Managing the costs of a telecoms business

Telecoms businesses know what they spend and they know their revenues. These facts are well monitored by the accountants and product managers. Marketing managers should also have predictions of future volumes and revenues. Budgetary data also predicts future expenditure.

These are necessary tools and data to manage a business, but are they sufficient? In situations where profits are reasonably certain, this ‘management by the bottom line’ may be enough, but telecoms is a complex business with many products, customer segments and various costs that are either directly or indirectly related to the product. Investments are also shared – one network system can support many services, so relating the cost to customers or products is not obvious.

In a competitive world, businesses need to understand the margins made (or lost) by each product, customer segment, distribution channel and tariff bundle. Without this visibility, decisions and targets have to be set using unreliable estimates. It is all too easy to set revenue targets that can be met by all product managers, yet each product can be loss making. Revenue is a necessary but not totally sufficient target. This may lead to the irony of bonus payments to managers just prior to Chapter 11!

With the development of more complex product packages, diverse sales outlets, plus tight margins, it has never been more important to have access to proper management data. Access to the right data provides insights for pricing and cost control, it reduces risks and it rewards the right (profit making) managers. A strategy can be founded on solid foundations.

Making a system that provides cost and profit data broken down to the detail required is certainly not easy, but this is not a reason to avoid doing it. Some operators are forced to make such systems by regulatory authorities. Once done, these systems provide valuable management data with benefits far beyond keeping the regulator off their back.

A mobile operator client had only recently started business, but realised the need for such a cost-of-profit tool. It is now able to track each basic product (mobile calls) and each tariff bundle over time and can see how profits change. Using predicted volume data and budget information, the average future costs can be measured. This provides inputs to pricing managers, who now have financial targets to meet and data to use to build up a picture of the total cost of new tariff packages, and can set profit-making prices. This reduces uncertainties and risks in building up fixed-price and bundled deals for services that inherently have volume-variable costs.

A fixed operator client created a triple-play package. If challenged by competition authorities, the ability to produce costs of each component and to show no price squeeze or anti-competitive behaviour is vital. Competition law penalties can be severe, so the risks of using ‘good guesses’ are much too high.

With movements to next-generation networks (NGNs), it can be argued that more costs are shared and can be arbitrarily distributed to products – so why bother making a cost/revenue model? We see that there are real cost drivers for most costs and whilst there are common and shared costs, these must be understood in order to decide what should recover these costs. NGN costing is embryonic but it can be done. For an NGN client we recently developed a cost-based price calculation that satisfied the regulator – possibly one of the first such calculations.

These cost/profit systems do not replace market- and customer-driven strategies, but supplement the product management thinking and allow risks to be reduced. Prices certainly do not need to be cost based (unless regulated), but overall, revenues must recover costs in the long run.

These financial management systems are not new ideas, but Ovum still sees a significant need for operators to introduce them. This is an old idea that should never be out of fashion.