DETERMINATION OF ROI OF A BILLING SYSTEM
MUHAMMAD SALMAN KHAN
Associate Manager BPM Telecard Limited
Dec 10 - 16, 2007
Billing systems, particularly in Telecommunications, are one of the largest expenses as quoted by prominent executives of these organizations. At the same time these billing systems are also the cause of their biggest problems (which are in need of the most repair and effort). In fact, globally there will hardly be a telecom that doesn't see repair and/or replacement of their billing systems as their main IT concern.
THE QUESTION OF COST BENEFIT
"How to compute the ROI on an investment made on a billing system" remains a critical and unattended question inspite of so much concern, aggravation and a handsome amount of money being spent on these billing systems. Put another way, "What is the optimum amount of money that should be invested on billing systems?" and "What are the maximum and minimum limits of such spendings?" Who can disagree with the fact that billing systems form a vital part of the overall framework of a teleco's setup? Does it means that we spend an indeterminate amount of money for this purpose keeping in view the significance of the billing systems.
THE TIME HAS CHANGED
It looks weird but it is a fact that an industry that has been in existence for over 100 years has yet to find out how to rationalize such a basic and indispensable element? Simple. In the "good old days" of telecommunication we didn't have to worry about the cost. The revenue stream and profit margins of telecos was so high and the cost of the billing systems was so incredibly low compared to that profit that no one was bothered much. It was an easy task for the billing system managers to get financial support for improvements. The money was the only solution in case the billing system needed improvement. The times have changed. The prices of systems and development costs continues to raise while ARPU and returns continue to decline.
DO WE NECESSARILY NEED A BILLING SYSTEM?
A few years back, this might have been a ridiculous question. All telecos required billing systems to collect revenue.
Today, however, it is all in all likely, and maybe even enviable, for a telecom to function on an entirely "cash in advance" or "prepaid" mode of business. The outburst of IN (Intelligent Network) technologies and the swift incorporation of prepaid wireless and long distance services identifies that a telecom needs to settle on whether it requires a postpaid billing systems when the trend in the telecom industry is rising towards prepaid.
There can be many situations in which a telecom may sacrifice its whole postpaid business in order to cut down expenses of billing system as well as those related to revenue assurance, invoicing, collections and all of those costly extra activities. Another approach to this problem is instead of becoming "cash and carry" operations, the telecos can become wholesalers who sell their network capacity to others. Hence the telecom is concerned only about interconnect, and their customers (the VASPs value-added service providers) take care of the customer billing operations.
The obvious conclusion is that rapidly finding out how to calculate the ROI on a billing system could be crucial to the success of the company.
Ways to Determine the Amount of Investment on a System
Telecos use various techniques to find out how much they should spend. These methods fall into two classes:
1. Lowest Price Technique
2. Benchmarking Technique
THE LOWEST PRICE TECHNIQUE
In Lowest Price technique, the commercial or procurement person consults with the management and formulates a list of the features that are the absolute minimum of what is essential to run the network. With this list, the manager endeavors to get the best bargain in the open market for delivery of those features. If the list of minimum requirements contains the right items, the commercial or procurement department is smart enough to get a good bargain and the vendors are able to deliver what they quote, then only this technique will be suitable. The fact is that, those are some pretty big postulations. There are several logical defects in this technique, even if it appears to be practical.
1. If you want some extra features and functionalities in the billing system to perform, this technique is unable to take care of them. If we include them the price of package will be driven too high. So how do you come to a decision what the bare minimum of functionality is?
2. As the history shows that low cost solutions result in the overheads and delays resulting cost of project much higher than initially anticipated.
3. The absence of ROI on the billing system in this technique, shows only how much we are buying it for not that whether we should be spending this amount in the first place or not?
THE BENCHMARKING TECHNIQUE
The benchmarking technique is taken as a relatively dependable and practical technique by most of the billing managers globally despite the fact that it is more costly and requires more research and involvement of management. With this methodology,, telecom managers try to search other telecos of the same magnitude, type of business, and intricacy, who are willing to disclose how much they spent on their billing system.
A comparative study of the pros and cons of this technique reveals the following findings:
This technique provides some distinctive benefits.
• Impartiality and a more global perspective on the issues being faced
• A figure of what the total cost of a successful implementation should be (in contradiction to the optimistic and often unrealistic approximations of a vendor)
UNLUCKILY, IT ALSO HAS ITS DEFECTS.
• Probability of finding out a telecom of the same magnitude and similar enough to benchmark against is quite low.
• What about the possibility of spending the same amount but getting more functions?" What about spending half as much and still getting all the features needed? The validity of decision is not possible in this technique because it only tells that the Telecom made the investment, not the result was success or failure.
This whole discussion would remain incomplete without looking into the dimension of in-house development of billing system. The telecos usually don't bother to go into complexities of in-house billing systems development. The reasons may be lack of specific telecom knowledge of analysts and developers and secondly employing a full time development team for a project which in most of the cases is a one time task, seems undesirable. An ideal billing engine should be developed once with capabilities to cater maximum future enhancements in business lines and day to day changes in tariffs etc.
Another perspective on this issue is that the telecos have core competencies of their business more than any other third party vendor and in-house development teams can handle the contingencies more professionally. Depending on the circumstances and scope of business, the choice lies on management to decide whether they can afford the long term HR related costs or vendor charges on maintenance or each upgrade in the billing system. We require a methodology to find out the basic, truly rationalized case for a billing system.
