Detecon Study Costing System Maturity in Telecommunications Companies. Results of A Detecon Survey

Study
Costing System Maturity

in Telecommunications
Companies
Results of a Detecon Survey
We make ICT strategies work

Results of the Detecon Survey Study <
Costing System Maturity in

Telecommunications Companies
Results of a Detecon Survey

February 2010
© Detecon International GmbH 1

> Study Results of the Detecon Survey
This publication or parts there of may only be reproduced or copied with the prior written
permission of the publishers.
Published by Detecon International GmbH

Oberkasseler Straße 2, D-53227 Bonn
www.detecon.com
2 © Detecon International GmbH

Table of Contents
1 Executive Summary 4
2 Findings 5
3 Detecon‘s Conclusion 6
4 Detecon‘s Recommendations 8
5 Survey Results 10
6 The Company 20

1. Executive Summary
The objective of this survey is to give a brief overview of the maturity of cost accounting systems at European tele-
communications operators by focusing on the following aspects: “What is the position of the costing department
in the company?”, “What information does the costing department currently deliver every month?”, “What are the
deliverables used for?” and “What tools are used to produce this information?”.
Detecon interviewed 22 costing professionals of 16 European telecommunications operators in the period of August
to November 2009 to find out if there is a specific costing trend.
Each interviewee was asked to answer 20 questions. Interviews were conducted either by phone or in one-to-one
meetings. Of those interviewed, 32% came from fixed line carriers, 32% from fixed + mobile carriers, 27% from
mobile carriers and 9% from other telecommunications-related companies (e.g. satellite operators). The intervie-
wees included 55% Costing Professionals and Managers, 33% Executives and 15% Others. The responses of the
interviewees were grouped into three regions. The regional grouping was done as follows: Region West (Germany,
Luxembourg, Switzerland, UK), Region East (Czech Republic, Georgia, Poland, Romania, Russia, Slovakia, Ukraine,
Uzbekistan) and Region South (Croatia, Macedonia, Turkey). Due to the selected amount of participants, no
comments are made as to the interpretation of regional responses.

2. Findings
Most respondents agree that the costing department is an essential function that delivers value to their business. It
seems that most operators can now calculate the cost and profit per service and tariff in regular intervals. However,
this Detecon survey reveals that operators seem to struggle to determine cost and profit per customer or even
sales channel.
When it comes to using costing information in day-to-day business life, most respondents agree that Pricing,
Strategic Business Cases, Regulatory and Cost Benchmarking are the key areas where costing input can be used to
calculate more precisely the economic impact of managerial decision-making.
Interestingly, customer cost and profit information is quite often used to calculate the life time value of specific
customers. However, as the answers to questions 14 and 15 show, it seems that customer value is not used to
manage customers differently.
While most operators have implemented Microsoft Excel or Access based costing tools, less than 50% have
deployed professional vendor software yet as the responses to questions 18 and 19 show. In the interviews,
many respondents indicated that initiatives are under way to integrate the existing tools into a common ERP envi-
ronment.
Most respondents explained that costing teams have been put in place in the Finance Department in the last
3 to 5 years and that these teams have become a well-regarded interface function to many other parts of the
business.
What Detecon also found out is that the level of costing systems maturity is very much correlating to the profit
margin over the years that a telecommunications company has been operating. These correlations are summarized
in the graph below.
Costing system maturity
Profit margin
Western European
Operators
Eastern and Southern

European Operators
5 10 15 20
Years of telecommunication company’s operations
Key business focus
� Growth and revenues � Intensifying competition and � Cost cutting and efficiency � Profitability and selected
regulatory constraints projects growth
Obstacles for costing systems
� Focus of the business is on � The need to better understand � Strong management pressure � Implement the
growth, costing systems are costs arises due to pressures to set up a costing system in recommendations of the
not in scope of management from the regulator to reduce a minimum amount of time costing analysis
prices and covering all requirement � Link costing systems with
� The benefits of costing outside from all parts of the planning & forecasting and
the scope of regulatory organization without any management incentive
purposes is not understood priorities and with frequent schemes
changes
� Keep systems simple and
Value added improve cycle times
� Limited at this stage � Show early on who are the � Give management a tool that � Get management thinking from
economically important shows the performance “revenue” to “profit” growth
customers, services, channels reality at a much greater level � Give a tool that allows for
and align the organization and of detail to enable better monthly performance tracking
Profit margin curve
budgetary investments decisions
Costing system maturity curve

