Going on a cost diet

A national interexchange carrier picks up $50 million in access charge savings over a period of six months. An emerging carrier shaves $17 million off its cost line and improves its local resale margin by 40%. A CLEC improves its EBITDA line by $300 million by adjusting its prices after finding that its resale product is priced 50% below the incumbent's.

In a tight economic climate in which revenue growth is shrinking, mature carriers are looking for ways to cut costs outside of the usual work force reductions and short-circuited business plans. Emerging carriers are being forced to manage their businesses for margin, making cost-containment efforts critical.

Carriers should be asking, “How can I improve my margins and generate EBITDA?” said Don Lynch, chairman and CEO of broad: margin, a consulting firm. Minimizing costs and maximizing revenue is a must if a company is to bolster its bottom line or get further funding, he said.

In telecom, operating costs can be substantial. About 50% of a carrier's revenue is paid to someone else, and that 50% needs to be managed closely or the carrier will “lose margin out the bottom end,” Lynch said. Most carriers pay out about 20% more than they need to — 10% as a result of a network that is not optimally configured and 10% from items such as billing errors, buying or using the wrong tariffs and other sloppy business practices — “nickels and dimes off the floor,” as Lynch calls them.

What are the most common areas prone to error? A CLEC may unknowingly buy circuits with retail or ISP tariffs instead of wholesale tariffs. A customer disconnects a service, and the carrier forgets to take down the underlying circuit. A carrier buys a network element or service from an incumbent carrier but does not bill through to the end customer. “Network guys worry about the ‘goes into’ but never worry about the ‘goes out of,’” Lynch said.

Hidden costs also can be found in the network cost structure for a particular metropolitan area, said Steve Louton, director of access planning and optimization for Broadwing.

For example, Broadwing reviews the number of circuits it buys in one cross-section of a city. If it finds it is buying eight or more DS-1s, it can switch to a DS-3 and save about 50%, Louton said. Similar savings can be had in the long-haul portions of the network and in metropolitan fiber rings.

On a switched access network, a carrier also can find savings in investigating whether it is cheaper to route calls through a tandem switch or whether the amount of traffic warrants a direct connection to an end office, Louton said.

Items to analyze include switched access tariffs, the number of end-office trunks that would be needed and the number of minutes going to a particular end office. “The rate difference has to be justified by volume,” Lynch said.

Broadwing also looks for more cost-effective ways to provision service. When Broadwing receives a service order, it looks at the vendors in its market and examines which can get to the customer location at the cheapest price. However, the carrier tries to achieve a balance between cost and time to market.

According to Louton, cost reduction has been a cross-functional initiative that has become ingrained in Broadwing's processes during the past two years.

One of the most important elements for Louton's department is to keep tabs on the network inventory and reconcile it with bills from vendors. When a bill arrives, a person ensures that the circuits on the bill coincide with what Broadwing has ordered and is using. Once the information is validated, the circuits are entered into a database. “That inventory of circuits becomes the basis for any [audit] that we do,” Louton said.

Periodically, a separate team audits every circuit in the database to uncover unused circuits or circuits that weren't ordered cost-effectively. In the second case, a circuit can be taken down and purchased more cheaply from a different vendor.

An accurate database of the circuit network, or inventory, is a resource that few carriers have, but it is the first step to network optimization, Lynch said.

“You can't expect to manage costs at a 30,000-foot level. You have to be willing to get dirt underneath your fingernails,” Lynch said.

It is also the underpinning to billing customers correctly and therefore maximizing revenue. “In a lot of [companies], a good, controlled network inventory does not exist,” Lynch said. Usually a carrier builds a network inventory on a spreadsheet first and later buys a network inventory system. The conversion usually fails miserably. “You wind up having a network inventory that's not worth squat,” Lynch said.

The impetus for a company-wide cost reduction or cost management plan can arise from a number of places — from the chief financial officer who sees a problem in the income statements to the operations manager responsible for running the physical network to the equity investors or board of directors seeking greater shareholder value. In general, it usually arises because of pressure on earnings or EBITDA, Lynch said. “A lot of times it comes from the CEO screaming bloody murder that his costs are too high,” he added.

But participation must come from all areas of the company. “In a lot of companies things are smoke-stacked — network engineers don't talk to cost people who don't talk to regulatory people,” Lynch said. If that is the case, the information flow needed for effective implementation won't exist, he said.

Slipping and sliding

The Nasdaq Telecommunications Index, a broad-based basket of 371 telecom-related securities, and the Telephony 25, our home-brewed indicator of sector stock performance, saw further declines last month. The T25 dove about 17%, and the Nasdaq index took a similar trajectory, falling about 16%. Three of the T25 stocks — Allied Riser Communications, Equinix, and Winstar Communications — hovered near the delisting zone, while big price percentage drops pelted Sycamore Networks (down about 50% since late February), Time Warner Telecom (43%), Nextel Communications and Level 3 (both off about 39%). Heading into April, shares in some services were showing signs of life, but analysts were still looking for market bottom.