Revenue Assurance scoring tool

Author : Jean-Marie Gandois 02/04/2013

Revenue Assurance approach

Scoring & audit tool

User’s guide

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1 General considerations

1.1. Definitions : What is “revenue assurance” “Revenue Assurance” essentially consists of making sure that all the receivables ensuing from the sale of products and services are correctly and completely collected. It implies the detection of any leaks throughout the revenue chain corresponding to a product or service, their accounting evaluation, the recovery of these sums and an implementation of palliative and corrective actions which will prevent any recurrence

1.2. Why The recent expansion of convergent offers by telecom operators (the various combinations of fixed telephony, data, mobile telephony, internet, television, video and voice over IP), as well as the steady increase of alternative operators and MVNO since the 90s, have rendered the traditional processes significantly more complex : order-delivery, collection-accounting and rating-billing, the networks interconnections and the necessary interfaces between different Information Systems – which to this day remain very much “product oriented”. Consequently, as some experts reckon, this revenue leakage may amount to between 2% and 7% of operators turnover, and in some countries, these income losses can sometimes reach up to 10% of the turnover.

1.3. The “revenue assurance” approach It is British Telecom who in Europe was the first to dive into a vast program of Revenue Assurance and Fraud to tackle consequent losses of income and to adapt itself to very strict English regulations aimed at protecting the consumer. The significance of this method is that even if the percentage of recovered income is low (for example recovering of 1% of the turnover), it can be directly allocated to the net benefit of the company because all costs incurred in production, sales and invoicing of products/services have already been recorded. The benefit is clear when we consider that, in terms of production and operation, it would be necessary to increase the turnover 10% or more in order to create the same additional 1% net profit. For a marginal cost (no new wage costs, minor investment in specialised tools requiring neither studies nor computing developments, light staff training in the methods) the profits can be quite significant.

1.4. Where the leaks of revenue come from According to the studies undertaken by the large audit firms, we find that approximately 46% of the leaks result from errors in the recording of the communications (Call Detail Record), 10% from an inadequate rate, 11% from incomplete customer information, 18% from fraud and 15% from outstanding payments. By implementing, on the one hand, controls in the processes used (crossed) by the revenue chain and in the Information Systems supporting these processes to detect the leaks of income and, on the other hand, by bringing long-lasting solutions to remedy these leakages (alarm systems, indicators, search of causes), we can largely improve the financial situation of the operator. These controls are additional to the set of purely accounting controls imposed by the new financial regulations (Sarbanes



Oxley)1. It is a global quality process which is only strengthening the practices already in place such as Process Management, Risk Management and financial control, to name a few. But as in any quality process, the ownership of specialised tools (verification of database integrity and consistency, flow analyses, samplings, correlations, invoice verification, alerts etc.) is not a sufficient measure to resolve all the problems of Revenue Assurance. Only a holistic approach can increase the effectiveness of the company.

Types of revenue leakages

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fraud

debt/writeoff

error file allocation

incorrect rating

customer records errors

lost records

missing records generation

corrupted CDRs

too late records

The following schema shows the origin of the leakages in a telecom company.

1.5. Revenue Assurance and Maturity level While reading the different writings over the subject of Revenue Assurance, it seems that many telecom operators focus on rating and billing but neither on all the end to end processes nor the different aspects of organization. Revenue Assurance needs a global approach including strategy, organization, operational processes, IT support and tools. The recent survey made by Ernst & Young over 64 telecom operators shows that the average level is about 3 and many companies remain under this level. The criteria for RA Maturity Model are the following.

©Imagine Consulting. All rights reserved 3

1 As per the global revenue assurance survey made by Ernst & Young in 2008 including 64 worldwide operators, “Sarbanes-Oxley, Internal Audit, and Revenue Assurance share a common interest in the proper functioning of internal controls”.