3. Detecon’s Conclusions
Driven by lower EBITDA margins and greater cost pressures, many European operators have drastically improved
their costing capabilities in the last 5 years – and continue to do so with increasing intensity. By now, most have
implemented the relevant costing tools to calculate and report monthly on cost and profit per service and tariff to
Marketing, Finance, Strategy and Senior Management. These functions have become used to this costing informa-
tion based on services and tariffs and use it in many cases as an essential input, specifically for strategic business
cases and pricing decisions. Also, operators have invested in costing experts to continuously refine the costing
methodology, improve the quality of reported numbers and assist the business to better understand the economic
impact of business decisions. Many operators are now making the next step by moving small-scale Microsoft Excel
or Access tools into the existing ERP environment.
So far, so good.
However, the costing managers that Detecon interviewed highlighted a number of areas that seem to still cause
considerable concerns.
• The telco world is just at the beginning of a consolidation wave. We will probably see more mergers and ac-
quisitions in Europe as well as throughout the world which will lead to bigger and more complex telecommuni-
cations companies. In this process, costing systems will need to be changed and adjusted to the new situation.
The challenge will be to work in more international costing teams and at the same time agree to one costing
standard to be used throughout the company.
• As profit margins in the telecommunications industry are declining, shareholders become more active in the
management of their investments and put more performance pressure on management. One of the obser-
vations is that shareholders are increasingly calling for more operational performance information than
what is already provided for in the regular statutory reporting packs, for example Profit and Loss Statements at
a segment, product or service level. Thus, costing managers no longer find themselves in a situation where they
need to provide cost and profit information only to internal customers. Instead they are faced with all the chal-
lenges of external reporting and communication, which means whatever they report to external parties needs
to be of a very high information quality, in alignment with the statutory results, approved by relevant internal
parties (e.g. Legal, Management), commented and communicated in alignment with the general strategy of
the company.
• The telecommunications market is facing a number of technological disruptions. A very important one is the
change from traditional public switched telephone networks to Internet Protocol systems. For costing
managers it means that the allocation of network costs to marketing services needs to be altered. In a tradi-
tional public switched telephone network a call will take a pre-defined route to get from the caller to the call
recipient. However, in an Internet Protocol System the call can take any number of different routes depending
on the configuration of the system, the time and utilization of the network. As a result, in the latter case, costing
managers have to estimate the probabilities for a call to take a specific route to be able to calculate the cost of
that specific call – which makes network cost allocation much more complex.
• Most costing systems are only capable to calculate service and tariff cost based on historical accounting figures.
However, company budgets and forecasts are typically not integrated into the costing systems. This limits
the ability of costing managers to calculate incremental and forward-looking service and tariff costs which are
recognized by all parts of the business.

• Due to the inability to calculate accurate incremental and forward-looking service costs, many costing managers
find it difficult to determine future values of customers and tariffs in a simple way. However, this information
is important for Marketing to determine the financial importance of customers and to assist Customer Care in
differentiating the management of customers depending on their value to the company.
• The costing department has always been an expert function that requires knowledge in various fields of Tele-
communications Engineering, Marketing, Customer Care, Finance and HR. As the requirements of this depart-
ment continue to grow due to changes in the market and technological innovation, it will become increasingly
difficult to find enough suitable personnel on the labor market.
Of course, every costing manager is impacted by these challenges in a different way. However, they seem to repre-
sent what many of them think.

4. Detecon’s Recommendations
Detecon suggests that every costing manager should at least consider the following action points:
1. Responsibilities and ownerships

In anticipation of potential consolidation and/or growth activities, establish the costing team under the Group CFO
and work out a clear policy on costing ownerships throughout the company. Integrate costing team members into
important decision-making bodies of the company (e.g. for strategic business cases, pricing, regulatory).
2. Methodology, documentation and communications

Document a standard costing methodology to be used by all business parts. Communicate regularly to all
stakeholders how service, customer and tariff costs and profits are calculated.
3. Integration of costing results into the statutory reporting pack

Agree on the level of cost accounting details to be reported to external parties along with the existing statutory
reporting packs. Implement a rigid internal quality control for these numbers as well as a new reporting work
flow that is in alignment with the existing external communication work flow. Align the comments of the costing
report with those of the strategic communication of the company. Be prepared to start more detailed operational
discussions with shareholders and agree on how you want to involve shareholders in a stronger performance
management. If you are in the phase of a merger or acquisition ensure that you implement these reporting changes
within the first 100 days after the transactions in order to demonstrate to shareholders that management under-
stands and controls the operational performance of the company.
4. Agreement on standard service unit cost

