Can I get into trouble for breaking copyright and reproducing parts of a Gartner report that is 5 years old? Probably. What the heck. I will do it anyway. In August 2002 Gartner Dataquest issued a report called “Revenue Assurance Service Providers to Rescue Ailing Telcos”. They interviewed a bunch of the “leading” RA service providers (i.e. companies that sell revenue assurance consulting and software to telcos). The list of companies they interviewed is itself pretty interesting and tells us something about the changes that have taken place in the industry. The list names Azure (but no Subex), Cap Gemini Ernst & Young, Danet, Help U Bill, KPMG Consulting and TMNG amongst others. The claims made for the benefits earned form revenue assurance sounded much the same then as they do today. In one question, the vendors were asked “how much does RA save?”. Here are the answers, in no particular order and with the names omitted to protect the guilty.
- Self-amortization during the first 6 to 12 months of execution is minimum performance. Revenue recovery of five times the cost of professional services cited.
- 1% to 3% of revenue during the time of the engagement; additional savings during subsequent stages.
- 2% to 10% of revenue.
- 10% to 20% of revenue during the first few months; less during later stages.
- US$7m on average.
- 10% to 13% of revenue.
- Variable based on client.
- Approximately 2% to 5% of revenue.
Quite a range of answers, I think you would agree. Some people thought 10% of revenues were at the top end, some put it at the bottom end of returns! Others decided to be a bit more cautious in making it clear it was “variable”, which is code for “what kind of stupid question is that?”. $7m or pay-off in 12 months sounds impressive until you appreciate that this is much lower than 1% of typical revenues. The report concluded that benefits of between 2% to 5% were likely. Note that they were claiming the benefits earned, not just stating the amount leaked.
Fast forward to July 2006. The Financial Times prints this lazy piece of hack journalism on revenue assurance. We get some different people interviewed but the message is just the same. That article claimed that 10% to 12% of revenues is being lost on average. And Alon Aginsky, boss of cVidya, goes on to clarify that the increase in revenues will lead to an undiluted increase in EBITDA. In other words, every dollar of revenue recovered is an extra dollar of earnings.
So, given that everybody loves numbers so much, we should do some maths. The FT article described telcos as a US$1,000bn industry. Not very precise, but a nice round number to start with. Now suppose that our diligent RA vendors have exaggerated only a little and on average save 2% of revenues for every business they help. And let us say that they are very small and much ignored, and that every year they only sell to 1% of telcos worldwide, meaning that in 5 years they have only covered 5% of the industry. We will assume that a telco needs to buy from an RA vendor once only. And let us agree with Alon Aginsky that a dollar of revenue = a dollar of EBITDA. What, then, is the global increase in telco EBITDA that has resulted from revenue assurance? US$1,000bn*5%*2% = US$1bn per annum. In 5 years, the cumulative EBITDA benefit would have been US$3bn. Pretty impressive, huh? After 5 years or more of doing this kind of thing, and finding the estimates unchanged, the benefits of revenue assurance appear to be as certain as death or taxes. And this is at the low end of estimated benefits, averaging just 2%. Benefits might be 10 times higher according to some. But there is one flaw. It is complete bollocks.
Do revenue assurance people really think that CEOs are morons? Probably. But even if CEOs are morons, they have targets to meet and shareholders to satisfy. Suppose an RA firm could increase Deutsche Telekom revenues by “just” 2%, all of which goes straight to the bottom line, with a payback within a year and an ROI of 500% or more. Do you really think Rene Obermann, DT CEO, would not take it? DT 2006 results show group revenues of EUR61.3bn and adjusted EBITDA of EUR19.4bn. The 2006 revenues were up 2.9% on 2005, EBITDA down 6.2%. If revenue assurance stats are to be believed, then revenues could have grown by an extra 2% to be 4.9%; that would be worth an extra EUR11.9bn to the group. Instead of group EBITDA falling by EUR1.3bn, it would have risen by a staggering EUR10.6bn, an increase of more than 50%. Instead, poor old Rene is struggling with a month-long strike at DT in response to plans to cut EUR0.9bn of costs over the next 2 years. Which do you think he would rather have, a long, unpleasant, politically sensitive and possibly unpopular battle with trade unions to reduce costs, or more than ten times the money through the magic of revenue assurance? If Rene was really that stupid he would need to employ a monkey to feed him and wipe up his drool.
Here are my favourite elephant jokes.
Why do elephants paint their feet yellow?
So they can lie upside down in custard without being seen.
Have you ever seen an elephant in your custard?
Works well, doesn’t it!
How do you know if you have an elephant in your custard?
Your custard is very lumpy.
No, the truth is that revenue assurance benefits are often like elephants with yellow feet. You pay some guy to come in and look for elephants in your custard because somebody else said they had elephants in their custard. The guy checks your custard and tells you it is very lumpy and must have lots of elephants in it. He finds the elephants and gets rid of them when you are not looking, and suddenly you have a lot less elephants in your custard, and he tells you he is confident there are no more elephants because the custard is a lot less lumpy now. And because you never knew you had elephants in your custard he can claim to have found any number of elephants. But somehow or other you never ever see an actual elephant with yellow feet. Better not tell the boss that you never actually saw any of the elephants, so you agree to a press release confirming the number of elephants removed from the custard. And a short while later somebody else reads that press release…
One interesting thing in the Gartner report you still hear repeated often is that the success of revenue assurance is limited because it is stuck with middle managers. I see this another way: CEOs do not like to have their time wasted. Middle managers can spend time on attention-grabbing fantasy stats, but CEOs are sceptical people who do not enjoy looking for elephants in their custard. Anyone wanting to get executive buy-in to revenue assurance would be wise to remember that.
Claims for the benefits earned from revenue assurance are so exaggerated and so silly, you cannot call it a case of crying wolf. You have to describe it as crying elephant. With all the big game hunters working in revenue assurance, you would think elephants would be nearing extinction after 5 years of sustained hunting, but oddly enough the prediction is that the market for revenue assurance software and consulting is set to grow to US$562m by 2010. That is a lot more elephants. With that many elephants, you think there would be a lot of elephant dung as well. Something smells bad, that is for sure. But it does not smell like elephant to me. Nope, it smells more like bull.
Nice article, one thing you forget to mention about the growth of the RA market and the losses that are predicted to grow is that companies do not learn from their mistakes. I have worked in Fraud Control and RA for some years and can honestly say that even with the same experienced staff moving from company to company, you still see the same fundamental mistakes being made over and over again. I believe it is down to laziness.
Imagine a situation where a guy works in the pricing department of a company that has an RA review and his lack of process shows that his team is responsible for losses due to inaccurate billing. Well, he might stay for a while and then move on to a new job, but when he gets to his new job, i doubt he would introduce those same controls if they were not in place. No he’d just get back to the easy life of not checking properly.
I’ve seen it time and time again.
However, I do agree that a lot of RA providers do indeed smell of bull…