Recognizing the Value of Revenue

It is an oddity of ‘revenue’ assurance that so many practitioners have little or no knowledge of what the word ‘revenue’ means. Paradoxically, if they are working for a CFO, they will be working for someone with a very thorough understanding of the word. Revenue is not just a simple function of sell more, get more revenue, company makes more profit, gets more cash, and everybody is happier. In fact, I have often seen RA people embarrass themselves by their ignorance in front of CFO’s, sometimes without realizing that they made fools of themselves. Ironically, these same people often talk about the need for support and sponsorship from the top, and will even give sermons about the importance of their job. Well here is a newsflash for those people: if you want the CFO to understand your job, it is a good idea that you first show some understanding of the CFO’s job.

Imagine the following scenario: the CFO is reviewing, yet again, the results for the year so far. He looks at the actuals, and the forecasts, and tries to know the reason for every variance. It looks like results are on target. Then the Head of RA strolls in to his office for a meeting to explain what benefit his team has added over the year. There was no target for this Head of RA, but the Head of RA goes on to explain how his team added a few hundred million of revenue to the company. Would it be surprising if the CFO was sceptical? Everything he was measuring was on target. He is looking closely at the results on a regular basis. Everybody’s numbers come back to him. They all add up and he has explanations for everything. Yet, as if by magic, a team in his own directorate pops up and claims to be adding huge benefits that were not even part of his forecasts. Then imagine the scenario continues as follows: the CFO is impressed and is glad to see this level of return from his RA team. So he wants to ensure RA is managed like everything else – by forecasting the returns from RA that will be enjoyed in the next financial period. All of sudden, the Head of RA wishes they could leave the room. He is confronted by one of two choices:

  • RA focuses on work that is predictable and easy to forecast. Work becomes dull ‘handle-turning’, dealing repetitively with the same symptoms of the same known problems, but never fixing the root causes.
  • RA has to make wild guesses on the value it will add, without knowing what the leakages are, and without knowing if it will be able to push the necessary fixes through. In addition, this work must be done in a way that can be shown to be genuine when properly scrutinized by the CFO.

Either way, from now on the CFO expects to see the numbers, will expect that they are incremental to all the work performed elsewhere, and he will be disappointed if the numbers come short. Self-indulgent ‘measures’ of RA’s success created by the RA team but not reviewed by anyone else may be usual in immature telcos, but the telco’s RA maturity cannot increase without proper measures. Remember, spending a lot on software may give people jobs, but it will not help the business if nobody can measure if value is being added. Like any team, RA’s reports of its performance needs to be properly and impartially reviewed to prevent the RA team giving a biased view of its own success. Which brings us back where we begun – with not understanding the word ‘revenue’ and hence being prepared for that scrutiny.

I question whether any revenue assurance department deserves that name unless they employ at least one person with a good technical understanding of the principles of revenue recognition and a detailed knowledge of the policy adopted by in their company. Otherwise, their job is not about ‘revenue’ but about ‘data’. If they do not understand revenue, these teams should be called data integrity teams, because they may understand the data but not what it is ultimately used for. You can check data without understanding its purpose. The shortcoming is that if you only partly understand the purpose of data, the checks may not be optimized for the needs and risks faced by the business. To claim to assure revenues, you have to know what they are, and all the factors that will influence the revenue numbers as scrutinized by the CFO and reported to shareholders. Yet lots of RA teams contain not a single person with more than a cursory understanding of the complexities of revenue recognition. Take a look here for a very well-written article on how revenue recognition policies do matter.

Assuring revenues means understanding revenues, and revenue recognition is a complicated discipline in its own right. RA people would do well to remember that. If your RA team is not going to assure revenues, then best not make claims that the CFO will see through. Instead, RA should be honest, and explain the limits of what is done. When it comes to putting a value to the benefits added, RA departments takes a chance when calculating their own numbers if they do not also understand revenue recognition. Some get lucky, others do not. To avoid the danger of having those numbers ripped apart at a senior level, RA should work with somebody in the business who really understands revenue recognition. Then, when the numbers are presented to the execs, they will be more robust. They may also be smaller, but if you want executive support, it is better to have a smaller and reliable number than a big number that the CFO does not trust.

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.

4 Comments on "Recognizing the Value of Revenue"

  1. David Leshem David Leshem | 25 Oct 2008 at 3:27 pm |

    Hi Eric,
    I enjoyed reading your post. It addresses the fundamentals of the telco business, and somehow I always enjoy to discuss the forest other then the trees.