21 clos des cascades 93160 Noisy le grand France


Processes & toolsOrganizationStrategy

• Reactive and instinct-based RA activities. Only basic RA tasks• Substantial manual effort and end-user computing tools only

• Undefined RA structure. Limited to isolated and personal initiatives• Small team not focusingexclusively on RA activities

• No formalized strategy and limited Revenue Assurance influence

Level 1 :Early

• Basic revenue leakage-relatedtasks performed• Automation remains fragmented

• Early formalization of teh RA function but with low influence• Skilles set in development

• No formalized strategy but someRevenue Assurance successesLevel 2 :

Recurring

• Major RA processes covered• Some automated RA processes

• Defined and recognizable team focusing on RA activities• Availability of multidisciplinaryskills. Training on an ad-hoc basis

• Formalized strategy and influence at executive levelLevel 3 :

Established

• All revenue leakage and fraudprocesses are covered• Tools are widely available

• RA activities are spread into the organization and monitored by the RA team• RA staff have key technical skillsand subject matter expertise. Training budgets are available

• Formalized strategy with strategicpapers and elements of group integration

Level 4 :Managed

• All Revenue Assurance processes are covered• Optimized automation of Revenue Assurance tasks

• RA primarily undertakes a monitoring and advisory role• RA staff also have accountingand auditing skills. Formal training and skills optimization plans are in place

• Strategy is risk-based, includescost reduction parameters, and isintegrated within Group

Level 5 :Optimized

Revenue Assurance Maturity Model

Source : Ernst & Young

1.6. Global vendors solutions Different vendors have developed software solutions for fraud & revenue assurance management, to ensure revenues in a company based on data bases reconciliation, billing verification and flows analysis (ACL Services, BassetLabs, Control Point Solutions, cVidya, ECtel, Fair Isaac, Hewlett-Packard, Infogix, KPMG, Lavastorm, Lightbridge, Neural Technologies, Praesidium, PricewaterhouseCoopers, Subex Azure, Vibrant Solutions, WeDo Technologies…). They consist of plugging on the different data bases all along the processes and collect the discrepancies and incoherencies. The results are reported on different dashboards allowing business analysts to bring solutions and controls. These solutions generally are expensive and need different platforms and modules to cover all the data flows. Then business analysts work from the results to propose solutions for improving the systems.

1.7. Before solutions But we think that a prerequisite is to establish a correct diagnostic of the situation. This diagnostic involves a precise audit and scoring of the maturity of the processes crossed over by the revenue streams. This type of audit and scoring should take generally 20 to 25 days for a specialist auditor. The purpose of the present tool is to dramatically shorten to a few days the delay of the audit, using hypotheses and a set of standard audit questions to present a rapid diagnostic of the major risks, for a revenue stream, process by process. Thus, the persons in charge of the revenue management can see rapidly where the vulnerabilities of the system are and how they can improve the waterproofness of the processes. ©Imagine Consulting. All rights reserved 4 21 clos des cascades 93160 Noisy le grand France


1.8. What processes The purpose of this tool is to remain simple. So the processes scanned are the major ones crossed over by the revenue stream. We can use the level 3 processes as described in the e-TOM (Enhanced Telecom Operations Map) as follow:



2 Concepts and assumptions

2.1. How to estimate the potential leakages


tc.

mptions

The leaks are made of known and identified leakages (ex: bill not paid) plus unknown leakages due to errors, discrepancies, records lost, incorrect rating e

2.2. Assu The observations of the field and the results provided by different studies lead to several assumptions based on empiric situations. The different parameters impacting the basic level of potential leakages are the following ranked in two groups: the first one concerns external and objective criteria. The second one concerns internal parameters and is related to the organisation itself and the maturity level of the processes and of the Information System. Production criteria

1. Sales: leaks are proportional to the amount of the product / service sales. The 1% ratio is an objective for many operators;

2. Growth speed: faster is the speed and higher is the risk of leakage. leaks are proportional to a part of the growth;

3. Age of the product / service: the risk is higher with recent products / services than with old ones because the Information System and the procedures take a lot of time to adapt to the new revenue stream.

Organisation criteria The amount of potential leakages also depends on the following criteria:

4. The level of maturity of the processes: number and quality of the controls put all along the different processes;

5. The level of automation of the controls: ratio between automated / manual controls;

6. The continuity of the Information System, the quality and the global automation: interfaces, data bases, capacities, quality of the OSS/BSS, etc.



