Archive for April, 2008

Consolidation, consolidation, consolidation continues to be the dominant theme for revenue assurance vendors. Israeli revenue assurance and fraud business ECtel has just completed the acquisition of the assets of fellow Israeli business Compwise. Read the press release here. The deal valued Compwise at US$1.3m, and will involve ECtel incorporating Compwise’s products into their own, and continuing to support Compwise’s current customer base.

Compwise is a telecoms-oriented supplier of business intelligence; their products are designed to take very large samples of real customer EDRs and calculate billing values using actual and hypothetical tariff plans. The applications are several: use the customer’s own tariff to recalculate their actual bill and check that it is correct, use a planned new tariff to understand what the impact might be on total revenues, use a competitor’s tariff to gauge who provides the better deals and how best to compete. You can also include tariffs for the interconnect and wholesale costs to analyze margins and profitability in addition to revenues. It is a good tool, and a kind of automation that is under-utilized in the industry. Part of the reason for that is that recalculating bills tends to be low on the priorities for RA teams – too low if you ask me. It requires hard work to build and maintain an independent copy of tariff plans, but there is a big benefit in learning how tariffs actually work at a detailed level, not just how people think they work. The two are not always the same. I have been in telcos where a customer has queried their bill and the bill follows a snake-like path around the organization because one person after another has a different opinion on whether the bill was right or not. The marketing-oriented applications of Compwise’s product should be even more compelling than its use for revenue assurance, but marketing and pricing functions often lack the sophistication with data to appreciate the benefits of a tool like this. Anybody who has been around a data warehouse function knows how many reports the marketing arm of the business demands to do its work, but will also appreciate how often there are fundamental flaws in their understanding of the data. Do we all know what a customer is, what a call is, and what a bill is? No. We may think we know based on common sense and that the majority of examples will be clearcut. But without clear definitions that determine where to set the boundaries, it is deceptively easy to ask for a couple of reports analyzing the supposedly same total number of things, but which then do not equal each other.

Why then is ECtel buying Compwise? I see a couple of forces at work here. First, ECtel is going for growth. It has turned around after some lean years, and has the capital and the vision to stay in the consolidation race, at least for now. ECtel is intending to remain competitive with the WeDo’s and Subex’s who have also bulked up. Second, ECtel is diversifying. This is another riff on the topic of revenue assurance vs. revenue maximization. Compwise’s product covers revenue assurance but has greater sales potential when pitched as a maximization tool. ECtel may find a way to pitch the sales both ways, by trying to reach out and sell direct to Marketing functions, but also by encouraging RA teams to broaden their scope and move into revenue maximization using technology and data they should already be comfortable with.

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Do you like those puzzles where one train leaves Vladivostok at 8am, bound for Istanbul and traveling at 47mph, whilst another train leaves Istanbul at 9.15am, etc? I do. By accident, I spotted this worked example in a Subex annual report from 2003. The puzzle is: can you spot the flaw?

“For example, assume that a carrier is generating US$1.2 Billion in annual revenue of which half, or US$600 Million comes from inter-connect revenues. On a monthly basis, this would translate into US$50 Million of inter-carrier revenue. Using industry figures of a 10% revenue leakage as found in studies conducted by firms like PwC and KPMG, this would only represent 90% of the revenue actually owed which means that US$5.6 Million is not being collected monthly or US$ 66.7 Million annually, representing 5.6% of the annual revenue. The impact on the EBITDA and net earnings is even more significant. Assume that the carrier is generating about 5% EBITDA which would result in US$60 Million annually. By collecting this revenue, EBITDA would increase by 100% since there are no additional costs associated with generating this revenue.”

Did you get it? I actually like a lot of the maths in this. I like that they worked the calculations on the basis that the percentage leakage is relative to what revenues would have been if there had been no loss, not on the post-leakage figure. That means, as is demonstrated in Subex’s sums, that absolute loss = (% loss/100) * (reported revenues + absolute loss). Hardly anyone ever interprets % loss like that. Most interpretations of percentage loss, including those generated by Analysys, who conduct Subex’s annual survey, use this equation instead: absolute loss = (% loss/100) * (reported revenues). Mathematically the former is more elegant although it requires more effort to calculate and is harder to understand. However, there is then a strange mental cartwheel, as we are told this represents 5.6% of annual revenue. Huh? They mean 5.6% of the reported revenues, of course. Otherwise it would be 5%, which is what you get if you divide the 10% leakage by a factor of 2 because interconnect accounts for half of all revenues. You may hence have noticed that a US$66.7m improvement in EBITDA would be a 111% improvement over the reported EBITDA of US$60m. You would get a 100% improvement only if we were talking about the EBITDA that should have been generated if there were no leaks, on the assumption that EBITDA is a constant ratio to revenue. But then, the whole point of saying that fixing leaks involves no additional cost is to make it plain that the ratio between EBITDA and revenue is not constant. Are you still with me?

Anyhow, all of that discussion about numbers was just to keep you distracted. My real answer about the flaw in Subex’s example is given below.

Interconnect is a zero-sum game. However much one telco loses, another telco gains. If one pays too much, the other receives too much. If one pays too little, the other receives too little. Winners and losers net out overall. Applying an “industry figure” of 10% overall leakage to interconnect, and using that to draw a conclusion on EBITDA improvement makes no sense. Suppose every telco was consistently in error, each one underbilling other carriers by 10%. All that would happen is there would be an equal and opposite total balancing gain as other carriers enjoyed lower costs. There would be individual EBITDA winners and losers, depending on whether the carrier bills more than it gets billed, or vice versa. The overall EBITDA total, however, always remains the same. In the example, no mention is made of the impact on EBITDA if other telcos plugged the supposed leaks in their interconnect revenues. As this theoretical example could not apply to every telco at the same time, what is it an example of?

