Archive for June, 2013

This month’s L.T.T. by Guy Howie was meant to illustrate a key use of call margin reporting, and also demonstrate the fun challenges of identifying the exact issues and following through to useful conclusions.

This challenge needed a thorough logical and mathematical approach to untangling all the factual issues, and then a more commercial and creative approach to identifying the possible opportunity.

Material Interconnect Losses – Solving the Maths Challenge

Firstly, it is important to understand the Net Revenue and Cost pence per minute rates in operation.

The Total net ppm Revenue charges can be derived through dividing the Total Net May 2013 Revenue by the May 2013 minutes. This gives a net ppm fee of 0.1230. This, for the sharp minded, is equal to the old (pre Sept 2012) ported rate – so it is safe to assume that revenue is understated because both the ported rate was too old – 0.2330 pence per minute should have been used, and also, more frightening, the main headline revenue rate of 0.9926 ppm is not being applied !

Similarly, the Total net ppm Cost charges can be derived through dividing the Total Net May 2013 Cost by the May 2013 minutes. This gives a net ppm fee of -1.483. According to the charges, one would only expect -0.49ppm, but this is -0.9926 more than expected. To the keen minded again, 0.9926ppm should be the additional headline revenue figure. Looks like they have put in a cost rate instead of a revenue, which is easily done where rates can be confusing. Ouch !

The conclusion through maths is that the 0.9926 revenue rate has been input as a cost in error, and the porting charges were not updated on 31/08/2012 when they should have been. A ‘true’ revenue leakage figure of £141,280 per month can be derived from the numbers.

Validating the Issues and Quantifying the Opportunity for Your CFO

Solving the maths puzzle told us that rate have almost certainly been input incorrectly – this can only then be validated by performing lookups within the actual Interconnect system – most are very rich in functionality and will include audit trails of rate changes going back years. This can be achieved by working with your colleagues.

All very interesting, but to now answer the CFO’s main question about the size of loss and recoverability. Typically, within the Interconnect Space, Carriers will have legal agreements stating how far back Billing errors can be amended. This is usually 3-6 years here in the UK. So, it is fair to deduce from the information that the errors go back as far as 01/09/2012 (date of last rate change) – Hence you can safely inform the CFO the recoverable loss could well be in the region of 10 months (Sept 2012 to June 2013 inclusive) multiplied by £141,280 = £1.4 Million. You should also recommend a more thorough review of Margins, to be led by Revenue and Margin Assurance !

Congrats to Sriram Dharmarajan for providing by far the closest and most comprehensive answer. The next L.T.T. will be published on Monday 15th July.

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The share price of Subex, the Indian business assurance vendor, continues to slide to new lows. Trading was negative on Monday and Tuesday, with falls of nearly 5% recorded on both days. The share price has fallen below INR6 for the first time, having reached INR5.70 at its lowest point.

I am sadly reminded of the tagline that Subex used for their 2011-12 annual report: “nurturing a strong foundation”. Since then, most of the top management team has been uprooted. A quick glance at the current exec team reveals the transformation that has taken place during the last year. Only three of the current execs are survivors from the top team per last year’s report: Vinod Kumar (COO), Sekharan Y. Menon (Chief People and Administrative Officer) and David Halvorson (General Counsel). The plan may have been to chop away the dead wood, but there have been few signs of the kind of fresh thinking and innovation that caused Subex to grow into a market leader. Poor results for the 2012-13 financial year, with no sign of a turnaround in the final quarter, signal that Subex needs a new strategy to reverse their decline. So far, Subex’s leaders have yet to provide that kind of leadership.

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Alan and Carolyn Mazkouri run a small business. For 15 years they were loyal customers of Orange UK, who provided them with 10 phones. Their average bill was GBP300 (USD450) per month. So when they received a bill for GBP163,179 (USD247,559) they had no intention of paying. Who would? They are running a small electrical business, not a multinational conglomerate. However, Orange UK showed once again how too many telcos fail their customers and lack adequate controls relating to high usage, bill shock, and potentially fraudulent behaviour. And instead of learning their lesson and apologizing immediately, they pursued payment over a 9 month period, only backing down when the Mazkouri’s called both their lawyers and the BBC. Here is the story as presented on the BBC’s Watchdog consumer protection show:

There is also a short written version of the story at the BBC’s website here and the transcript of this video is available here.

So what was Orange’s final response? After being shamed by bad publicity, a company spokesperson finally proffered this meek apology:

We apologise to the Mazkouri’s for the inconvenience. We have fully refunded all charges from this exceptionally high bill and offered a further gesture of goodwill. We look forward to hearing from them.

