CHALLENGES AND POTENTIAL REWARDS OF COMMUNICATIONS COST MANAGEMENT

The accounting question in lay terms: Are the charges valid, can they be verified, and are they treated in a manner consistent with accounting practices across communications expenses and assets?

Beyond basic compliance issues, there are immediate potential hard-dollar savings. There are also other benefits that come from good management practices. Potential savings vary depending on the size of the organization and the effectiveness of current practice. Realizing the savings requires headcount and computer resources appropriate to the size of the organization. To get a feel for potential impact you can compare your organization to large and mid-size business.

Fortune 500 companies average $10 to $12 billion in annual revenue and typically spend $100 to $120 million on communications. Mid-size companies average $18 to $20 million in revenue and spend $20 to $30 million on communications. It takes between one and seven heads to pay the (monthly) telephone bill, which typically ranges between a few hundred and several thousand invoices, where each invoice may contain several hundred or several thousand pages (or pounds). The monthly delivery of the telephone bill becomes a point where the physical work involved in breaking the bill down and entering the actual charges into an accounting system is a daunting effort. Validating the charges is almost never done, and that’s one of the areas where cost management can realize significant hard-dollar savings. How much is the issue. General industry consensus based on experience is a range of 10% to 12% of total spending during the first year, tapering to half that level over the next 4 or 5 years. If one took the numbers literally, that would indicate a positive impact on earnings for the Fortune 500 on the order of $10 to $12 million or 10% of earnings, and $2 to $3 million for mid-size companies. How to realize that kind of impact on net income is attention-getting for any sane chief financial officer or chief executive officer.

Very few, if any, large companies receive and pay paper phone bills today. Even with the demise of paper invoices, the number of transactions and invoices cries for some form of automated invoice validation. Pricing complexity for basic services, plus the burdens of taxes, access charges, universal service fees, and other add-on charges imposed by federal, state, and municipal tax authorities all add up to a significant challenge. Adding normal business expansion, contraction, churn, and change doesn’t make it easier. Automated invoice verification requires the bill in machine-readable form and an accurate, well maintained reference database containing standard cost and inventory of circuits, equipment, facilities, and services.

Defining the Problem

Recall the earlier description of what is included in telephone service bills—they are highly summarized and comparing each charge in each invoice is very labor intensive. To put the problem and a potential approach to solving it in perspective, it is helpful to diagram it out as shown in Figure 1.

Figure 1: End-to-End Billing and Cost Allocation Process

On the service provider side, it is easy to see that the billing submitted is made up of many components. The basic service charges include a fixed monthly charge for local service and variable charges for long distance service. In addition to basic service charges, there are a myriad of federal, state, and municipal taxes, FCC access charges, universal service fee, and others. 

FCC access charge funds do not get remitted to the FCC. They go into the RBOC Treasury. This has implications for the future as far as eliminating variable long distance charges.

On the organizational side of the problem, we have two basic needs: keep track of taxes that may have an impact on corporate income or other taxes and fees that may be useful when dealing with community relations or investor information, and allocate total expenditures to all the departments in the accounting system.

ANATOMY AND PATHOLOGY OF COMMUNICATIONS BILLING AND PAYMENT

Billing for communications equipment, facilities, and services has its roots in telephone service billing. For many years before 1984, AT&T’s local operating companies generated the vast majority of telephone bills. Pricing was based on tariffs accepted and filed with the Federal Communications Commission (FCC) and each state Public Utilities Commission (PUC). Basically there were two rate structures, one for business or other organizational entities and another for residential service. Pricing was a combination of a fixed monthly charge to subscribe to local service, plus an incremental charge for calls outside the local exchange area, also called a long distance call. Charges for long distance calls were made each time long distance service was used and calculated on the basis of a minimum charge for the first 3 minutes, plus a per-minute rate for each additional minute the call continued beyond the first 3 minutes. The basic minimum and additional minutes rates were also distance sensitive. The longer the physical distance between the end-points of the connection, the higher the rate. Go back and read this paragraph again.

