many service providers want to enter costs derived from another system. So we include places in the system where you can post external costs, say a computed average SMS cost. That’s fine.
But in calculating the margin of service bundles that are mixture of on-net and off-net costs — that’s where the value add of a commercial software solution comes in.
Let’s step back and ask a more fundamental question: why are operators eager to implement this newer and better approach to margin analysis? Well, here I would point you to two industry trends: increased competition and service complexity. Consider these issues:
Many departments at a telco will find margin analysis useful, but marketing and finance probably get the most benefit because it’s all about analyzing the profitability of different products and services.
With usage data collected from the network plus invoices to subscribers and from third party partners, we can analyze each and every subscriber and service.
Here are the most important uses of margin analysis:
The whole objective of margin analysis is to understand the financial profit or loss status of individual telecoms products, services, and packages. To do that we subtract the total revenues of a particular product with its costs?
Sounds easy, right? Well, it would be easier if we didn‘t have to deal with two entirely different kinds of costs. There are the direct costs associated with the particular service you are trying to get the margin of. Then, there are also hundreds of indirect costs such as the salaries of people, marketing costs, etc.
Luckily data on indirect costs is relatively easy to obtain. That data lives in a telco’s financial system and is computed by adding up payroll, purchases and the like. Now, there are many different ways to combine indirect costs with direct cost to arrive at a full-loaded margin analysis.
cVidya’s approach is to leave the method of combining direct and indirect costs up to the individual operator. Instead, we focus on the hard part — sorting out the direct costs of the individual services, products, and bundles.
The difficulty here comes from the need to gather direct costs from data sources scattered across the telecom enterprise. For instance, interconnect contracts are managed by the business. Usage collection is done by engineering. Pricing plans are done by marketing. In short, many pieces of the organization jigsaw puzzle need to come together.
Merely collecting information from all these sources is challenging. Then there’s the added task of managing the many algorithms or formulas used to calculate profitability.
Billing cycles add another huge level of complexity: since telecoms bill on many days of the month, so you have to figure out how to align those billing cycles to get an accurate margin.
Volume commitments to partners are yet another complicating factor. For instance, in content settlement, the rate may be $100,000 per month for a certain level of subscriber purchases, but $150,000 per month if that volume commitment is not met.
So sorting out all these complexities — and fitting them in with the unique needs of individual telcos -- is where the real value of margin analysis software comes in.
As I mentioned at the outset, the great news for financial and revenue assurance professionals is that margin analysis isn‘t one of those costly applications that only large carriers can afford. On the contrary, at cVidya, we are implementing it as a “bolt-on” solution to RA.
RA software essentially paves the way for margin analysis because every department who has an RA solution already has most of the source data already collected, normalized, and augmented with added data such as the demographic, regional, and network information associated with customers.
Adding margin analysis to RA brings some nice advantages. The analytics information is online and users can interact with it dynamically to drill down to specific segments or even create new alerts. And because the platform is based on xDR-level data as opposed to just aggregate numbers, you can view the various dimensions data in highly granular segmentations.
Here are some examples of the flexibility this new style of margin analysis solution delivers:
Margin analysis, catalyzed by big data platforms and leveraged by revenue assurance systems already in place, brings some exciting new business-optimization power.
It will allow a telecom organization to deliver not just revenue assurance, but real-time and fine-grained “profit assurance” as well.
Copyright 2012 Black Swan Telecom Journal