Archive for October, 2008

There are a few options available to us when data is not directly reconcilable. All of which hold benefits and pitfalls – so I’ll let you decide which is best:

1) Data Enrichment – In the majority of cases it will be possible to find a tertiary data set that can enrich your primary source to allow the reconciliation to take place. However it’s not just a simple case of updating one side of the reconciliation and proceeding as standard. Certain decisions need to be made:

  • Which data set do you enrich? ie network, billing or both
  • How to treat records that cannot be enriched?
  • How to treat duplicate enrichments?
  • How to perform the reconciliation – it’s technically now a 3 way rec, so should be dealt with accordingly

 2) High Level Reconciliation – Even if data is not directly linkable at the individual record level, it is more than likely still possible to reconcile at a grouped level ie total active network customers Vs total billed customers. However, if you perform a reconciliation at this level there are certain risks/issues:

  • RA Equilibrium – you lose visibility of the individual issues and just see the net effect ie in its worse case you are overcharging 50% of customers and under charging the other 50%, however due to a high level reconciliation you see the net effect of perfect billing.
  • Revenue Loss/Gain – the high level reconciliation shows a tangible error,  in this case you can’t fix anything as you don’t have detailed results so you end up having to perform the detailed reconciliation anyway.

To avoid issues the simple trick is to perform the reconciliation multiple times at different grouping levels, it will avoid the equilibrium issue and should enable you to isolate specific issues – thus avoiding an all encompassing detailed reconciliation.

3) Data Source/Process Enhancement – Quite simply, get the original data sources enhanced by their business owners to include a common key.  RA isn’t just about finding money, it’s also about ensuring good business process to reduce the risk levels against the company’s revenues. Clearly if there is no direct link between a customers product and their bill then there is an associated risk.

Summary

Ultimately the way I like to deal with these situations is by consolidating the above 3 options. Firstly I would perform the high level reconciliation – this will generally find risks and issues, that will allow you to justify the need for a business process enhancement by the data owners. To assist the data owners with the enhancement I would then perform a one off data enrichment exercise – identifying all records that can be easily updated and isolating the areas at risk. Eventually we end up with a fully cleaned system that can be monitored with ease going forward.

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I was talking today to a colleague, whose name, role and company best be kept anonymous, and they advised me a recent incident where their RA vendor issued two bills, for the (exactly) same service, to different parts of the company. These two parts of the company were both expecting an invoice due to internal hand-overs taking place at the time and so both authorised and made the payment. This was only picked up some time later, by chance, when the two people met on something else and it got raised.

All of which raises a number of interesting questions. Firstly, how does a company selling RA products/services which help telcos reconcile high volume, low value transactions across complex network, mediation and billing domains, then not get their own low volume, high value billing right? Secondly, if an RA vendor is doing this (accidental or deliberate, it doesn’t matter), how much more might it be occurring? Third and lastly, I am a fan that RA focus on “revenue” not cost as I believe there is enough complexity in that alone but I am sure an RA methodology could be applied to proactively identify these instances. Now that would lead to an interesting discussion – “we used the RA product/service you provided to find a leakage/loss associated with the RA product/service you provided”.

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Now here’s a question. Can RA practices be standardized (or bottled) into a one-size-fits-all solution?

What do I mean by the above statement? Should it be imperative that every issue/leakage raised by the analysis of underlying data yield a “bigger-picture” analysis, or should each issue raised be closed on a case-by-case basis. It is still a fairly common practice to reconcile data on atomic levels (xdr levels) by performing transferance checks through all the downstream systems. In effect, we could say that we are going to re-validate the expected business process defined for a particular product. However, is the effort and time that we would need to put into this exercise worth it? I am not of the opinion that we do not need to validate transferance, but do we need to be matching each and every xdr and check for its presence in the downstream systems? The number of analysts required to crunch the outputs of such large data correlation check and the time that would be going into it would not be, in my opinion, a correct and efficient use of the resources at your disposal.

If we go by the KPIs defined in “GB941-A_KPI_Metrics_Wookbook” (from TMF), we could see a fairly good set of indicators for monitoring the overall health of a system. However it is my opinion that it has been formulated from the viewpoint of an operator with a good level of maturity in RA, with emphasis on a process-driven methodology. Would this approach be accepted by every operator who wants to setup a RA department? In my personal opinion, I do not think they would. Over a period of time, once the intial steps have been taken, then perhaps the operator would gravitate towards a more standardized approach, but in the initial few months everyone runs around trying to justify the RA function. This is essentially a period of “controlled chaos” where we are looking for all the quick-win scenarios. Unfortunately, the emphasis is only on discovery and not recording the methodology for ascertaining best processes towards progressive maturity. Even though this is a period of individual heroics, it could lead to the development of a viable process by various learnings that one gains.

I was thinking along the lines of a set of KPIs at each stage of the maturity progression, with emphasis on capturing key learnings at each stage. Any thoughts on this?

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The publication of the FY09 Q2 results from Bangalore revenue assurance provider Subex will generate a mixed reception amongst investors. As the press release points out, product revenues are well up year-on-year. Product revenues for Q2 were US$26M (Rs.1,127M), up 57% compared to the same quarter last year, and slightly up compared to Q1. Consolidated revenues were US$33M (Rs.1,421M) up from US$24M (Rs.1,030M) in FY08 Q2. However, the press release does not say much more. Looking at the figures, it is easy to understand why. As anticipated, revenues from services continue to decline. There has also been a further reduction in operating costs. EBITDA before exceptionals is relatively healthy at US$5M for the quarter. However, the growing cost of interest accounts for more than half of that figure, highlighting that Subex will have liquidity challenges if it does not sustain its success in winning orders and converting them into cash. The biggest dent to the numbers came through exceptional exchange losses of US$16M on Subex’s FCCBs. After exceptionals and tax, Subex’s loss for the quarter was US$17M (Rs.717M), taking the loss for the year so far to US$32M (Rs.1,373M).