Agree on standard service unit cost to be used by all business parts for a certain period of time. Make sure that
standard service unit cost is based on a statistical trend rather than a specific month in order to avoid statistical
distortions.
5. Budgets and forecasts

Integrate budgets and forecasts into service, tariff and customer costing. Improve statistical trending based on
historical periods and forecasting assumptions. Determine a methodology to calculate the future value of customers
and tariffs and agree this methodology with Marketing.
6. Accounting data improvement

Help the Accounting Department to improve the quality of the monthly company P&L, especially with regard to
Accrual and Revenue Recognition Policies, but also with regard to optimizing the use of the Chart of Accounts and
the Asset Register.
7. Operational data improvement

Help the operational departments to report accurate results for the cost drivers used as inputs to the cost system
(e.g. traffic data).
8. Pre-emptive planning of technological changes

Work with Marketing and Network Engineering on the most realistic technology scenarios for the coming 3 years
and prepare a plan of how that will impact the costing system.
9. KISS = Keep it short and simple!

Despite the growing technological complexity aim at maintaining the basic and simple standards of cost allocation
and be very careful to not over-engineer the costing tools.

10. Human resources planning

Work together with HR on building a training and development plan for employees in the costing team to give
them the opportunity to grow within the team and the company and thus ensure that good resources stay in their
job roles for a longer period.
From the discussions Detecon had with many costing managers, most of these recommendations seem to be
fairly straight-forward and self-explanatory. Yet, many costing managers find it difficult to implement them as they
require the support of other business functions. And, as a matter of fact, other business functions typically have
other legitimate priorities.
So, in order to succeed, it is absolutely critical that costing managers can demonstrate the value they are contributing
to the company by using their existing results. They can then take this “proof of success” to ask for the support of top
management to implement further changes that will even increase the value of their team. Without strong support
from top management it will be very difficult to implement any of the above-mentioned r ecommendations.
Once top management support is secured, there are two ways to implement these changes. One way is to set up
a small task force with a dedicated mission and a clear time frame to implement the changes and train the existing
costing team to continue in the new structure, system and processes. This task force can consist of experts from dif-
ferent business functions or of outside consultants. Another way is to set a longer term plan for the existing costing
team to grow along clearly defined goals including the recommendations mentioned above.
It is difficult to say which of these two ways is better or worse. It depends.
The first will definitely lead to results faster than the second. Also, it will take the momentum of top management
focus to make some of the more difficult decisions. However, there will also be a greater risk that people in the
organization are left aside and don’t feel committed to the new structure or processes. So, it really depends…
Costing managers who are about to go for a similar project will need to analyze and weigh the benefits against the
risks of both ways prior to making their final decision.
However, not to take any decision tends to be the worst decision.

5. Survey Results
Question 1:
I agree that the Costing team or department is an essential function in our business.
15
West
South
East
Number of respondents
10
7 1
4
3
2
1 1 1
0
Strongly agree Agree Neither agree Disagree Disagree No comment
nor disagree very much
More than 60% of interviewees agree that the costing department is an important function of the business.
Question 2:
I agree that the Costing team or department have proven their value-added in a number of projects.
9
West
8 South
1 East
7
6
3
5
1
4 2
2 4 4 4
3
1
0
Nearly 60% of interviewees believe that the costing department has delivered added value to the business. 20%
neither agree nor disagree and 20% do not think that the costing department has delivered value added.

Question 3:
I agree that we are able to calculate the cost and the profit of our marketing services.
7
West
South
6
East
5 2 2
4
1
3 6
2 4
3 1
1 2
1
0
Only 50% of interviewees believe that their costing department is able to calculate the cost and profit of marketing
services. The other half is either unsure or disagrees. As service costing is a basis for tariff, customer and sales channel
costing, it is interesting that such a great number of respondents did not know if service costs are available or not.
Question 4:
I agree that we are able to calculate the cost and the profit of our tariffs.
10
West
9 South
8 East
3
6
1
5
4 2
3
5
2
3 3 3
1
1 1
0
Similarly, around 50% of interviewees believe that their costing department is able to calculate the cost and profit
of tariffs. However, at least 30% disagree, while less than 10% neither agreed nor disagreed. Interestingly, only 1
respondent neither agreed nor disagreed.