So far, we have a basis and method for calculating charges for service. Nothing has been mentioned about extra charges for other fees and taxes. We can get by this point fairly quickly by using the simple technique our elected governing brethren use when exercising their awesome responsibility to levy taxes—simply tell the merchant to charge and immediately remit a flat percentage against an item or on the total amount. Maybe we should add on one other little detail. How many taxing entities are there? Hard to say, but we can estimate starting with one federal, 50 state, and thousands of local municipal and county entities who want to charge some small amount for the privilege of paying a telephone bill within the boundaries of the governmental jurisdictions where one lives and works.

Now we are at a point in our anatomy and pathology where we have written a high-level description of the method for arriving at the charges for one or a primary telephone line for 1 month of service. With the magic of simple addition and multiplication on an already complex process, we can contemplate printing and presenting a bill for payment. What does the bill look like? First there’s a summary of fixed monthly charges for subscribing to the service, complete with taxes. Then there’s the long distance calling summary, complete with details about the time the call started, duration, and charges for each call. For one call, or none, add one more page for long distance service. For the 21st call, add one more page. From the service provider perspective, we now have a streamlined process where we can bill for the majority of our customer base as long as they are single line customers. Oh, and by the way, because we are considering this from the telephone company’s perspective, we also have a streamlined provisioning process whereby every single order for changes or new service drives the single line billing process. What happens when someone wants a second telephone line? Simple answer: Install one and send a second bill each month.

By now your hair is hurting, or if it isn’t, then get ready, it may begin to hurt shortly. Sure it’s painful, but you must understand this picture, else communications cost management will remain elusive and without value. Remember, we are trapped in telephone service billing and payment before 1984, which means one bill for each telephone line, one payment for each bill. Not bad for residential and small business, school, church, library, or other organizational entity to deal with. Telephone service for the masses. What about the larger organization with a corporate headquarters and tens, hundreds, or maybe thousands of field offices? Or a state, county, or large city government with hundreds or thousands of employees in many locations, each with at least one telephone line. You guessed it; phone bills in boxes, not envelopes, measured in pounds, not pages.

The telephone company rose to the challenge, installing service, which works well, and delivering a bill for which payment is expected in due course. Now it’s someone’s job to validate the bill and pay. And with that, we have arrived at the point where it starts to make sense to consider communications cost management process and practice in large and mid-size organizations—business, non-profit, government secular, or whatever—the consideration is how many telephone lines are required and being paid for. And remember, this is before 1984, and only applies to telephone service, single line access to shared switching facility based services called plain old telephone service (POTS). What’s happened since 1984, you might ask. The simple answer is that beginning with the divestiture of AT&T and deregulation of the long distance communications industry, businesses and residential subscribers had to replace single line, single-service billing with triple billing and in many cases initially with triple payment, one for equipment, one for local service, and a third for long distance service. Stop and think about it—the number of billable items tripled. The amount of envelopes and postage tripled or maybe quadrupled.

Fast forward to 2003 and consider again that communications cost management is not just paying the telephone bill any more. What was a single bill changed into multiple bills because of deregulation and divestiture in 1984. Since then, technological advances and availability of commercial products and services from hundreds or thousands of potential suppliers morphed into hundreds or thousands of bills representing millions of transactions for data traffic, mobile telephones, pagers, two-way radios, remote site security and surveillance services, Internet web access supporting internal and external supplier, and customer transactions, as well as plain old telephone service. Now instead of one trusted supplier whose bill was (appropriately or inappropriately) trusted for so many years, we now have many suppliers requiring some level of validation and due diligence to comply with basic accounting rules, tax statutes, and fiduciary responsibility. Read this paragraph again. Not only are there common sense reasons to manage and pay communications costs wisely, there may be legal implications as well. Check out the Sarbanes-Oxley Bill of 2002 and talk to your attorney and an outside auditor.