2.2.1. Production criteria We can draw a model based on these assumptions coming from observations. The first thing is to determine a theoretical Maximum of leakages due to objective criteria. For example, we assume as hypothesis that the basic risk of leakage equals to 1% of the turnover (period n) + 15% of the growth amount between the periods (n) and (n+1) we get the following formula: Theoretical maximum leakage = 1% (Tn) + 15% (Tn+1 - Tn) where Tn is the turnover of the period n and Tn+1 is the turnover of the period n+1. We can describe several situations to show the influence of the growth speed: Situation 1: slow growth : Tn = 1000 ; Tn+1 = 1120 (growth = 120 = 12%) Lmax = 1%(1000) + 15% (120) = 28 (equals 2.5 % of the actual turnover Tn+1) Situation 2: medium growth : Tn = 1000 ; Tn+1 = 1200 (growth = 200 = 20%) Lmax = 1%(1000) + 15% (200) = 40 (equals 3.3 % of the actual turnover Tn+1) Situation 3: rapid growth : Tn = 1000 ; Tn+1 = 1600 (growth = 600 = 60%) Lmax = 1%(1000) + 15% (600) = 100 (equals 6.25 % of the actual turnover Tn+1) We can trace the different impacts of these criteria in graphics.

a) Influence of the turnover value. The first graphic shows that this amount of leakages is proportional to the turnover. However we generally observe that the ratio tends to decrease with a higher turnover as some costs or basic leakages are only linked to the existence of infrastructure.

Leaks related to the turnover

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b) Influence of the growth speed As fast is the growth, as high are the risks of loss of revenue. However, we can have the possibility to limit arbitrarily the growth rate for many reasons: the number of products sold is not significant (too small or the product was launched in the end of the period, etc.) The following graphic shows the influence of the growth speed for a stable basic turnover.



Leakages (value and % of the turnover) due to the growth rate; basic turnover = 1000

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Value of the leaks% of the turnover

c) There is also another criterion which impacts the ratio of proportionality to the turnover: the age of the product / service sold. We observed that when a product has been sold for several years, the different processes (order, delivery, activation, networks, billing) are well known and well grinded. Here is an example observed which gives ideas to choose the appropriate value for the evaluation.

Evolution of the ratio with the age of the product / service

0,001,002,003,004,005,006,00

1 year 2 years 5 years 10 years > 10years

age

ratio

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ratio (%)

2.2.2. Organisation criteria Then, the second group of criteria, as results of an audit and scoring, goes to lessen this theoretical maximum leakage value according to the number of controls, their automation and their quality.

• If the entire revenue stream is totally controlled and fully automated, the global potential leakages should tend toward zero2.

• In the contrary, if nothing at all is controlled and not automated, the risk is high and the global potential leakages should be equal to or greater than this Lmax value.


2 Note : The value 1% of the turnover for revenue leakages is an objective for telcos. Usually, the experts agree on an evaluation of global revenue leakages between 3% and 10%, sometimes more.



Several formulas depending of the degree of interaction and relative conditionality of the parameters have been tested. The studies leaded to 3 formulas according to this degree of dependence and interaction. In this Audit and scoring tool, this is the mean formula which is used because it covers many situations. The general idea is that the amount of leakages is a linear combination of the different ratios of controls and IS automation applied to the Theoretical Leakage maximum. Global definitions: GPL: Global Potential Leakages DL : Detected Leakages (well known and identified) Definitions of the ratios coming from the results of the audit/scoring: PCR: Process Control Ratio. It measures the number and quality of active controls along the revenue chain ISAR: Information System Automation Ratio. It measures the quality of the Information System supporting the processes (number of interfaces, uniqueness of the data bases, etc.) PCAR: Process Controls Automation Ratio. It measures the part of the controls which are automated. The general formula is a linear combination looks like :

GPL = DL + Theoretical Leakage max [ f1 (PCR), f2 (ISAR), f3 (PCAR)]

Example of results with the model: Basic turnover = 1000 K€ Next turnover = 1200 K€ Ratios taken are a base of 2.25% of the turnover and 15% of the growth. The pre computed theoretical leakage max = 48 K€ Zero detected leakage Each ratio as result of the scoring audit PCR, PCAR, ISAR equals 50% The results are: GPL = 29.4 K€ (equals 2.45 % of the actual turnover)

2.2.3. Objective of this method Warning: This method is empirical and based on observations. The objective of this method of scoring the maturity level of the processes crossed by the revenue stream is to give a rapid and simple evaluation of the potential leakages. The different criteria have to be tuned by the different processes in charge because each company is different to the other. Once this tuning is done, the tool allows to predict potential leakages for a revenue stream, it allows showing where weaknesses



are and, used periodically, it allows seeing the gains after improving the processes controls. The default values were those tested on several situations into a big European operator but it could be different for a small one or in other country.



3 Functionalities of the application The present application is developed with MS Access. The application is launched when double click on the filename (extension: .mdb)

3.1. General menu

Select the entity / organisation you want to audit. The list of entities / organisations is first listed in the Entity Table (see below).