Question 5:
I agree that we are able to calculate the cost and the profit of our customers.
12
West
11
South
10 East
1
9 2
8
7 2
6
5
9
4
3 6
2
1
1 1
0
Only one interviewee strongly agreed that the costing department is able to calculate the profit of customers. 45%
agreed, however another 45% disagreed. This seems to suggest that nearly half of the respondents cannot yet
calculate the cost and profit of customers.
Question 6:
I agree that we are able to calculate the cost and the profit of our sales partners.
8
West
7 South
1 East
6
1
5
4
1 1
3
1 5 1
2 2
3
1 2 2
1 1
0
At a sales partner level, interviewees had even more opposing views. Only 23% agree that their costing department
could calculate the cost and profit of sales partners. However, 45% agreed.

Question 7:
I agree that we are able to determine not only average service unit cost but also the incremental cost of
services.
9
West
8 South
1 East
7
1
6
3
5
3 6 2
2 4
1 2 2
1
0
While 41% of interviewees agreed that their costing department is able to calculate incremental cost of services,
27% clearly disagreed.
Question 8:
I agree that this information is provided regularly (monthly or quarterly) by the Finance department.
10
West
9 South
8 2 East
5
1
4
7 1 1
3
2
1 3 3 1
1
1 1
0
While it seems that at roughly 50% of operators costing information is regularly provided by the Finance depart-
ment, in at least 32% of cases this does not seem to be the case yet.

Question 9:
I agree that this information is provided regularly (monthly or quarterly) by the Marketing department.
Only 3 interviewees agreed that in their case the costing information is regularly provided by the Marketing depart-
ment. It seems that in most participating companies costing calculation is in the hands of Finance, although the
costing output is very much used by the Marketing department.
Question 10:
I agree that this information is actively used by the Marketing department for pricing decisions for data
products.
12
West
11
South
10 East
9
3
8
7
6
3
5
4
7
3
1
2 4
1 2 2
0
The majority of interviewees agreed that the Marketing department uses costing information for pricing data
products.

Question 11:
I agree that this information is actively used by the Marketing department for pricing decisions for all other
products.
14
West
13
South
12
East
11
3
10
9
8 2
7
6
5
4
7
3
5
2
1 1
1
1 1 1
0
The same applies for all other products.
Question 12:
I agree that this information is actively used by the Marketing department for pricing decisions for marke-
ting campaigns.
10
West
9 South
8 2 East
7
1
6
1
5
3 6
5 1
2
1
1 2
1 1 1
0
However, only 32% of interviewees agreed that costing information is actively used by the Marketing department
for deciding on marketing campaigns. A great majority of interviewees believes that no costing information is used
to support these types of decisions.

Question 13:
I agree that this information is actively used by the Marketing department to determine the value of cust
omers.
12
West
11
South
10 East
9
3
8
1
7
1
6
5
4
7
3 6
2
1
1
1 1 1
0
45% of interviewees agree that Marketing uses costing information to calculate the value of customers. However,
in more than 50% of cases this does not seem to be the case yet.
Question 14:
I agree that this information is actively used by the Marketing department to manage customers differently
depending on their value.
7
West
South
6
East
1
5 2
1
4
1
3 2
5
2
3
1 2
1
0
Only 27% of interviewees agree that customer costing information is used by Marketing to manage customers
differently depending on their value. A large number of interviewees do not believe that customer costing infor
mation is used for managing customers differently.
Furthermore, it appears that even though some Marketing departments use costing information to determine the
value of customers, they do not use this information for managing the customers.

Question 15:
I agree that this information is actively used as input for strategic business cases.
14
West
13
South
12 2
East
11
10
3
9
8
7
6
5
4 8
3
1
2
3
1 2
1 1 1
0
Nearly 75% of interviewees agree that costing information is used as input for strategic decision making.
Question 16:
I agree that this information is actively used for internal process cost benchmarking.
10
West
9 South
8 2 East
7
1
6
5
1
4
3 6 2
1 1
2
1 2 2 2
1 1
0
Benchmarking seems to be another important application area for costing information. Nearly 50% of interviewees
use costing information for this purpose.

Question 17:
I agree that this information is actively used for regulatory purposes (e.g. interconnection pricing).
8
West
7 South
1 East
6
5 2
1
4
1
3
1
2 4 4
3 1 1
1
1 1 1
0
50% of interviewees agree that costing information is also used for regulatory purposes. Due to the sensitivity of
the issue a number of interviewees made no specific comment.
Question 18:
I agree that this information is calculated using an internal system solution (e.g. MS Excel or MS Access).
12
West
11
South
10 East
9 2
8
7 2 2
6
1
5
4
3 6
5
2
1
1
1 1 1
0
Most interviewees replied that they are using a simple Microsoft Excel or Access solution to produce costing
reports.