ACCEPTANCE OF EQUIPMENT

Digital equipment and systems always include some form of software. After all, digital hardware wouldn’t be of much value without the software. Software sometimes goes by other names or euphemisms such as firmware or micro code. Less often, other software such as interpreters and compilers and utilities may be included or supplied with equipment or part of systems. Application or configuration software may be required for the equipment or system to function properly or meet requirements. Applications software might be the product of a third party developer. The possibilities are many, but what is important is what the requirements are or what was included in the order or supply agreement that caused the equipment to be delivered.

The digital television transmitter contains detailed specifications and a general approach to test and acceptance. This gives the potential supplier an idea of expected performance and an outline of proving the equipment meets or exceeds the specifications. What is not included is a detailed test plan. A test plan can be written from scratch by the buyer or alternatively provided by the supplier as part of the deliverables, subject to approval by the buyer. Both require significant effort to prepare and validate. Chances are the supplier or the manufacturer already has a detailed test plan for each component or subsystem used in the manufacturing process as well as a system test plan for a complete unit.

Making a manufacturer’s system test plan valid for use in accepting the equipment is dependent on emulating the intended use and environment. Essentially, this involves assembling the system as close as possible to the final operational configuration. In most cases this is not a big issue. However if the equipment or system will carry significant volumes of traffic, this may not be possible, except through the use of traffic generators. Again, the main concern is to carry out any and all steps included in the supply agreement. Simply making measurements and validating functions and features outlined in the supplier’s published specifications is prudent and helps to uncover and resolve any issues or concerns.

Acceptance of Circuits, Facilities, and Services

On the service provider side, similar concerns and processes exist. The governing approach is either in a tariff or some form of supply agreement. If not explicitly mentioned or called out, then the alternate approach is to use applicable ANSI, IEEE, IETF, ITU, or other applicable recommendations. The process and focus of the effort should be structured around the end-to-end service model block diagram. Initial concern is to make sure connectivity exists by examining and testing the underlying circuit or facility. Validating or accepting a new circuit on an existing facility is less complicated but riskier than accepting a new facility. Regardless, the process is fairly simple and very similar.

If the circuit or facility is intra–LATA (local), only one provider is involved. If it is inter-LATA (long-distance), three service providers are involved: two local exchange carriers and one inter-exchange carrier. If the service is international, the international portion will involve two more physical pieces and a local exchange carrier at the far end.

Circuit acceptance in any case involves a fairly simple process and requires relatively simple test equipment. When the service provider informs you that it is ready for acceptance, simply connect the equipment, loop back the circuit at the far end, and initiate a bit error rate performance test for at least 48 hours—preferably 72 hours. The circuit should perform error free. If there are errors, turn it back over to the provider and ask them to fix it.

Once the circuit or facility is accepted, then remove the bit error rate test equipment and replace it with the operational equipment (multiplexer, server, or whatever) and begin operational tests with the complete system.

DOCUMENTATION DEVELOPMENT PROCESS

Documentation typically starts when a bright idea appears on the scene. The bright idea may fix a problem, expand production capacity, save operating expense, or change the way a company does business. For content transport networks, the project will likely be structured around a combination of equipment, facilities, and services. Carrying the project through to completion will hopefully have a favorable impact on revenue and operating expenses, be profitable when completed, and require significant capital investment.

Starting documentation should be done at the earliest possible time and continue throughout the project with a final release upon completion and commencement of operations. Documentation should reflect reality as closely as possible during the construction and test phases, and especially upon completion. Sloppy or incomplete and uncoordinated documentation leads to mistakes and mismatches, any or all of which can cause re-work, which can be expensive.

Missing details in the final release can impede quick and efficient repair or service restoration.

Documentation should mature as the project matures. Small projects where the project manager functions as the design authority and holds overall responsibility for the project should follow the same process as large projects with dedicated full-time design, scheduling, and financial staff. Components in the documentation include an initial sketch, first draft, preliminary release, one or more revisions, and a final release.

The initial sketch is simply a combination of a brief description of the idea in written form and one or more drawings. It may also include a high-level table or spreadsheet containing preliminary budget estimates of cost, revenue, and profit impact.

