Assuring Sunshine

This post started out as another in the occasional series on what other industries do when they talk about ‘revenue assurance’… and then a flash of inspiration made me see the relevance to what we do in telcos. As part of my regular web trawl about revenue assurance news, I found myself reading about ‘solar revenue assurance’ . It turns out the concept is a form of insurance for the income generated (pun intended) from investing in a new solar power program. You can read more here. This use of the phrase is at the far end of the spectrum from what most people think of as being revenue assurance for telcos. There has been many a person who has misheard a syllable and assumed that people work in a department called ‘Revenue Insurance’. The linguistic connection between ‘assurance’ and ‘insurance’ is strong. When farmers talk about ‘revenue assurance’ they invariably refer to a financial guarantee that ensures they remain solvent even though crop production will vary. That same variability also threatens solar power projects: returns are lower if the sun does not shine! Step back and look at the big picture and there is justification in using insurance to share the risk, and hence motivate more investment and more total production than if the risk was not shared.

The connection leads me to an interesting question about revenue assurance in telcos. If you listen to some people, it is guaranteed that RA will not just pay for itself, but deliver huge returns. On the other hand, there is pessimism about financing RA projects. Execs are unwilling to take risks when they are not confident about the returns. Some vendors bridge the gap by offering risk-sharing deals. In short, the vendors do not ask for money up-front and instead take a slice of the incremental income they produce for the telco. Outsourcing of revenue assurance and fraud management is also becoming more popular, making vendors genuinely long-term partners in the battle to maximize business value. So what would it take to offer insurance for the returns generated from revenue assurance or from fraud management? If leakages are caused by mistakes, and fraud by theft, then revenue assurance and fraud management are a kind of operational risk management that lowers the telco’s costs in a similar way to how safety training reduces the number of accidents and security guards reduce the number of thefts. We can also insure against accidents and thefts, so why not insure against leaks and frauds? On the other hand, the vendor that offers its services on a risk-reward basis could seek insurance for its returns, which is nothing other than a ratio of the losses that the telco would otherwise have suffered.

Back in the here and now, nobody does insure revenues and/or leakages like this. The truth is that, despite the sales hype, leakages are less predictable than the weather. Insurance companies take on a degree of risk, but they do not gamble on unknowns. This should open our eyes to the possibility of a kind of maturity that currently resides well over the horizon. There is a level of quality control and process integrity where we could predict the overall value of leakages and frauds as reliably as the weather is predicted. That level exists, even if we never climb that high in practice. We are currently far below that level of sophistication, and all our measures only tell us about the past, without being a reliable indicator of what lies in the future. When revenue assurance and fraud management reach a stage where the variances they address are as predictable as sunshine or rain, then it will become possible to create financial products that further share the risks. For now, the practice of telco revenue assurance is a long way short of revenue insurance. Validation of its ongoing economic value will only come when revenue assurance returns are predictable enough to be bought and sold.

Eric Priezkalns
Eric Priezkalns
Eric is the Editor of Commsrisk. Look here for more about the history of Commsrisk and the role played by Eric.

Eric is also the Chief Executive of the Risk & Assurance Group (RAG), a global association of professionals working in risk management and business assurance for communications providers.

Previously Eric was Director of Risk Management for Qatar Telecom and he has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and other telcos. He was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.