Question 19:
I agree that this information is calculated using a professional vendor software (e.g. SAS, SAP, Oracle).
7
West
South
6
East
1
5
1 1
4
1 1 1
3
1 5
2
3 1 3
1 2
1
0
50% of interviewees explained that in their companies no professional software is yet used to calculate and report
on costing information. However, it seems that an increasing amount of operators think about investing in pro-
fessional software to reduce the time and resources it takes to produce, analyze and distribute monthly costing
reports.
Question 20:
I agree that we have a dedicated costing team in place to calculate this data and provide business support.
9
West
8 South
1 East
7
6 2
1
5
4
1 1
3
5 1 1 5
2
1 2 2
0
Most operators in this survey seem to have established dedicated costing teams to deal with cost allocation, repor-
ting systems and management analysis support. However, in 25% of cases, no costing teams seem to have been
established yet.

6 The Company
We make ICT strategies work
Detecon is a consulting company which unites classic management consulting with a high level of technology
expertise.
Our company’s history is proof of this: Detecon International is the product of the merger of the management
and IT consulting company Diebold, founded in 1954, and the telecommunications consultancy Detecon, foun-
ded in 1977. Our services focus on consulting and implementation solutions which are derived from the use of
information and communications technology (ICT). All around the globe, clients from virtually all industries profit
from our holistic know-how in questions of strategy and organizational design and in the use of state-of-the-art
technologies.
Detecon’s know-how bundles the knowledge from the successful conclusion of management and ICT projects
in more than 160 countries. We are represented globally by subsidiaries, affiliates, and project offices. Detecon
is a subsidiary of T-Systems International, the business customer brand of Deutsche Telekom. In our capacity as
consultants, we are able to benefit from the infrastructure of a global player spanning our planet.
Know-how and hands-on expertise
The rapid development of information and telecommunications technologies has an increasingly significant
influence on the strategies of companies as well as on the processes within an organization. The subsequent
complex adaptations affect business models and corporate structures, not only technological applications.
Our services for ICT management encompass classic strategy and organization consulting as well as the planning
and implementation of highly complex, technological ICT architectures and applications. We are independent of
manufacturers and obligated solely to our client’s success.
For further information please contact:
Carsten Schröder
Managing Partner Corporate Finance
Mobile: 0049 175 932 3583
eMail: Carsten.Schroeder@detecon.com
Christian Barte
Team Leader Performance Engineering
Mobile: 0049 160 989 42969
eMail: Christian.Barte@detecon.com
Detecon International GmbH

Oberkasselerstr. 2
53227 Bonn
www.detecon.com

Detecon International GmbH
Oberkasseler Straße 2
53227 Bonn – Germany
info@detecon
www.detecon.com
© 02/2010

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Detecon Study Costing System Maturity in Telecommunications Companies. Results of A Detecon Survey

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Formats disponibles

Study

Costing System Maturity

We make ICT strategies work

Costing System Maturity in

Results of a Detecon Survey

© Detecon International GmbH 1

Published by Detecon International GmbH

2 © Detecon International GmbH

© Detecon International GmbH 3

4 © Detecon International GmbH

Eastern and Southern

Key business focus

© Detecon International GmbH 5

6 © Detecon International GmbH

© Detecon International GmbH 7

1. Responsibilities and ownerships

2. Methodology, documentation and communications

3. Integration of costing results into the statutory reporting pack

4. Agreement on standard service unit cost

5. Budgets and forecasts

6. Accounting data improvement

7. Operational data improvement

8. Pre-emptive planning of technological changes

9. KISS = Keep it short and simple!

8 © Detecon International GmbH

10. Human resources planning

It is difficult to say which of these two ways is better or worse. It depends.

However, not to take any decision tends to be the worst decision.

© Detecon International GmbH 9

10 © Detecon International GmbH

© Detecon International GmbH 11

12 © Detecon International GmbH

© Detecon International GmbH 13

14 © Detecon International GmbH

The same applies for all other products.

© Detecon International GmbH 15

16 © Detecon International GmbH

© Detecon International GmbH 17

18 © Detecon International GmbH

© Detecon International GmbH 19

Know-how and hands-on expertise

For further information please contact:

Detecon International GmbH

20 © Detecon International GmbH

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