Taking on Telecoms Cost Management

Aberdeen sees sizable cost-savings opportunities in telecommunications spending for enterprises

Boston — April 11, 2003 — The average Fortune 500 company spends more than $100 million each year on telecommunications services, but as much as 12 percent of telecom service expenses are billed in error, costing enterprises millions every year and making total telecommunications cost management (TTCM) a rising priority for a growing number of firms, according to a new report from technology consultancy Aberdeen Group.

The complexity of the telecoms services spend for most enterprise has made this category extremely difficult to analyze and manage in the past, but also an area that promises significant savings opportunities, according to the Aberdeen report, "Total Telecom Cost Management: An Aberdeen Enterprise Buyer's Guide." Moreover, new tools and services are coming to market that can help enterprises get better control of their telecoms spend.

"IT and telecom budgets represent one of the top four expenses that influence a company's indirect costs, but too often telecom spend is spread out across the organization, precluding effective policy and contract compliance efforts and overall spend analysis and optimization," said Christa Degnan, research director at Aberdeen Group and co-author of the report.

Dana Tardelli, also a research director at Aberdeen and Degnan's co-author on the report, noted that their research indicates that the average Fortune 500 caliber company is likely to spend more than $116 million a year on telecom services and will process more than 15,000 invoices annually. "The management of this expenditure is largely inefficient," Tardelli said, "In fact, most enterprises don't audit these invoices and don't know exactly how much they spend on telecom services. As a result, enterprises are not in a position to make wise purchasing decisions."

In addition, the complex nature of telecoms bills, often listing thousands of line items and any number of add-on services or additional charges, makes traditional approaches to controlling indirect spend impractical for managing telecoms. "It's a massive amount of data, and we found that the approach of using the 80/20 rule to just look at the high-dollar items doesn't work here, because those high-dollar items are typically more correct," Tardelli said. "It's the high-volume, low-dollar line items that get away from you."

Indeed, the researchers found that with accounts payable departments struggling just to keep up with the flood of telecoms charges and more often than not simply paying the bills as they come in, many enterprises have been reluctant to take on this category. "A lot of companies haven't touched this area because it's been too much of a can of worms," Degnan said flatly.

Even when they do take on their telecoms spend, enterprises relying on internal resources — primarily personnel and home-grown tools — struggle to obtain less than 10 percent of the savings opportunity because of the highly complex nature of this category, Aberdeen reported.

But help may be on the way. Degnan said that solutions are available to address telecom cost management by leveraging automated processing platforms, efficient methodologies and experienced personnel, and that these should be considered as a new area of business process automation as companies continue to look for new areas of cost savings in the current economic climate.

In particular, Aberdeen found software solutions, consulting, business process outsourcing and hosted application services available to help companies tackle their telecoms spend. The available solutions address all areas of communications, including long distance, wireless, local voice, data networks, Private Branch eXchange (PBX), calling cards, conferencing and pagers, and Aberdeen's report offers criteria for evaluating the different solution offerings.

While the solution providers' approaches to telecoms spend vary, the researchers write that the solutions themselves all have essentially the same goal: "They seek to eliminate the unnecessary costs related to inefficient enterprise telecommunications processes and reduce total costs through systematic strategic sourcing of telecom services and on-going contract compliance."

In the report, Aberdeen identified three areas within the lifecycle of the telecom service procurement process that can deliver savings, including validation (monetary refunds and credits associated with billing error corrections, caught through billing validation activities), optimization (more efficient management of a company's users and suppliers) and outsourcing (using outsourced service providers to avoid the burden of maintaining telecom experts internally).

The researchers say the potential savings from taking a total cost management approach to telecoms spending will vary, depending on — among other factors — how "dirty" a company's existing processes are, how dispersed the company's operations are and how complex its current telecoms spend is. "Overall, companies that have had multiple locations and multiple carriers, and that are largely decentralized, like retail enterprises, find it very difficult to centralize that spend and to start driving efficiencies and cost reductions," said Tardelli. Thus, these same types of companies could enjoy the greatest benefit from implementing TTCM.

The report included several scenarios illustrating the potential savings from TTCM, suggesting that a Fortune 500 company spending $100 million a year on telecoms services could reduce its annual telecoms spend to about $78 million within four years and accrue some $25 million in combined hard cost savings by year four on an investment in TTCM technology and services of about $2 million. Of course, as the saying goes, your results may vary.

One factor in favor of taking on TTCM, according to Aberdeen, is that the change management issues involved are not likely to be as complex as they often are when implementing, say, a new e-procurement system, simply because little actually changes for the end user. "You're really not involving the end user as much," Degnan said. "For the most part, a lot of it is really the back-end automation, not front-end enablement."

Why haven't the telecoms services providers stepped up to the plate to offer better billing or additional services to help their customers get a handle on their spend in this area? Tardelli, who is Aberdeen's research director for communications infrastructure and services, notes that with telecommunications companies facing billions of dollars in losses from erroneous billing, they too have an interest in improving their billing. But at the same time, these companies are struggling with multiple systems in their back-ends, making it somewhat unrealistic to expect that they are going to be able to get better control and provide more accurate billing to their customers. And, Tardelli noted, "They also make a lot of money in this gray area, so it's really up to the enterprise to put the carriers on a leash."

In the long run, the two researchers suggest that wider adoption of TTCM could actually force the telecom companies to offer better service to their customers. "Once you start to get some TTCM systems and processes in place, you can start doing supplier performance management on telecom services," Degnan said. This could prompt the telecom companies to begin making service a key differentiator in their industry — an industry in which, as Tardelli pointed out, "service has often taken a back seat."

Interestingly, Degnan, who works in Aberdeen's supply chain practice, said that her telecoms research grew out of previous work she had done into best practices and technologies for managing travel and entertainment (T&E) procurement. Many of the enterprises that she interviewed in the course of that research mentioned that one of the biggest benefits they had seen from automating T&E procurement was gaining insights into different spend categories. As it turned out, a surprising amount of telecoms spending was being billed through T&E systems, for example, by sales reps seeking reimbursement for their cell phones or executives charging for telephone calls from their hotel rooms. Naturally, this type of reporting contributed to the difficulty that enterprises faced in getting a handle on their telecoms spend.

In the future, Degnan said she would likely be looking at similar categories that, in the past, enterprises have found difficult, if not impossible, to manage, such as car services, overnight shipping or even restaurants. In these categories, too, the new procurement and spend management solutions that companies are implementing have given enterprises new capabilities to analyze and, ultimately, better manage their spend.