A designated project manager should prepare a first draft document as soon as the bright idea gains traction and sufficient interest. This individual should be knowledgeable about the technology and basic business financial aspects of the project. The first draft should be as complete as possible in technical and financial terms. At a minimum, it should contain a technical description, list of equipment, facilities, and services required, a statement of the impact on operational functions, an estimate of the cost, revenue, and profit impact in as much detail as possible, and a schedule or estimated time frames associated with major phases or activities making up the project.

Design review is a critical step in any project. Design reviews are nothing more than a small group of experts from accounting, purchasing, operations, and engineering considering the details of a proposed or in-progress project and making an assessment of the potential risks and unknowns associated with various aspects of the project. A design review can be conducted at any time during the life of the project after the first draft documentation is complete. Depending on the scope and size of the project, it may be valuable to stage multiple reviews as a project progresses. Design reviews may morph into project status reviews over time.

Some practitioners find it valuable to conduct the first design review before release of an RFP, and a follow-on review after responses are received, evaluated, and preliminary vendor selection is completed. Vendor presentations can be made part of a design review where all functional organizations representatives have an opportunity to gain exposure to potential suppliers and assess their ability to perform.

A preliminary release, sometimes called version 1.0, is considered the first example of final documentation. It should include all the documents deemed to be appropriate and necessary for accounting, purchasing, installation, test and acceptance, operations, administration, maintenance, and change procedures. Each document created specifically for the project should contain a reference section where specific third party documents, standards, construction codes, regulatory, and other references are noted. The preliminary release should include updated and extended versions of all documents included in the first draft. Equipment, facilities, and services should be as detailed as possible, and at a minimum include quantity, part number, or other reference identification to be used by accounting when auditing and paying one-time or recurring charges.

One important document in the preliminary release is a formal test plan and acceptance form. This document should be in a state of completion so it can be used to verify physical, functional, and performance characteristics of equipment, software, facilities, and services provided by third parties in fulfillment of purchase orders and accepted proposals. The test plan acceptance form should have matured through the RFP and contract process with each third party. Exceptions or conditions related to acceptance should be documented and any agreement to waive or delay performance as agreed in any contract should be within the context of the test plan.

The documentation should be carefully managed during the construction, test, and acceptance phase. This involves attention to physical details such as cable, patch panel, and rack label details as well as configuration parameters. For example, IP address and phone number details should be checked and double-checked from the time they are planned until final check-off on the completed documentation. Class and type of service designators must be validated.

As the documentation and construction come closer and closer to reality, it may be necessary or appropriate to make additional releases. These should be clearly labeled with a new version number, such as version 1.1, similar designator, dated, and maybe even timed, depending on circumstances and potential requirement to maintain coordinated work to continue. It is also advisable to maintain a change record summarizing the changes included in each release, why changes were necessary, and the specific section and page where the changes were made.

EVALUATING SOURCES OF SUPPLY

Evaluating sources of supply may be more critical than evaluating what’s being supplied. After all, the best equipment or service on the planet is greatly diminished in value if it can’t be depended on. Repair, replacement parts, and upgrades are important life cycle extenders. The latest gadget has diminished value if your organization gets sued for patent infringement by the supplier’s competitor and the entity the gadget was purchased from isn’t around, or doesn’t have the resources to defend itself and its customers in such an action. No matter who is right, the outcome is less than satisfactory.

If your organization uses a purchase order process (i.e., limits the power to commit funds to be paid in exchange for goods and services using a purchase order form) then it’s likely the individuals authorized to issue POs can conduct supplier due diligence. Initial or preliminary due diligence is general in nature and does not require any technical subject matter expertise beyond a qualified purchasing representative’s knowledge of buying what the acquiring organization needs for its business. As project planning proceeds and technical concerns arise, subject matter expertise will be needed to complete the due diligence process.

Evaluating sources of supply is a process whereby accounting, contractual, legal, and technical subject matter expertise investigate and quantify potential risks of doing business with an unknown third party. It involves an examination of the entity’s financial health, ability to produce deliverables in the level and amounts required, and its ability and reputation for post-deliverable support of whatever type is required by the acquiring organization.