Select the Business line you want to audit. The data base contains le list of Business lines in the Business Line Table 5see below).

Select the product / Service you want to audit. This is the revenue stream (from the order to the bill) you want to know how much are the risks of leakages. The application have also a table of products (see below)

Click on the “validation” button to enlighten the financial data. You get the following screen.



The financial data come from the Products Table but you can change it in this general menu. Thus you can test the model with different expected growth values, and you can fill the “known revenue leakages” zone if you have detected and evaluated such leaks in your processes. Then validate by clicking the right button “validation” to access the functionality of scoring and results. The menu looks like the following:

The next operation is to click on scoring button (if the scoring has not yet been done)



3.2. Scoring screen The scoring screen is the following:

Number of questions for the selected process

Process selection list

Question area

Notation scoring radio buttons

Navigation buttons

The Entity / Business line / product are recalled. The business process or IS has to be selected. Then the number of questions for this process is shown in the right window. The navigation in the questions list (first, next, previous, last) is made with buttons. Once the notation / score is recorded, the question presented is the next one. The scoring is done until the last question of the last process has been reached. If you go past the last question or behind the first one, you get the following control messages:

Once all the questions for all the processes are fully answered, you can go back to the general menu for getting the results.



3.3. Results menu You get the results by clicking on the Results button in the General Menu.

The table gives for each one of the 6 processes the value of the Process Control Ratio and the Process Controls Automation Ratio. This table shows where are the major risks. In this example, the most risked processes are the “Order and Delivery” process (66.67 % controlled) and the “After Sales Service” process (43.75% controlled). In more these 2 processes are automated only at 50%. Below is the measure of the automation of the Information System. In this example the ratio is 78.57%. The weight of each process is to compute an average. The right part of the screen recalls the different amounts and assumptions taken for the ongoing product and entity. By clicking on the graph button there is a graphic view of the processes ratios.



3.4. Tables Management menu This menu allows to enter the different parameters used by the application.

3.4.1. Entity / Organisation Table Click the first button to open the entity table management: You can change / add entities or organizations or offices of the company.

The key is automated. Just fill the “name-entity” field.



3.4.2. Business Line Table Click the second button to open the Business line table management: In the same way you have just to fill the blank field with new business lines. The key is automatic.

3.4.3. Product Table Click the third button to open the following screen:

You can handle each business line (buttons at the bottom) then change / add a product for the selected business line. Fill the name, turnover(n) and (n+1), the known leakages if so and the launching year of the product. An other way to fill these financial data is from the General Menu.



3.4.4. Processes and IS Table Click the fourth button to open the following table:

This table contains the 6 standard major processes involved in the selling of a product or service, plus the Information System supporting these processes. You can change the name if needed. The right field belongs to the weight given to each process. The values can be from 1 to 5. It depends of your knowingness of the situation in the company. The tests have been made with equal weights of 5.

3.4.5. Audit questions Table Click the fifth button to open the list of the auditing questions. The table looks like the following:




You first select the process at the bottom of the screen then the list of related questions appears in the central window. It’s possible to cancel, change or add new questions. Note that the “weight” column on the right is for weighting each question if you estimate it pertinent. The last column is to indicate by “1” if the question relates to the automation of the control. Example : for the question “Do the existing controls verify that all the new subscriptions are taken into account ?” if such a control is automated you fill “1” in the column, else you fill “0”. You can print and preview the global list of questions to keep a copy by clicking on the buttons “print all the questionnair” or “preview”.

3.4.6. Calculation rules Table The button “Calculatio rules table” opens the different parameters and assumptions taken for the entity / organisation. The table is linked to the Entity table. The actual values are default values usually observed in a big telco. These values have been tested and tuned on several real examples. You can eventually change it. The screen gives the different ratios for each entity of the Entity table (handled with the buttons at the bottom).




3.4.7. Percent of turnover taken as a basis of leakages due to the age of the product You can tune these percentages. The default values stem from real use cases. The screen is as follows:

4 Conclusion This system for evaluation of the risks of revenue losses is a model, not the truth. But it allows to the client or to the editor of RA solutions to make rapidly a diagnostic about the possible global potential leakages. The differentiation by process permits to target the area which need in first position controls and resources of management. With this present tool, the auditor can make a diagnostic in some days rather than 20 or more days. He just needs to get the good manager who can answer the questions.

Revenue Assurance scoring tool

Business

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