Investing in Revenue Assurance and Fraud Management for Strategic Advantage

Daniel Peter of Mara-Ison Connectiva contributes today’s guest post, which revolves around a common challenge for revenue assurance and fraud management: measuring the benefits that are delivered. However, Daniel steps back from the usual headlong rush into calculations and equations, and first poses a much more fundamental question. What kind of value should revenue assurance and fraud management seek to deliver?

I have been thinking lately about the fundamental attitude of telcos towards Revenue Assurance and Fraud Management (RAFM). My recent interaction with RAFM Managers and System Integrators suggests that every dollar that’s being spent on RAFM is questioned; while cost consciousness is good for a telco’s short term profitability it might lead to loss of strategic advantage when unfavorable decisions are made on RAFM spending.

RA is not a mere hygiene factor but provides strategic advantage to the telco. I have also seen discussions in certain RA forums where they discuss, “whether cost of RA is higher than the leakage detection”, “what is the ideal payback period for RA System”, “what is the breakeven point for RA System”… This made me wonder whether the tools and techniques for breakeven analysis and payback period are the right approach for the investment/expenditure decision on RAFM.

Competitive forces for telcos are on the rise with regulators making concepts such as MNP mandatory; while consumers enjoy better features and services it puts tremendous cost pressure on the telco (margin has become very thin). This margin pressure has also affected the investment or budget allocation decision on Revenue Assurance and Fraud Management – for both people and technology. RAFM is a cost center and it’s being targeted by the management as a potential area to cut down cost just as they do to areas that are not core to the business; but RAFM is core to telco. Another interesting observation is that investment in RAFM is very different from an investment in a new software system or marketing campaign where short term return-on-investment calculation should be the driving force for decision making.

When a telco invests in an OSS, there’s a decision making process in place where the business and IT jointly participate in selecting the vendor. This approach helps the management in ensuring that the allocated budget has served the purpose, certainty on increasing profitability and securing the return on investment.

There are various tools and techniques to calculate RoI. For example, a telco planning to launch 4G LTE will perform breakeven analysis to determine the Break Even Point (BEP) for the incremental revenue generated from 4G LTE. Cost of cannibalization is factored in for this example as the subscriber would unsubscribe from the GPRS plan (Cost of cannibalization is the decrease in profits as a result of reduced sale of the existing product; customers are moving to the new product. From GPRS to 4G LTE in our example) BEP provides the number of incremental units the telco has to sell to cover the expenditure which means if the firm sells less than the BEP, they lose money. BEP is the point where the telco generates zero profits from that investment which means revenue is equal to the total expenditure at that point.

Payback period can also be assessed using breakeven analysis as we can forecast how long it will take to get to the breakeven point. When the payback period is very short, there is a risk that the return on investment is lower; in other words the return on investment is assured and the rate of return can also be quantified. It’s mandatory that the decision maker hit that number otherwise that expenditure will be classified as a bad decision. When the units sold exceed the BEP, it is fetching profits from the investment. Breakeven analysis is a good tool to assess whether an investment should be made or not and whether it’s feasible to achieve the BEP within an acceptable time frame. Tools like these are very helpful for investments/expenditures that yield direct results within a short period and the revenue stream is straight forward.

Now the question to answer is, can we consider tools such as these to make decisions on investment in RAFM? According to TMF, the objective of the Revenue Assurance Management processes is to establish an enterprise-wide revenue assurance policy framework, and an associated operational capability to resolve any detected revenue assurance degradations and violations. While all these can be quantified and measured, the question we have to consider is whether the telco should use a short-term RoI analysis such as Breakeven for RAFM?

In my opinion, measuring RoI for RAFM with tools and techniques such as Breakeven Analysis should be avoided, as RoI for investment in a plant/machinery/network expansion is focused on production and sales whereas RAFM function exists to provide strategic advantage and the returns are long-term although identified leakage in short-term can justify the expenditure in RAFM. Unlike investment in network expansion, the object of the RAFM function is different. Telco should assess the key outcomes of RAFM and not calculate RoI solely based on leakage detection. RoI for RAFM based on leakage detection focuses on how much leakage the investment has found and how many dollar worth of fraudulent practices have been found, which is an indicator of loss of qualitative focus.

