The Myth of ‘Average’ Intercarrier Leakage

They are spoken of less often these days, but we still keep hearing about those pesky ‘estimates’ of ‘average’ leakage. RA software vendors, obsessed with the profit (or loss) they will be reporting to investors each quarter, like to exaggerate the prevalence of leaks to help secure a sale, much like a burgular alarm salesman is going to exaggerate the number of robberies if it helps him increase his commission. Exaggeration can generate a sale in the short run, though in the longer run, RA vendors inevitably get undermined by the observation that industry estimates never go down. ‘Estimates’ of leakage remain steady or go higher every year, no matter how many hundreds of millions of dollars is spent on RA software in the meantime. That rather implies that the net benefit of RA is negative: every year the telco industry spends more on RA, yet every year the estimates of leakage get worse!

We all know the reasons why the numbers are not reliable in the way presented, but my favourite bugbear is the idea that there is an “average leakage” for intercarrier traffic. Think about it. Take every telco in the world. Estimate the net error when they pay each other for intercarrier services. What is the mean average leakage? Zero. We know that as a fact. We know it without estimates or data or guesswork or case studies or anything. If the purpose of the estimate was to get an average across all telcos, and we are only talking about intercarrier, then we know that one telco’s loss is equal to another telco’s gain. In short, errors in intercarrier billing and settlement are a zero sum game. If one telco is being charged too much, another is earning too much revenue. If one telco receives less than it should, another is paying for less than it used. Whatever gibberish you spout, there is no way to identify an average ‘leakage’ without also admitting to an average ‘gain’ that is equal and opposite. Yet vendors are so addicted to marketing spiel, they cannot stop themselves. Bang goes their credibility as they try to tell us a mathematical impossibility has been proven thanks to their very unscientific (and very convenient) observation. I just found this gem, courtesy of a cVidya-Stratecast report:

In the wholesale market, inter-carrier revenue leakage represents approximately 3 to 5 per cent of service provider’s total costs for traditional voice products, and in the range of 7 to 11 per cent for broadband products.

Perhaps cVidya are trying to say that service providers are always on the losing end of intercarrier errors. I bet they do not say that to their customers who sell traffic on a wholesale basis! To be fair to cVidya, they are not alone in falling into this trap. I once blogged about similar interconnect leakage hyperbole from Subex, though I am heartened to say I have never caught them repeating that mistake. And I know that cVidya’s people regularly read talkRA (IP works both ways – allowing us to tell where the readers are). So hello to everyone at cVidya, and please stop pretending that intercarrier error is all losers and no winners…

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.

3 Comments on "The Myth of ‘Average’ Intercarrier Leakage"

  1. Avatar Mike Willett | 1 Oct 2009 at 2:07 am |

    Hi Eric,

    If you are using the term “intercarrier” to refer specifically to interconnect, then you’re right that, across the global industry, this is a zero sum game. If, however, you broaden “intercarrier” to wholesale or roaming arrangements, then this may not be zero sum.

    Within interconnect then, though the global industry may be zero sum, this will almost certainly not be the case for an individual operator, where they could be a winner or loser. Lack of perfect information though means that not everyone knows whether they could be a winner or loser, and this is where RA can provide insight and appropriate decision making.


    • Hi Mike,

      Surely the same logic applies to most wholesale too – one telco’s loss is another telco’s gain? But you make a good point. I am guessing you are thinking of wholesale and roaming where the end user is charged and there is a relationship between two or more telcos where they all earn a share of that charge and they all have a common point of failure (probably the network where the call originated) so if the charge is never presented in the first place, they all lose. An example would be an outbound roamer where the outbound network loses a record of a call made whilst roaming – both the outbound network and the customer’s home network suffers a leak. The world, of course, is still a zero sum game – if all telcos lose, the customers must win!

      I think we are of like minds that whilst interconnect is a zero sum, the point is not about a crude prediction of financial benefits but a subtler principle that a good telco does not want any errors – whether in its favour or not. Yes, a telco may be a loser, and so needs to check to prevent that. However, if the Head of RA promises his CFO a 3% benefit based on some spurious ‘average estimate’ he may get a nasty shock. The purpose of estimates like this is to build a business case – and we both know RA people tie a noose around their necks when the promise benefits that are never delivered. If the CFO backs spending on the integrity of interconnect costs and revenues based on a % prediction of benefits, but there was no actual leakage, or the telco was actual gaining from errors rather than losing, the CFO should rightly be asking why he trusts the Head of RA to improve the integrity of his business when the starting point is totally unjustified claims from unreliable sources like vendors.

      This dovetails into the wider argument that people like David Leshem raise. If RA should grow into a business assurance activity that looks at things like whether the base propositions are profitable, then it will never gain the necessary credibility if it starts out by showing a disregard for presenting good and honest numbers about business performance. Your model – RA providing insight and supporting decisions whether the business is a winner or a loser – is the right one. It serves a good purpose in itself, and is the platform for revenue assurance to evolve. The promise of integrity, rather than a reduction in leakage, lives at the more mature end of the scale. To mature, a telco’s RA team must develop their own mindset, and decide that honesty and integrity overrides the temptation for the quick and flashy claim of financial wins where they may be none. This provides a foundation for RA to evolve and adopt a wider view of assurance of other aspects of the business. Some people call this ‘business assurance’. My preference is to talk about integrating revenue assurance with risk management.

      When you look at the world with those risk management glasses on, you also start to see something else. Overcharging your business partners is not a good thing, even though on the % win/lose scale it leaves the business a winner. Of course it can leave the business financially better off in the short term, depending on how quickly partners discover the errors and the strength of their bargaining power – their contractual, commercial or political strength and how this might be used to claw back losses. More importantly, a sour business relationship can lead partners to punish ‘bad behaviour’. Regulators can change the playing field under the influence of a telco that can show it has been ripped off, future contract negotiations can become difficult or partners may take their business elsewhere. Those risks, and the potential damage to the business, cannot be plotted on some simple ‘average estimated leakage’ scale, but they are part of the bigger picture. RA can play a vital job in managing those risks – but only if there is a willingness to argue that an error that leaves the telco the ‘winner’ at another telco’s expense can sometimes cause more harm than any leak.

  2. Avatar Mike Willett | 5 Oct 2009 at 2:26 am |

    Hi Eric,

    Re the reference to wholesale, that is what I was thinking of. In this case, the wholesaler gains some revenue, the retailer does the same and the end user gets a larger bill.

    Your other points raise an interesting thread. I was deliberately careful with some of my wording, in that I suggested RA’s role was to do the analysis but not to necessarily to make the decision about what to do with the analysis.

    In your last example, RA may identify that the telco they are working for is a “winner” but they rarely own the commercial relationship with the “loser”, manage the regulatory environment or would be required to implement any corrections. As such, RA can, and should, advocate a position of integrity, but other business considerations may override this. This could apply equally should the telco be in the “loser” position as well, and I often have other carriers telling me about how difficult it is to actually get an undercharge fixed.

    From my consultancy life, I know of many telcos whose practices in relation to interconnect, could be described as less than of high intergity. When RA or fraud people come across these behaviours, it can be difficult to get the company to turn away from such, sometimes significant, revenue sources. This can become a very real test of the integrity of the RA manager.


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