The idea of “revenue leakage” is generally perceived as a metaphor for telco-specific billing issues. But the fundamental elements that contribute to revenue leakage in telcos also exist in many other industries, and will soon be intensified as on-line electronic billing presentment is adopted.
Basic ingredients: take torrential volumes of micro-transactions in aggregate, stream them through a poorly integrated system that’s held together with the digital equivalent of staples and string, try to slice and dice, meter and tariff the flood of micro-transactions at various control points within the rickety system, and recombine them into coherent, personalized customer billings without losing any revenue or customers along the way. Add a ferociously competitive and volatile playing field that does not allow the luxury of time to develop a common billing platform. Result: systems leaking revenue.
Similar scenarios exist in other industries such as utilities, financial institutions, mutual funds and data warehousing organizations that are getting involved in e-commerce. There are lessons to be learned from the telco experience.
Revenue leakage problems are typically brought to the CFO’s attention via abnormal financial results or the Customer Service Centre in the form of customer complaints, but the CIO is responsible for investigating and understanding the problem. How can the proactive CIO deal with revenue leakage before it escalates into a problem? How can he or she determine the nature and magnitude of the problem? Can these revenue assurance tactics be adopted and applied to other similar industries? What are the broader implications to organizations with poorly integrated systems that may be contemplating electronic billing or e-commerce ventures?
The Revenue Leakage Problem
Telecommunications industry analysts estimate that between 2 per cent to 5 per cent of all billable-minute revenues are lost because of absent or incorrect billings. Telcos typically focus on revenue leakage only when a major fluctuation occurs in financial results or billable metrics. Unfortunately, this approach is misguided, as there are many significant revenue leakage problems that may not turn up in monthly trend-analysis reports. For example, if a rating table has not been updated and is incorrectly charging 8 cents instead of 10 cents a minute, the total amount of revenue generated for the service may appear stable from month to month. No unusual fluctuations in financial results will result that might alert a reviewer to the rating error, so the problem may remain undetected for a long time.
Assumptions that revenue leakage problems will turn up in financial results are dangerous. Revenue loss can occur in any element of the revenue stream, from new product development to systems (switches, order & provisioning, rating, invoicing) to back-end customer support. Given the sheer scale of transactions processed by a typical telco, the total dollar amount of money washing down the drain due to leakage can be substantial.
Revenue leakage is often treated as a billing issue. Auditing calls from switches, making sure rating tables are properly maintained, verifying accounts receivables, checking invoices for completeness — these are all billing-related activities. If the charges aren’t on the bill properly, the billing organization has failed. But it’s important to remember that revenue generation crosses many departmental lines.
One department is not in control of the revenue stream. One department is not responsible for all the elements on the invoice. One department is not responsible for new product development. Ultimately, no one department is responsible for customer satisfaction. As each department passes information and responsibility onto the next, the chances for breakdowns increase. Factor in: high transaction volumes, multiple processing systems and frequent reliance on third parties, often competitors. Transactions travel across multiple systems and are handled many times before reaching their final destination in a recordable and billable format.
Ensuring processes, systems and people are all working together with the appropriate controls in place is a monumental task. Revenue leakage happens at the weak links in this intricate and highly complex process. Yet the CIO bears the brunt for any issues that may occur.
Systems Under Stress
It would be a gross simplification to view the problem as a change control issue. The aggressively competitive environment that telcos inhabit moves, changes and shifts too quickly. Traditional and time-consuming change control procedures are not enough to deal with the accelerated pace of change. New competition caused by deregulation and advances in technology has transformed the telecommunications industry. Mergers and acquisitions are now common in an industry that saw little change over decades. New services are now brought to market in weeks rather than months or years. And customers who were locked in to a single provider can now shop around, forcing customer service issues to the forefront.
Says CIO Edward Glotzbach of SBC Communications, which recently merged with Pacific Bell, acquired Southern New England Telephone and began the acquisition of Ameritech: “We have 30 different billing systems, each developed a little differently and in a different period of time. It was a big enough problem when we just had one company, but now that we have multiple companies, we have multiple legacy systems that we have to assimilate into one architecture for the corporation.”
IT teams at these telecom companies are charged with implementing changes resulting from demand for new services and mergers and acquisitions. A job that once focused on building and supporting monolithic mainframe systems in a stable market now involves creating and introducing new revenue-generating services. Says Mark Temmings, an account manager for Ohio-based Convergys Corporation: “Most telecommunications systems are based on 1970’s technology. They were built to support a regulated market, one very structured and rigorous in nature.” The main task today is to build, deploy and support these new services, and speed to market is critical.
The problem is that telecom companies have traditionally used the silo approach to deploying operations support systems like billing, ordering, provisioning and other functions for each service. These mainframe-based legacy systems typically don’t communicate well, if at all, with one another. The true challenge, ultimately, is one that many industries understand all too well: big systems integration of product-oriented legacy systems with new customer-oriented systems that are frequently Web-based.
The problem is further compounded by advances in technology. Service convergence is the holy grail for most telcos: the idea that single, next-generation providers will deliver voice, video, data, Internet access, wireless voice and even cable offerings over a common infrastructure. Executives love the idea, and customers are eager. Equipment suppliers are delivering technology that can support many different services over a common network. Many carriers have the desire and means to offer consolidated voice and data products, bundled discounts and even one-rate packages that combine many different services. But until they can be properly and reliably billed, such convergent offerings are just another dammed-up revenue stream.
If a carrier wants to offer six or seven different services, it will be necessary to buy, install and maintain six or seven different billing systems. Off-the-shelf solutions to integrate, or more accurately, to mediate disparate systems and generate a consolidated billing are being developed but they’re rarely complete solutions and are always painful, requiring monumental effort to implement and tailor to a specific provider’s fragmented systems environment. Moreover, a common billing platform may solve the customer service problem, but it won’t ensure the billings are right — although it would reduce the number of weak links in the processing cycle that might result in incorrect billings.