Evaluating the financial health and stability of a potential supplier can be accomplished by examining a set of audited financial statements covering a period of time in the past. Publicly traded entities that are potential suppliers are required by law to file quarterly and annual financial statements. If the potential supplier is not a publicly traded company, then there may be other sources of financial information such as Dunn & Bradstreet. D&B is a credit rating organization, providing credit history and assessment. As such they have access to information on most any entity that wishes to do business on credit. They also collect information about how the subject pays their bills. 

For example, do they pay on time, or according to agreed on terms, or are they occasionally or perpetually behind? These same agencies also monitor and report on lawsuits and extraordinary events that may have an impact on the company. Considerations or concerns about the potential suppliers intellectual property rights may be found in simple searches that can turn up patent or copyrights granted.

The overall concern amounts to the ability of the supplier to produce and support the required quantity of equipment, software, or facilities and services for the time required, typically ranging from 2 or 3 years to longer than 10 years. The ability to conduct due diligence isn’t rocket science; it’s mostly a matter of common business knowledge. You and your peers in accounting that deal with purchasing, contracting, and paying bills can undertake and complete it with a reasonable amount of time and effort.

EVALUATING EQUIPMENT AND SERVICES

Evaluating equipment and services is usually within the context of feasibility assessment, or project planning. Risk is minimal and limited to the amount of time and perhaps travel expense invested in this type of activity. As projects grow and commitments are made, risk grows. What we are concerned about is risking capital, and if the opportunity is real, risking the loss of not just the invested capital, but also some or all of the promised return. The worst of all possible nightmares is a scenario where the project causes a problem outside the scope of the project as envisioned, requiring an unplanned, unbudgeted expenditure.

Not only should equipment and services be evaluated, but their source of supply as well. Conducting due diligence on one or more suppliers varies by level of effort depending on several factors such as how long the prospective supplier has been in business, their size, and their capability to produce and deliver the products and services required by the project at hand. A new supplier that’s been actively supplying products or services in the marketplace for several years will require less effort than a start-up. A start-up with an innovative, new product may require more effort; certainly it’s likely the effort will be different. Well-known or start-up, any situation involving claims of significant new technology should be taken with a grain of salt until all potential material risks have been uncovered, examined, evaluated, and quantified.

Due diligence is most effective and efficient when it is conducted in a way that it becomes a benchmark for acceptance of equipment and services. Conducted properly, there should be no surprises for buyer and seller. If function, form, and performance are not as expected, then there has been a misunderstanding in the past, or something about the hardware, software, or services needs troubleshooting and fixing. Ideally, the due diligence process takes into account the requirements and specifications, and compares capabilities and performance of equipment, facilities, and services of one or more sources of supply. The process should begin with a simple paper-based evaluation. Once everything looks okay on paper, more extensive evaluation can be undertaken.

There are two basic approaches to conducting evaluations. A general evaluation can be undertaken whereby the supplier provides a set of information about the capabilities and performance characteristics of the equipment. The evaluator takes that information and proceeds to determine if the equipment or services are capable of performing as claimed in the information provided. This may or may not determine if the equipment and services meet the business requirements of the buyer. The other approach to evaluating equipment and services takes a specific requirement or set of requirements and then proceeds to determine if the equipment and services meet some or all the details in the requirements established by the buyer.

Once a direction is established, then the process can be sequenced into three or fewer logical steps. Step one can be what’s referred to as a paper-based exercise. Simple expert analysis of the information provided by potential suppliers can be analyzed to determine if it meets or exceeds the requirements established by the potential buyer. The next step after paper evaluation requires examination and testing of one or more working samples. Depending on the size and complexity of the project and the potential risks/returns at stake, scalability may be an issue. If scalability is a concern, then the structure of the initial working samples and their evaluation criteria should be staged and structured so as to be extensible to greater scale. Another way to view this issue is to structure the paper evaluation and the initial working sample evaluation so it is representative of the full scope of the network or system as known at a given time.