Going back to the forecasts for FY09, we see that Subex is still on course for its revenue projection of US$125M, having generated US$66M in the year so far. Although the management cannot be held responsible for foreign exchange fluctuations, Subex would now need a dramatic helping hand from world markets if it is to meet its forecast of US$12M profit after tax. The bad news about exceptionals may lead the careless investor to miss one key point: Q2 profit before exceptionals and tax was still slightly under US$1M. After the last two quarters’ results, Subex’s management has each time promised that investors will see the benefits of reduced costs following successful completion of integration. They cannot say that a third time. Yet, if Subex has now cut costs back to the minimum, a profit before exceptionals and tax of US$1M per quarter is still well short of what would have been needed to deliver the forecast US$12M profit after tax for the year. Given that revenues have been solid so far this year, it does not appear that the underlying business is as profitable as it needs to be to return a US$12M profit after tax over US$125M sales. EBIT before exceptionals was only slightly over 10% in Q2, making the forecasted returns unattainable as soon as you add in the real cash costs of interest and tax. Just to improve the underlying performance of the business to the point where quarterly results are in line with the profitability promised in the annual targets, Subex would need to generate US$3M profit after tax each quarter. It now needs to do significantly more in the second half of the year if annual profit targets are to be met, ignoring exceptional items. To deliver profits in line with expectations, Subex will need to further reduce its cost base, and healthily beat its forecast for revenues. For example, if Subex could reduce its staff costs by a further 5%, and if it could grow quarterly revenues by another 3%, then Subex’s underlying profitability would be roughly in line with that needed to generate annual profits of US$12M over sales of US$134M. The question is whether Subex is reaching a point where cost-cutting and sales generation are reaching a limit. If it is, then the targets cannot be realized, and investors will have to get used to the idea that Subex may be a viable business, but will not be as profitable as hoped. If, on the other hand, further cost-cutting and sales can be realized, this may lead investors to grow impatient with a management team that is turning the business around a lot more slowly than they originally promised. Losses on exceptionals are just one of many headaches for Subex right now.

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Bangalore-based Subex, suppliers of revenue assurance software, are due to release their half-yearly results soon. There will be a keen interest to see what they reveal. After bad figures and missed forecasts last year, investor confidence needs to be bolstered. Subex must show they have finally completed the integration of the acquisition of Syndesis and turned the corner with genuine improvements in operating results during Q2. In the run up to the results announcement, it is interesting to see the recent press coverage they have garnered, which may give some clues about how Subex’s management will present their recent performance. This relatively positive article focuses on how Subex is reducing its reliance on BT, its largest customer. However, with BT still contributing 18-20% of total revenues, compared to 21-22% last year, there is no sign of a significant improvement in the diversification of its customer base. If anything, this modest improvement only serves to reinforce how much Subex’s turnaround depends on a continuation of big orders from a few customers. As the article points out:

Unlike most companies in the IT services sector, Subex is over-dependent on its top-10 clients. The top-10 clients contribute close to 85 per cent of its revenue.

It is also interesting to note that this article hints at a reduction in income from Subex’s software services division. Subash Menon, founder and CEO, was quoted as saying:

“The services business we do is essentially body-shopping and requires a lot more onsite activity, where the margins are as low as 6-7 per cent of EBITDA. Five years ago, 70 per cent of our revenues were coming from services. Today it is less than 20 per cent. Our plan is to bring down the revenue contribution from services to 5-6 per cent in the next three years.”

Menon’s spin on this disguises an important shift of emphasis. Whilst software services may have represented 70% of revenues five years ago, back then Subex was a much smaller business. During those 5 years, Subex has grown through acquisition. Revenues have multiplied several-fold as a result of ever larger takeovers. During that time, it was inevitable that the proportion of revenues from software services would be diluted if those services only grew organically. In contrast, nobody is expecting to Subex to continue its spending spree in the coming years. Subex’s forecasts for the full year emphasize increased profitability, not increased revenue. That implies any further reduction in the share of revenues from software services must come through an absolute reduction in those revenues. In order to improve overall margin ratios, it would make sense to downscale a division which earns low margins in general. However, unless Subex is hoping for improbable levels of overall growth, the plan must be to reduce the software services division to a third of its current size. That will mean headcount reductions amongst the 250 staff currently employed in that division. What makes this news particularly interesting is that previous press speculation has been that the software services division would be sold off. A depressed market with reduced credit may have eroded Subex’s confidence that they will find a buyer, causing them to change their approach.

Worse news for Subex was highlighted in this story. This article reiterates how the falling Indian stock market and falling Indian currency have hurt those companies that borrowed in US dollars. Subex has a large FCCB hangover, having used them to pay for acquisitions. Although these convertible bonds are not due for redemption for a few years yet, unless there is a tremendous turnaround in share performance, investors will not convert them into equity, and Subex will not be able to secure new debt at as cheap a price. Although Subash Menon has already been upbeat in the press about his company’s ability to cover its finance costs, the article highlighted Subex’s main worry:

CLSA [an equity research firm] in a report said Subex… face[s] high liquidity risks once FCCBs come up for redemptions, unless there is significant rally in stock prices.

Investors will no doubt have plenty of questions, and be expecting good answers, whatever numbers Subex are about to report. Keep an eye on this situation, because if Subex continues to struggle, or if it makes further cuts, the impact will ripple throughout the rest of the revenue assurance industry.

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