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.

2 Comments on "Assuring Sunshine"

  1. Güera Romo Güera Romo | 25 Oct 2010 at 2:14 pm |

    Does this also imply that we must insure our businesses against the human resource component which contribute to operational inefficiency, willingly or by pure dumb-assness? Can I develop a human incompetency index to assist the underwriters of the newly created revenue insurance assurance service against which they can determine their underwriting risk?

    • The answer is ‘yes’ – if we believe RA gains really are as predictable as some people suggest. I’m just trying to impale people on the horns of a dilemma. Either people are predictably error prone and hence you should be able to insure against the cost of their mistakes, or they are not predictably error prone, and you can’t guarantee that RA will deliver x% returns in every business. I don’t disagree with the observation that this implies insurance that pays out in response to human failings. All failings can ultimately be traced back to a human being. In some ways the conclusions are absurd – highlighting flaws within the arguments made. Whilst we know people make mistakes in general, and the overall probability may one day be measured with a degree of confidence, we cannot say for certain that there will be mistakes in every single instance. But then consider the impact that revelation would have when making the business case for investment in RA: “we know that $x of mistakes get made on average… but this telco may suffer from more mistakes, or less mistakes, than the average…” The $x loss is insurable if regular and unpredictable, but not insurable if there is a very wild pattern of distribution of losses. But if we admit to a wild pattern of losses, it begs the question of all the common assumptions that underpin ‘standards’ etc…

      Note that nobody in RA seems to have given much thought to what might cause a specific telco to suffer more or less than the average number of mistakes. Forget the maturity curve for RA, which has to collapse all CSPs into an assumed common timeline for development. Suppose a CSP got ‘lucky’ and implemented proactive RA without realizing it, and hence suffered much lower losses as a result, before anybody implemented any reactive RA to detect and measure leakages. Is this imaginable? Yes, it is perfectly imaginable. Much of what is ‘proactive RA’ is nothing other than good business practice to avoid mistakes. It’s perfectly possible to imagine one CSP had adopted practices that are less error-prone than another, instead of supposing they are all equally likely to make mistakes. Design reviews, good documentation of business rules, good co-operative working practices that cut across silos… these activities could have been adopted without first waiting for leakages to motivate them. But if these activities can be adopted without waiting for leaks to occur first (or even thinking in terms of leaks), it illustrates that RA will actually add much more value in badly-run businesses than in well-run businesses, and that broad generalizations about the benefits of RA cannot be justified.

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