“Electronic Stapling” Approach
Many providers like AT&T, MCI WorldCom Inc and Sprint have come up with aggregated billing systems, that, in essence, pull information from many billing systems and “staple” it, digitally speaking, on one piece of paper at the end of the billing cycle. That’s a far cry from truly unified billing platforms, which largely still aren’t operational. For now, the interim step telcos are adopting is to aggregate the information from disparate legacy systems and put a new front end on the system. Today’s billing system reality is “electronic stapling” rather than true electronic, converged billing.
But this measure is indeed temporary. The relentless market does not permit complacency. Customer interest in electronic commerce in general and electronic billing in particular is forcing carriers to move quickly. Unfortunately, having reasons to embrace Internet-based customer service doesn’t necessarily provide answers on how to do it. Electronic bill presentment adds the additional major headache of processing on-line billings in real-time rather than batch processing. Traditional providers, saddled with legacy systems and manual internal processes, face the daunting task of not only getting information on the Internet but also automating the systems in the first place. Newer providers may not have legacy systems to worry about, but they face their own challenges, like limited funds and aggressive growth which systems may not be able to support. All providers are faced with spending time and money educating customers about their Web-based services and marketing them.
Aggressive market conditions, M&A activity, commoditized services leading to increased customer service requirements, inability to integrate legacy systems, lack of common billing platforms, accelerated new product development, e-commerce issues: these business issues are hardly unique to telcos. On the contrary, these are challenges faced by most industries. Telcos are, however, in the unique if unenviable position of being first at the gate. Revenue leakage problems are the symptoms of systems under stress. Systems stapling is at best an imperfect interim step, and even implementing a common billing platform may only succeed in alleviating certain problems. Is there a way to minimize technology risk in a volatile market characterized by shifting technology? The solution lies in adopting risk management techniques.
Solutions for the Proactive CIO
The question is not whether a telco is leaking revenue, but rather, how much revenue is being lost, how can it be captured and how can the root causes be addressed? Risk management concepts and techniques have recently evolved into a formal methodology termed “revenue assurance” to answer these questions.
In its broadest sense, revenue assurance is any activity an organization does to ensure that processes, practices and procedures result in revenue that is billed completely, accurately and in a timely manner. Traditional change control procedures are designed to prevent problems, but in a volatile, high-risk systems environment, these procedures are not enough to capture and contain all business risks up-front. A revenue assurance program is also needed to reduce the number of problems that will inevitably escape the change control net. A good program uses risk assessment procedures in combination with change control procedures to identify, minimize and/or eliminate significant business risks throughout the revenue process.
In the past, many CIOs perceived revenue leakage as the cost of doing business in telecommunications. However, competitive market conditions have heated up, resulting in dropping prices and shrinking profit margins. The potential for lost profits, market share and even bankruptcy has forced telcos to rethink the issue. A proactive stance is needed, as the reactive approach — waiting for revenue leakage to turn up in financial results or to be detected through customer complaints — is both inadequate and dangerous.
The CIO is responsible for IT systems, which are the life-blood of the business of telecommunications. In this environment, this responsibility includes dealing with the broader business and financial implications that can arise when technology risks are not minimized. However, all IT systems are imperfect and things will go wrong. Revenue assurance has evolved as a solution to enhancing systems integrity in a volatile systems environment.
The proactive CIO can use revenue assurance techniques to prevent billing problems that can be prevented, and detect problems that can’t be prevented. Alarms, controls and key performance indicators can and should be built into systems so that issues are prevented or identified as they occur. To accomplish this, the CIO needs to work closely with his revenue assurance and financial colleagues, both during new systems development and also on an ongoing basis to ensure systems and processes continue to operate as intended. If anomalies are not detected and corrected, minor revenue leaks can very quickly result in significant dollars being washed away.
Mapping the Risks
Revenue assurance programs allow organizations to identify revenue opportunities and threats, and enhance the efficiency of operational and support activities. An effective program will increase billable revenue and cash flows, make operating processes more efficient, cut end-to-end cycle times and minimize the chance of service disruption. Process and risk analysis is a critical component of a revenue assurance program. Inherent business risks are identified, sourced and measured to focus efforts. Analysis of existing and potential business risks are mapped and prioritized so efforts can be focused on critical areas that produce the greatest results.
External resources and third-party providers can assist telcos on two key fronts. On the strategic front, human know-how is needed to determine the best approach to mitigating risk based on industry developments and best practices. On the implementation front, external resources skilled in risk assessment techniques may be needed to build and implement a revenue assurance program. Automated software tools are the cornerstone of a successful program, as the scale and complexity of telecommunications billing does not lend itself to the brute-force approach of manual validation.
Revenue assurance methodology was originally developed for telecommunications companies, but the underlying risk management principles can be applied to other industries that face similar challenges: rapidly shifting market conditions, processing small transactions on a massive scale, and fragmented hand-me-down systems architecture. For example, utility companies are now facing markedly similar conditions as power markets deregulate, and may benefit from the adoption of revenue assurance techniques. Financial institutions, mutual funds and data warehousing organizations also face similar issues. Revenue assurance concepts can be generalized to be of use to any savvy organization that wants to implement improvements in its revenue processes and drive dollars to the bottom line.
Darren Henderson is a senior manager and telecommunications specialist within PricewaterhouseCoopers Global Risk Management Solutions (GRMS) Canada group based in Toronto. Rosie Lombardi is a consultant within the same group. They can be reached at darren.henderson@ca.pwcglobal.com and rosie.lombardi@ca.pwcglobal.com