The ‘gesture of goodwill’ was reportedly a GBP250 compensation payment. Not surprisingly, the Mazkouri’s are taking their business to another provider. My concern is that lessons are not being learned by disjointed and dysfunctional telcos, and this story raises so many questions that I must be brief when spelling them all out:

  • These people were customers for 15 years. Their average bill was 0.2% of the bill that prompts this story. The usage on one particular phone was sky high over a three week period. The usage on that phone was undoubtedly far higher than the usage on the other 9 phones covered by their contract. How much data does a telco need before its fraud monitoring spots something unusual? How long does it take to intervene proactively to contact a customer and, if necessary, cut off their phone?
  • When something is so obviously wrong, why does it take 9 months and negative TV publicity before the telco says sorry and tries to make redress? Why are the human beings that work for Orange not empowered to take more action to bring this kind of complaint to a swift resolution? Are Orange’s processes too rigid?
  • The victims ran a small business. These people rely on phones to stay in business and to service their customers. Like banks, telcos have a responsibility to the wider business community and the economy as a whole. With that in mind, why were Orange so slow to offer compensation, given that the inconvenience of a disconnected phone means this customer may have lost business?
  • There is probably a report somewhere in Orange that says they ‘lost’ £163,179. That report is incorrect. Orange never had a hope of getting that money, so they could never have lost it. Those numbers are the kind of rubbish that pump up leakage reports but are divorced from economic reality. What Orange has lost are loyal customers they were regularly earning a profit from. And Orange has also lost an immeasurable amount of business from other potential customers who watched this BBC show and decided to use another provider instead. What is the total loss? We cannot measure it with certainty, but it should be estimated and reported for what it really is. Unless a monetary value is applied when assessing damage to reputation, then reputation is always treated as worthless.
  • A newly-purchased smartphone was constantly downloading data. Either the problem was caused by a bug, or by malware. If it was a bug, has anyone followed up to determine how many buggy handsets are out there, and how many customers may be affected? Is the handset manufacturer at fault? If the fault was malware, where did it come from? Were there lax security protocols at the store which sold the handset? Or maybe with the manufacturer? Or did the customer download the malware himself, in which case Orange has been too meek in defending themselves, and they should have pointed out the dangers to other customers? In short, what does the telco do to protect themselves, and their customers, from network usage which the customer does not instigate and does not want?
  • Telcos are concerned about network capacity and how the rapid growth in data usage may overwhelm their infrastructure and constrained capital spending. They use this logic to justify bandwidth management, sometimes in ways that interfere with the customer’s experience. So what happened in this case? Should Orange be doing more to manage bandwidth in cases like this, or did they get lucky because the bill might have been even higher were it not for their existing approach to limiting bandwidth?
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Subex, the Indian business assurance vendor, received bad news when the Karnataka High Court upheld a decision to remove tax exemptions previously given to businesses operating in the country’s Special Economic Zones (SEZs). The court dismissed Subex’s petition in the process of making its judgement. For more, see here. The effect of the tax change is reported to be the…

…imposition of 18.5 per cent minimum alternate tax (MAT) on the book profits of SEZ units with effect from April 1, 2011, besides imposing dividend distribution tax with effect from June 1, 2011.

Indian business taxes are fiendishly complicated, and the interpretation and application of Indian tax law is notoriously unpredictable, as has been highlighted by a string major tax cases, including cases that involved telecoms giants Vodafone and Nokia. An earlier survey showed the imposition of MAT on SEZs has made India less attractive as an investment destination. This ruling adds to Subex’s tax woes, who are separately disputing demands for USD6.6mn in back taxes and related penalties.

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This month’s LTT comes from Guy Howie, who has joined the talkRA quiz team. Guy is a Director at BIAAS, the supplier, since 2006, of the GNRM database solution which ensures accurate and maximum National and International Retail call billing. BIAAS also provides specialist expertise in call margin data warehouses for the telco sector.

The challenge

You work for AceTelco. Following a meeting with product management to discuss the P&L, the CFO explains he has growing concerns with the margins on some types of Non Geographic Calls. In particular, he suspects a potential problem specific to Freephone Non Geographic calls which Transit the network. Normally, AceTelco does not transit these type of minutes for trading purposes, but they are thought to be transiting the network because the 0800 numbers have been ported out to another telecommunications operator a few years ago.

As the Revenue & Margin Assurance Manager, you have a great reputation for finding leakage. You have always suspected material undetected errors in the Interconnect Billing System, as it contains millions of price points, and generates huge revenues. It has traditionally been outside your RA scope and neglected by top management with numerous staff changes over the years. You see this challenge as a great opportunity to start changing this tradition.

You have access to more detailed reporting on call margins, which no-one has ever really understood.  These reports are derived from a system which extracts all Interconnect Rated Records relating to a call, and then combines these into one line in a database to reveal the net wholesale revenues and costs and also the margins for each individual call.

The CFO wants your opinion after lunch:

  1. Is there a real loss and if so, how much in the last month?
  2. What exactly, if anything, appears to have gone wrong?
  3. What do you recommend happens next in order to prove any suspicions about the errors?
  4. Do you have a view on the overall size of any possible loss and can it be recouped?

You have just been provided with the following information: A margin Report for the Freephone Transit Calls in May 2013, summarised by destination number by your analyst. And some Interconnect Prices relating to the outbound operator, from the product manager.

You also have the following limited knowledge about Interconnect.

  • ‘remember that in the Interconnect world ‘Freephone is the other way around, so be careful with the minus and plus signs’
  • ‘transit calls don’t tend to generate high margins, but they can be great for overall revenue figures.’
  • ‘Interconnect contracts normally state that if there is a billing error, you can go back 6 years’

Please email your answer to – the answer will be revealed in two weeks time, along with the name of the first person with the correct answer.

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