NPV AND ROI OF BILLING SYSTEM INVESTMENT
Fundamental accounting methods can provide an initial hint as to how ROI on billing system can be computed. In theory, the value of an investment is determined by analyzing the net present value (NPV) of the funds being allocated against the long term return that the company will receive from that investment. The decision of what to invest in depends on which investment will yield the best ROI.
FACTORS EFFECTING THE ROI
This is not so easy as it looks like. There is a whole lot of factors upon which this ROI depends. For instance if we look at different types of billings which involves prepaid versus /postpaid, simple versus packaged, volumetric versus event based, interconnect versus consumer, voice versus data and wholesale versus individual billing, we can see a cosmos of different factors which effect the value of resulting ROI on the billing system. In addition to these, several services which have emerged recently such as VoIP, Broadband, WiMax, Hotspots, Callshop, Calling Cards, Internet, IP-PBX etc. have made the calculation of ROI, a perfect paradigm for billing managers in Telecos around the globe.
DETERMINING THE REVENUE STREAM OF THE POSTPAID BILLING BUSINESS
While appraising the investment value of a billing system, we must first figure out precisely how much business we anticipate to get from postpaid billing customers. Although the actual computation will be a bit more involved than this, let's presume that a postpaid billing system will have a useful life of 10 years.
• Step-1. Calculate the total revenue stream for the next 10 years (Expected ARPU Average Revenue per User multiplied by the Number of Customers).
• Step-2. Calculate the total expenses (anticipated CAPEX and OPEX) for the same 10 year period.
• Step-3. Deduct the expenses from the revenue to get the total net-revenue-before-billing-system-investment (NRBBSI).
NRBBSI = TOTAL REVENUES (10 YRS) - TOTAL EXPENSES (10 YRS)
To determine the ROI, simply deduct the cost of the billing system CBS from the NRBBSI. The result will be the net-profit after- billing-system-investment (NPABSI).
NPABSI = NRBBSI - CBS
If the NPABSI is good enough, then the investment is a good idea.
CALCULATING THE ROI FOR EXPANSION AND UPGRADING
The task for justifying the expense of a billing systems upgrade or expansion is more challenging than calculating a comparatively straightforward value of ROI while rationalizing getting a new billing system. This is a fact that most companies already have billing systems in place and needs an upgrade or enhancement of some sort.
IMPORTANT QUERIES REGARDING BILLING SYSTEMS ENHANCEMENTS
Given that a billing system is already in place, there are several queries that the manager should ask before deeming an investment in an expansion project.
1) As a result of billing errors or imprecision caused by the current billing system, what percentage of revenue is being lost?
2) What is the actual cost of running the billing system, and can cutbacks in expense be achieved with an upgraded system?
3) What are the future risks involved, as a result of the current billing system capacity?
4) What is the useful life of current system?
5) As the telecom grows, will the current billing system be able to adapt new lines of business or how much scalable and flexible the billing system is?
6) What is the weakness to regulatory, investor or press scrutiny due to shortages in the billing system?
7) What is the anticipated future revenue flow of postpaid activity?
8) What is the performance of related functionalities (NetOps, Mediation, Interconnect, Collections, Provisioning etc.) and how well does the billing system line up with another system's qualifications?
The financial disadvantages (hard costs and opportunity costs) and advantages (cost reductions and future business expandability) that upgrades to the billing system should generate, can easily be perceived by managers just by reviewing the current revenues lost to inappropriate billing, cost cuts that an enhanced billing system environment could create, the risk coupled with the current systems capacity, and the most likely future demand for postpaid billing commotion.
SUNK COSTS VS. EXPECTED LIFT FROM INVESTMENT
Most of the telecos face another problem as they already have billing systems in place. The preliminary expenditure of the billing system is a "sunk cost" because the amount is used up and cannot be recovered so there is no point in considering it. Now when the case is to decide whether or not to upgrade the system, however, we require a different calculation, called the "lift." Lift calculations try to figure out what the incremental rise in revenue (or decrease in expense) would be for each rupee invested in a billing systems upgrade. By carefully assessing the answers to the eight major questions for billing systems upgrade as well as finding out the economic value that each enhancement can deliver to the telecom, we can evaluate those benefits against the costs and compute the lift they will deliver. If the resulting lift is good enough, the expansion project is supposed to be feasible.
TENTATIVE ENHANCEMENTS AS COMPARED TO STREAMLINED ENHANCEMENTS
At present most of the telecos still depend upon intuitions, feelings, and replicating other telecos despite of performing a formal rationalization analysis. Still most managers would like to see more scientific techniques used in major systems investment decisions,
The analysis which has been given here straightforward and could very well help those managers unwind in regard to the billing system investments they are planning to make.
Due to the increased vision and concerns of senior executives of telecos regarding this issue, the need of a comprehensive set of tools to determine the right amount of investment in billing systems have risen tremendously, keeping in view the telecom industry continues to grow in complexity, and as ARPU and revenues continue to decline.
Specifically talking about Pakistan's telecom industry, the positive side of picture shows that during July-April 2006-07, telecom sector attracted US$ 1.4 billion which is expected to cross one and half billion dollar mark at the end of year in addition to this, the total tele-density in the country has reached 40.2 (as of end April 2007) registering year on year (YoY) growth of 53 percent. All these positive signs shows the potential of investments in pipeline of which billing systems are an integral part.
But on the other side of picture one must keep in mind that our telecom industry is still operating under the shadows of strict regulatory framework of government and regulatory bodies. There are few telecos who can afford opportunity costs and expenses related to the billing systems upgrades and enhancements.