Managing Carrier-to-Carrier Costs

Posted: 07/1999

Managing Carrier-to-Carrier Costs
By Faye F. Henris

Carrier-to-carrier charges, commonly referred to as telco charges, include access,
reciprocal compensation, collocation, unbundled network elements (UNEs) and other
interconnection fees. This constitutes the largest operating expense faced by
telecommunications providers. In fact, a typical telecommunications provider will spend 45
percent to 55 percent of its revenue on telco charges. Obviously, managing these charges
must be a priority for all telecom companies.

A common challenge is the lack of coordination every company has among the various
groups that impact the telco management process and cost structure. In many companies,
these groups have little or no interaction. In addition, many departments within the
organizations have goals that are not consistent with telco management goals. Further
complicating matters is the fact that the direct impact to telco management from these
departments is subtle and often unrecognized.

Comprehensive telco management includes specialists from finance, carrier relations,
network engineering, network provisioning, legal and regulatory, marketing and sales.
Individually, these organizations can be highly effective and directly contribute to a
company’s telco structure. However, the key to maximizing telco management savings is
through coordinating the efforts of each of the disciplines. The work of the finance group
is diminished without an effective carrier relations organization. If a key regulatory
change is not communicated to the finance function, savings opportunities often are missed
or misstated. If circuit/network changes are taking place without input from the finance
group, telco savings initiatives can be wiped out.

The first step in coordinating a company’s telco management processes is developing an
understanding of the individual groups that affect telco costs. The following is a list of
the primary organizations that have an impact on telco management and examples of their
respective cost-impacting activities.

Finance: Audit and Accounting

Goals: The telco audit group is responsible for the verification of vendor
invoices to ensure accurate telco charges. This organization also tracks circuit activity
and regulatory and contract changes, and verifies that they are reflected in vendor
invoices. The group disputes inaccurate charges and manages disputes to achieve cost
recovery and resolution. It compares actual invoices to planning and accrual models to
verify accuracy and reforecast as necessary.

The accounting group will provide telco reporting throughout the organization. This
ensures that a company has established, and is adhering to, appropriate reserve and
accounting guidelines.

Depending on company size, this group also may be responsible for the revenue-assurance
function to determine if all cost inputs relate to a corresponding billing output.

Telco management impact: For obvious reasons, this group has the most direct
impact on telco costs within a company. The identification and dispute of overbillings and
inaccurate billings has a direct impact on a company’s bottom line and operating
performance. It is critical to provide accurate, timely and useful telco cost data to the
impacted business units for support in product, pricing and vendor decisions.

In addition, failure to perform end-to-end revenue assurance can represent a company’s
single largest exposure. Though true of any telecommunications provider, it is truly
mission-critical in the case of the reseller.

Carrier Relations

Goals: The carrier relations organization establishes and maintains a company’s
relationships with its numerous telco vendors. Most carrier relations groups will work
with regional Bell operating companies (RBOCs), interexchange carriers (IXCs), competitive
local exchange carriers (CLECs), Internet service providers (ISPs), competitive access
providers (CAPs) and any other entity that provides or provisions networks or minutes of
use. This group handles the communications with carriers, including negotiating contracts
and business terms, disputing settlements and identifying vendor-related strategic
alliances.

Telco management impact: Carrier relations representatives must understand the
telco management agenda and manage carriers to ensure maximum opportunity. The carrier
relations group depends upon data supplied by finance to support decisions and business
plans of marketing to meet future needs.

Network Engineering

Goals: Network engineering works to determine the most effective way to deliver
calls and meet demand anticipated by the marketing organization. This includes the
selection of equipment, capacity of network segments, selection of vendors and the
connection to the end user.

Telco management impact: Decisions involving capacity requirements, location of
facilities and access vendors have a direct impact on telco costs. The telco cost group
will be able to assist the network engineering group as it evaluates network options and
strategies based on current costs and vendor billing to determine least-cost alternatives.
This often will prove to be different than those created from pure network data and
diagrams.

Network Provisioning

Goals: The provisioning organization receives customer orders and uses these to
create service orders, which involves determining how a circuit is used and the network
facilities necessary to support the order. Provisioning also manages the fulfillment of
orders and updates the facility inventory database to reflect all circuit activity.

Telco management impact: The circuit design from provisioning has a direct
impact on telco costs. Equally important is maintaining circuit inventory. Without
accurate circuit data to validate charges associated with circuit activity (install,
disconnect, grooming), a company is crippled in its efforts to manage facility telco
costs.

Legal and Regulatory

Goals: The regulatory group’s task is understanding the current regulatory
environment, tracking and understanding the impacts of regulatory changes and representing
a company’s interests as regulatory policies are established.

Telco management impact: A shift in the regulatory arena, even a subtle one, can
have major impacts on a company’s telco cost structure and bottom line. These impacts can
be both positive and negative and must be communicated, understood and proactively
managed. It is critical for the regulatory organization to have a clear view of the
financial impacts that will result from the advocacy of certain policy issues. There will
be instances when a policy issue will significantly change a company’s entire cost and
network structure, as with local transport restructure in 1994 and access charge reform in
1998. Understanding financial and network implications before they happen is the only way
a company can hope to enjoy windows of opportunity and minimize the potentially adverse
impacts of regulatory shifts.

Marketing

Goals: The marketing organization’s responsibilities are identifying target
customer groups and forecasting traffic patterns and product demands. In addition,
marketing owns the task of identifying, developing and rolling out new product offerings.

Telco management impact: Forecasting activity directs where, when and how much
network capacity is necessary. Marketing must have accurate telco data and understand the
cost of telco elements that make up a given product to evaluate its potential
profitability. Without this data, marketing cannot determine appropriate pricing or
achieve the internal approval necessary prior to product introduction.

Sales

Goals: The sales organization identifies the needs of its customers and sells
product to fill demand. In many cases, the sales group may need to lower product prices to
be competitive and close a sale.

Telco management impact: Understanding the cost of the telco components of
products allows the sales team to be reactive to competitive pricing pressure while
maintaining acceptable profit margins. Underlying cost information also will permit the
sales team to work with appropriate commission structures and incentive plans to promote
products with the highest profit margins.

While gaining a detailed understanding of telco-impacting activities is a good starting
point for managing telco costs, it is only the beginning. Creating an infrastructure that
coordinates these groups is the next significant challenge. In some cases, this involves
relatively minor efforts to improve telco reporting and the communication of telco data
throughout an organization. In other instances, however, a company may need to make
structural changes to the organization.

These changes may involve management shifts in responsibility. For example, a company
might choose to create a reporting structure between the director responsible for network
engineering/provisioning and the finance director who controls the telco function. In many
instances, corrective action needs to be more invasive. One of the most common telco
management problems involves the facility (circuit) inventory process. Not only does a
company need to create an accurate and up-to-date circuit inventory, but also, the
company’s database must be maintained. All circuit activity, including installations,
disconnects and changes, must be reflected in this data. To satisfy telco management
requirements, most companies must undergo both procedural and systematic changes within
the network engineering/provisioning organization. The circuit data systems must be able
to store all circuit data relevant to telco cost management. A more significant challenge
lies in creating and enforcing procedures that ensure telco details are entered and
maintained in this system.

Telco cost management should begin at a functional level and drill down to the
procedural and audit level (see diagram, below). When internal organizations begin to work
together in a coordinated manner, a company can begin to claim ownership of an optimized
telco solution. Utilizing the optimal holistic approach to telco cost management,
companies will reap the rewards of greater cost savings, better intracompany communication
and increases to the bottom line.

Image: The Holistic Approach to Telco Cost Management