Did you like my answer? ;)

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You could not make this stuff up. One of GRAPA’s forums is dedicated to how they will professionalize the industry. Who is active on this forum? Three people: Papa Rob Mattison (self-appointed Hero of RA, 1st class), a senior manager at Ernst & Young in Belgium, and a product manager at South African software firm GijimaAst (??). Or at least, they were active – nothing much has happened on this forum since December last year. However, when they were active, they had some amusing discussions. Take a look at some excerpts [with my comments in the square brackets].

“I had a look at several industry related Certification programs and most of them have 2 to 3 levels of certification… I would like to propose only three levels of certification with possible specialist categories…
1. Certified Associate Revenue Assurance Professional. This certification…
2. Certified Revenue Assurance Professional. [snigger] …”

“I agree, we should… I would even limit the initial certification scheme to 2 certification a more general / foundations certification and one for the more advanced / experienced RA practitioners. E.g.
- Certified RA Professional [chortle] …”

“I am agreed to have two levels of certification…
- Certified RA Professional [lol] …”

“I agree with the CRAP/CRAM – Basic/Advanced approach [LOL!!] …”

“First of all, let us PLEASE come up with an Acronym other than CRAP [at last! somebody notices LOL!!] …”

How funny. They seriously considered introducing a qualification called C-R-A-P. But there is a serious side. Take a look at these excerpts:

“Below the suggested framework for Revenue Assurance Principles…

1. What is Revenue Assurance?
2. Revenue Assurance and the eTOM model [WHAT!?!? Why do they intend to hijack the bits of the TM Forum's work they want, and ignore the bits they do not want?]
3. Revenue Assurance Maturity Model [EXCUSE ME! More pilfering of other people's ideas. Maybe authors like me give away intellectual property so other people can attain it freely, and not because they intend groups like GRAPA to find ways to exploit it for financial gain.]“

“Should we put forward some standard well acknowledged (and available) white papers or books on Revenue Assurance that cover the topics mentioned above?
-> This will give the people wanting to take the certification exam a clear view on what they should study.
-> This will also give the committee a clear basis out of which we can draft exam questions…

Rob’s book could be a basis, maybe also some of his white papers. Additionally, TMforum (if we can use their content) also has some content that could form a basis. [Great idea! But shame on GRAPA for wanting to use the TMF's material when it has made no contribution to it.]“

“I agree. We should use as much of GRAPA documentation as possible. In addition to that I would recommend the following (same as yours above)

  • The Telco Revenue Assurance Handbook (Rob Mattison) [surprise surprise]
  • Revenue Assurance (Chorleywood Publications 2002) [I cannot find a Chorleywood report with a similar title, but whichever report is intended, the cheapest Chorleywood reports cost US$2000, and do they intend to get permission before they take material for their examination?]
  • Managing Successful Revenue Assurance (The Phillips Group) [US$1000 per legitimately acquired copy, and ditto, what about permission?]
  • List of TM Forum Books (very good) (TR131, GB941, GB941-A) [Yup, great idea! At least this means that the people at GRAPA read the TMF's output, even if they do not admit it in public. But what about fair payment for use of copyrighted material, especially as GRAPA intends to charge fees for exams and certification!?!?]

Sometimes it is hard to know whether to laugh or cry. GRAPA makes me want to do both.

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Here are a couple of classic comedy quotes. They sum up what customers think phone companies think about customers…

“Communism is like one big phone company.”

Lenny Bruce

“The phone company handles 84 billion calls a year, everything from kings, queens, and presidents to the scum of the earth.”

Lily Tomlin

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Illegal termination of international traffic is a thorny issue. Balance the right of a sovereign government to raise funds as it pleases with the benefits that flow from cheaper international communications. The Pakistan Telecommunication Authority (PTA) reports that PKR3bn (US$47m) is lost annually to the exchequer and national operators as a result of grey traffic. Chapter 2 of the PTA Annual Report for 2007 announced plans to purchase a solution to detect illegal traffic, with costs being split amongst industry stakeholders. The chosen solution is from Californian firm Narus Inc, and is supplied via the Pakistani solution provider Inbox Business Technologies; see the press release here. The software will be used to detect illegal VoIP gateways and hence eliminate grey traffic.

Smuggling telecoms traffic over borders is in principle no different to any other kind of smuggling. You can spend money on border controls, and make life harder for smugglers. You can fine them and imprison them. But the economic reasons that promote smuggling will remain: the costs being paid for international traffic are higher than they would be in a free market without border controls. Whilst it is easy to assess the loss in tax revenues due to illegal traffic termination, those revenues have to come from somewhere. With many Pakistanis living and working overseas, particularly in the USA, UK and Saudi Arabia, communication brings great benefits for society and the economy. There has been an explosion in international traffic with Pakistan, and prices are coming down, but I hope that the PTA learns both lessons from this experience. Not only do you need to automatically monitor networks to assure revenues, but you also need to drive down prices to the rate that would prevail in a free market. Only the two together will deliver the best overall return to Pakistani citizens and consumers.

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