SHAREHOLDERS ARE DEMANDING that after years of unprecedented expansion telecom deliver the profits promised in their business plans. This demand comes at a time when customers are cutting back on their spending. In this environment, carriers are exploring all methods to reduce costs and focus scarce resources on growing revenue.
A new breed of centralized telecom exchange offers an alternative. Such an exchange uses business approaches, processes and systems modeled on those used in the financial markets and have the ability to replace the current cost-laden wholesale billing process and prevent disputes that add cost to an industry experiencing unprecedented margin pressure.
Accelerated Cash Flow. In today’s capital-constrained telecom industry, cash flow and cash control are critical. Call termination costs represent 80 percent to 85 percent of wholesale telecom business costs. Collecting accounts receivable promptly means the difference between profitability and bankruptcy. Trading on an exchange enables carriers to improve cash flow as all bills are processed through the exchange and all payments to or from the exchange are netted, reducing the amount of cash transacted.
The exchange is not a carrier; its core service involves making accurate payments to sellers on time, every time. Moreover, exchanges make these payments as frequently as every 15 days, compared to the industry average of 74 days. These accelerated payments eliminate the economic risk of a working capital crunch caused by the misalignment of payables and receivables.
Credit Risk Management. Exchanges recruit strong financial partners to manage and underwrite credit risk. This is crucial in today’s turbulent industry that has witnessed high profile bankruptcies impacting other carriers with a domino effect. The Credit Risk Management table details some examples of the enormous amounts of money that have been lost recently under the existing system.
A best-in-class exchange uses a process that combines receivables insurance with cash collateral to secure exposure resulting from the net of a member’s buy and sell positions. Credit monitoring systems warn and disable a member’s ability to buy as it approaches and then reaches its preset exposure threshold. Exchanges have insulated many carriers selling to these companies against such losses.
Dispute Prevention. Three main factors lead to billing disputes: rates, destination definitions and call duration measurement.
Rate Discrepancies. Since 1996, the growth in international carriers from 396 to more than 2,800 has been accompanied by an increase in new services, calling rates and the opportunity for expensive mistakes. Monitoring frequent rate adjustments due to shifts in competitive market pricing adds an enormous and costly burden on in-house billing departments. It is common for a Tier 1 carrier to receive and issue as many as 10,000 rate changes a week.
In contrast, an exchange automatically captures changing rates as the members themselves enter their buy and sell orders. Calls cannot be passed without referencing the correct rate and incorporating it into the call detail record (CDR). Buyers cannot be charged a higher rate or sellers be paid less, because all transactions are governed by data held in a neutral central repository.
Destination Discrepancies. Beyond offering nationwide rates to various destinations, international carriers compete by offering competitively priced termination to various detailed destinations. The proliferation of hard-to-track codes associated with destinations and expensive mobile and other premium services, are adding onto the complexity and discrepancy of assigning codes to destinations. An exchange can eliminate these issues by defining lists of all included codes for each destination, and by alerting members when there are code changes.
Call Duration Discrepancies. Carriers often disagree on the duration of calls. Buyers and sellers record differing call lengths, triggering lengthy CDR reconciliation processes. A neutral exchange, on the other hand, resolves this problem before it starts by switching the traffic without incentive to alter the length of the calls. Its impartial call timing records eliminate disagreements.
Frees and Focuses Resources. One way carriers can exploit the above mentioned benefits is to shift their low-volume, high-burden off-net traffic on to an exchange, eliminating 80 percent of their wholesale billing requirements and associated costs. Carriers not only unload the billing to the exchange, but also the crucial collections and credit-risk management functions. As a result, wholesale billing costs are removed from a company’s general and administrative (G&A) expense and key staff are freed to focus on their core responsibilities.
David Sumka is vice president of Business Systems for Arbinet-thexchange, a telecommunications industry veteran with more than 15 years experience trading minutes and managing billing operations in large companies such as AT&T Corp. and MCI and smaller telecom startups.