Telecommunication Vendors: Tier-1, Tier-2, CLEC and IXC

Many of our clients find it unique that we would offer our expertise to Tier-1, Tier-2, CLEC, and IXC service providers in the United States and Western Europe. In reality, service providers are highly dependent upon other service providers for what we call "last mile connectivity." In most cases, they also require the telecommunications services of other vendors for their administrative and retail operations across the country. Telecommunications vendors have as much of a need (if not more) to rationalize their "wholesale" and "retail" telecommunications connections as typical end-users of their own services.

Telecommunications service providers are provisioning thousands of new client services where "last mile connectivity" is a service provided by other service providers. It is also true that the same service providers disconnect end-user services frequently, when clients no longer need them or, when they have changed vendors. This is an opportunity for continued and increased expense when the "last mile connectivity" remains intact with the underlying service provider. Vendor personnel have little time to "ensure" that disconnect orders are actually implemented by their last mile service providers, in a timely manner. The process is highly time consuming, and with limited personnel, the process of disconnect verification is often never addressed once the initial order has been generated. It is surprising that many vendors do not realize many of the initial disconnect orders go unimplemented.

Most of these services fall under "wholesale" agreements between vendors. Unlike normal end-users, these contracts are typically "dollar volume" based and are not specific to each service asset type, or by location. We have seen problems with dead-end services at Tier-1 service provider in the past. It is easy to amass hundreds of thousands of dollars of unused, wholesale assets over an extremely short period, ultimately compounding infrastructure costs, month-over-month and year-over-year. For the larger Tier-1 providers, this can eventually reach into millions of dollars in monthly falling margins, as well as increased pressure to raise end-user prices, in a compensatory effort.

Increased end-user prices result in higher client turnover or migration rates (consumer seeking comparable alternatives, based on price comparison). Increased end-user turnover results in decreased gross revenue and higher breakeven points, as a percentage of gross revenue, exacerbating the problem further. Vendors' personnel rationalization, over the past decade, has complicated this problem further, as vendors no longer have an abundance of personnel at their disposal to conduct thorough and extensive auditing of these end-point connections.

We conduct the same discovery process as we would with normal enterprise or SME end-user clients. Telecommunications vendors are the most difficult to audit, because the requirement for cross-referencing data is highly labor intensive. The process is slow and time-consuming, considering the overwhelming amounts of data that require correlation. Augmentation of existing, internal protocols is of absolute importance in this client class.

To develop a clearer perspective, the Telecommunications Industry, inter-carrier revenue was over $55 billion for 2010 (Lee & Lynch, 2011; p. 15). According to a report from Aberdeen Group (2005), 7 to 12 percent of all telecommunications expenses are erroneous or extraneous assets. These two research points would mean that yearly, 3.85 to 6.6 billion dollars of inter-carrier invoicing is erroneous or extraneous. Additionally, according to the same report from Aberdeen Group (2005), about 15 percent of costs are actually audited for accuracy, an industry-wide standard for both vendors and end-users, leaving 85 percent of costs unaudited. With decreasing revenue trends, since the early part of the last decade, this type of revenue loss can produce long-term, negative financial consequences for vendors. This is an ongoing industry issue today in the U.S., compelling vendors to abandon markets to bolster profitability. For European counterparts, this phenomenon is only now beginning to manifest itself.

Issues undermining vendor profitability are not strictly relegated to last mile connectivity issues. As auditors, we see numerous programming and billing issues that negatively affect vendors' monthly revenues. These issues often revolve around contract term expirations of their end-users. Although invoicing platforms generally stop applying "discount-based" term conditions to client invoices, upon expiry of contracts, special contract conditions require "manual" adjustment processes, which are rarely implemented.

Telecommunications Provider Example

During an audit of a multi-location client, we identified hundreds of PRI ISDN accounts that had previously been under contract terms in past years. Although the Customer Service Record (CSR), detail showed that the services were no longer under a valid contract agreement, they were still receiving the then contract rates, not tariff rates. This was an under-billing arrangement of over several hundred thousand dollars per month in lost revenue to the vendor. Since the current offered contract rates were less expensive than past contract rates, we placed the services under a new three-year term agreement with the vendor.

In this example, had the vendor reverted the affected services to tariff, after the original contracts expired, the end-user would eventually have discovered the dramatically increased rates, and generated a dialogue with the vendor representative. However, other similar end-user accounts were under tariff rates already, leading one to believe that they may not have reacted to increases in rates on the aforementioned affected accounts. The vendor lost revenue by not reverting the accounts back to tariff basis. Without a direct interaction between the end-user and the vendor, the vendor would have collected one or more months' of increased revenue, until a contract had been requested, compiled and executed between the end-user and the vendor.

Our experience has shown that most clients lose track of past contracts they have executed with their vendors. Further experience has also shown that most clients do not know how to request and read customer service records, which often identify the execution and term of existing (or in many cases, past) agreements with their vendors. For this reason, vendors need to comply with existing agreements, as well as comply with tariff when such agreements expire without renewal provisions.

Vendors often fail to revert end-user accounts to tariff compliance pricing upon contract expirations. The effect can be the difference between not meeting or meeting quarterly and annual expected EPS in the equity market.Rationalization of your wholesale and retail telecommunications cost structures reduces corporate capital requirements; optimizing ROI through decreased, average per end-user costs. Use the "contact us" form to initiate a probative dialogue by clicking here.