RAFM by nature is number focused but the return on RAFM should be qualitative focused. RA leads to increased revenues but leakage detection from dollar spent is not the right approach. Telco should assess the risk areas RA is addressing, do a what-if analysis to quantify the potential loss (in terms of revenue leakage, quality of service and fraud should the risks go unnoticed), the satisfaction the board has over the reported revenue and the confidence the customers have on the bills sent to them and deduction in their prepaid vouchers have to be considered. All these translate to strategic advantage and have to be considered while evaluating the value addition from RAFM.

Daniel Peter
Daniel Peter
Daniel Peter is Vice President of Analytics at Gamma Analytics. He heads Gamma’s Data Science group working with customers in advanced predictive model development, business data analytics, data science, and product strategy. He also has significant expertise working with Fortune 500 companies for Connectiva Systems and Hewlett Packard.

Daniel has a Business Analytics degree from IIM Calcutta, Masters in International Business from Kedge Business School, France, and MBA from Loyola Institute of Business Administration, India. He is the author of: “Corporate Response to Recession (2008-09)”. He speaks and writes on telecom topics and can be reached at daniel@gammanalytics.com
  • Daniel,

    It’s a good point: the decision to invest in RAFM is a strategic one.

    One of the best analogies, perhaps, is security. We know that not updating our anti-virus software is highly dangerous.

    Gary Beck of Beck Computers put it well in an interview I had with him in 2011. “Fraud is a wind that always blows”. You think you’re doing ok because your fraud losses are light. But as soon as you lower the protective wall (by firing a few smart people or inserting a bad monitoring system) the fraud wind knocks the business down.

    Many small carriers in North America have gone out of business because they failed to protect themselves with a modest FM investment. David West of Equinox tells the story.

    Revenue assurance should really be renamed “Process Assurance” because that’s really what it’s about. Revenue loss is only one of the negative effects of poor processes that contribute to dumb errors. Greater customer attribution and lack of making a profit are two others.

    Amazon.com doesn’t worry so much about RA. Books in a warehouse are pretty easy to keep track of; telecom services that cross multiple devices and providers are not.

  • Mike Willett

    Hi Daniel,

    Your comment on RA for strategic advantage is an interesting one. To me this implies competitive advantage but RA, as a practice, has traditionally sought to be more open in sharing experiences and knowledge. If telcos feel that they should not share information on RA for fear of conceding some advantage, then this would represent a fundamental change – whether this is better or worse is a whole discussion in its own right.

    Also, interested that RAFM should not be subject to the same financial business case diligence that other parts of a business are subject to. I don’t believe it will serve RAFM well in the longer term to be considered “different” – there is enough difficulty achieving acceptance as an essential part of the telco, without subjecting its investments to a different case. RA does have all the benefits of your last paragraph and I would suggest RA managers work hard, and possibly harder than others, to make the qualitative benefits of RA quantifiable. The benefits from a holistic approach to RA are significant and, only if they can be calculated and compared on the same basis as all other investments, can RA expect to communicate these benefits in the manner the whole telco organisation will understand and respect. Leakage is relatively easy to determine but quantifying the wider benefits of RA, and to an accepted industry standard, would, I believe, be a great step forward in RA’s continued maturation.

  • Daniel Peter

    @Dan
    “Fraud is a wind that always blows. If you put up a wall, you won’t feel the wind. But as soon as you take down that wall, it’s going to blow you over” – Gary. The interview with Gary in 2011 is very interesting to read even today. As Gary mentioned, the biggest problem they faced i.e., getting steady funding for their fraud department is still relevant and continues to be so. We have to equip the RA team with tools to convince the management the importance of Revenue Assurance and Fraud Management.

    @Mike
    RA’s tradition of being open towards knowledge sharing and experience is very important and continues to play a key role for RA’s continued maturation; for example post in forums like talkRA, etc., with good participation from the practitioners, I believe, are helpful in taking RA to a much mature level and also to correct when some of the industry wide initiatives are going in the wrong direction. Access to knowledge, information and technology are freely available for all the telcos, but the differentiator for competitive advantage through RA depends on their approach towards the RA best practices implementation, how fast they react to the available information & technology, decision on investment in RA and how much focus the management provides for RA.