    In your post you address the importance of revenue, its definition, generation and controls.
    I believe that revenue definition, even though was touched briefly warrants a separate discussion with multiple inputs:
    – accountants(internal finance dept) and possibly external auditors (GAAP?)
    – business executives
    – etc

    Separately, revenue generation or production should not be confused with controls. In many telcos, as a default, RA function falls into the controls category. In this case when the CFO would request from RA mgr some metrics, same as he requests from the marketing guys it would defy the meaning of control. Simple because, lets look at the telco as a big money making factory, RA dept role in its default definition is to fix all sorts of problems starting from plumbing & leakage, interfaces, miscommunication etc. As in any living organism that is generating revenue, problems occur due to normal course of business. Problem distribution is not unified, me have periods of long tide outs or tides in both quantity wise and severity wise. RA department is there to fix them. Same as a large landlord usually keeps a plumber on payroll to fix leakage in his property. I tried once to question what RA definition includes in addition to the core QC/QA function. IMHO, a mature RA dept should address the revenue generation function aswell, which would require invasion into the territory of the respective departments:
    – marketing dept – by questioning what/when tariff they to launch and why,
    – finance dept – by questioning what financial instruments are selected to invest the cash reserves of the telco and why?
    – customer care dept – by questioning what retention methods and tools used and why? After all, quite a few telcos invest in retention efforts between 5% to 10% of their annual revenue.
    – same with the other department.

    So as the Buddhists say, lets take a step back to the core question, which is how the CFO defines the objective of the RA dept and then we could draw the boundaries, objectives and criteria for success for RA.


  2. Avatar Mike Willett | 31 Oct 2008 at 11:24 am |


    This is top article on something that is all too easy for RA managers to forget.

    When the CFO says “ok I see you are saying you added this much value but show me that on the GL”, you need to be prepared. And if the leakage you have fixed is worth even 3% against a particular GL entry, how can you clearly demonstrate the benefit if customers have been growing, ARPU has been changing and yields are moving around. Even significant leakages may not show up the GL.


  3. Eric,

    the premise of your argument is that the RA organisation needs to understand revenue recognition concepts to have a common “language” when demonstrating its value to the CFO. I am not sure I fully subscribe to that statement for two reasons:

    1.) I would expect that few CFO’s run a business case on their revenue assurance organisation comparing the cost of that entity to the incremental revenue that could be recognised as a result of revenue assurance activities. In my experience, it is more typical that the CFO either sees revenue assurance as a “must have” business function, or has seen evidence that the organisation is exposed to revenue leakage. Usually, the cost of revenue assurance activities pale by comparison to the revenue leakage risk. In other words: In most cases, I would expect that an exact quantification of incremental recognised revenue is not necessary, because the benefit of the revenue assurance organisation is orders of magnitude higher than its cost.

    2.) If the value of the revenue assurance organisation were tied to incremental revenue recognised, then a good/mature revenue assurance organisation doing would be worthless, as it would prevent revenue leakage in the first place.

    Your basic point, however, is still valid. In a mature operating environment it most certainly does make sense to have a shared frame of reference how revenue assurance reports on its work and the value it brings to the business, and revenue assurance is well advised to ensure that it understands and copes with increasingly complex business models.


  4. Hanno,

    Thanks for your comment, but I think your answer identifies one of the deficiencies in how the telecoms industry perceives revenue assurance. Instead of revenue assurance functions being justified on a strict financial basis OR as a risk-preventative measure, it is often presented as a compromise solution for both. That is not so illogical, as there is overlap, but it can lead to confused thinking. If the purpose of revenue assurance is risk prevention, then this suggests that CFO’s who set targets for the returns earned from RA (as many do) are missing the point, as are vendors who guarantee that their products will generate a positive ROI. If the purpose of RA is just to earn a positive ROI, then the revenue assurance function should be run as a short-term project or program only, which is terminated as soon as costs outweigh benefits. Being the cynic that I am, I interpret a lot of the proposals that the purpose of RA can consistently adopt both goals as being a sign of a lack of confidence. As we say in England, the proponents of revenue assurance are wanting to “have their cake and eat it”. There are many operational risks that can be covered by an RA function but which cannot be translated into a straightforward ROI-driven business case. A simple example I often give is the story of a person who told me their job was only to reduce underbilling, and if they found overbilling, they would ignore it because it was outside of their scope. That being so, there is inevitable tension between wanting to generate maximum returns and wanting to reduce risk, and this is not being adequately explored. However, precision and consistency in measuring financial returns would at least mean that the ROI and net cost of the revenue assurance organization has been properly understood.

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