Amid the bevy of exotic information technologies that companies hope to leverage — or at least understand — it’s easy to lose sight of a relatively low-tech piece of equipment: the telephone. Until, that is, the bill arrives.
Make that bills. Every month at Hewlett-Packard, for example, nearly 2,000 invoices from telecom carriers arrive, some of them hundreds of pages long, totaling an astounding $250 million a year. Down in Plano, Texas, it’s David Samuels’s job to sift through that monthly mountain of invoices to find billing errors. It isn’t hard to find them: overcharges or fees for lines HP had ordered disconnected, among other errors, are common. But with just two auditors on his staff, Samuels began to suspect that his spot checks were uncovering just a fraction of HP’s potential savings.
“We looked for the low-hanging fruit where we could get large savings quickly,” explains Samuels, whose title, voice network engineering manager, belies his financial responsibilities. But no matter how many “low-hanging” billing errors he and his staff uncovered, there always seemed to be more. “Everyone kept thinking that the low-hanging fruit would be gone, but every time we audited the bills, we found more,” he says. Samuels and his staff, along with some external auditors, were finding errors that saved HP about 1 percent to 2 percent of its annual telecom costs. But Samuels says his team was “fairly comfortable that 5 percent of the total bills were in error.”
So just over a year ago, Samuels began looking for an automated solution. After examining several software products, he chose the Communications Management Platform from Tangoe Inc., a New Haven-based software and consulting firm. The software examines all invoices, compares them against existing contracts and tariffs, and systematically identifies errors. It also inventories all of HP’s telecom assets — phones, lines, and wireless devices — and identifies usage patterns for internal cost allocation and assets that are being billed but are no longer in use.
Samuels licensed the software from Tangoe at a cost close to $2 million, a not-inconsiderable sum in these days of constrained budgets. But he says the telecom-expense management (TEM) software has returned that investment and then some. “We’ve already identified almost $3 million in savings in less than a year,” he says, adding that they are above and beyond what his normal auditing approach would have produced.
Those sorts of ROI success stories may propel the nascent TEM market, now estimated to be about a $500 million business in North America, to 50 percent compound annual growth through 2008, according to Dataquest. To date, it’s a very fragmented market: Gartner identifies at least 70 companies that offer software, outsourcing services, or some combination of both, although there are already signs that mergers will create fewer and bigger players. Driving the market is a simple but compelling financial argument: by supporting telecom cost management efforts with a centralized usage and invoice reconciliation information management solution, companies can save 26 percent on average, according to an Aberdeen Group study. Given that Aberdeen found that the average large company spends $118 million a year on telecommunications services (the average midmarket firm, $26 million), the savings potential of TEM software and services seems hard to ignore.
Huge Bills, in More Ways Than One
The problem for so many companies is invoice overload combined with a lack of any centralized management structure or sophisticated payment platform to accurately process as many as 15,000 bills each month, some of them as hefty as a Sunday newspaper.
“If you don’t have some sort of enterprise technology that systematically collects telecommunications usage and billing data in a standardized format, it is very hard to reconcile the invoices against the purchases on paper manually, due to the volume and complexity of the invoices,” says Aberdeen research director Christa Degnan. “This is compounded by the fact that telecom carriers’ billing systems are so poor that they frequently bill in error.” Aberdeen estimates that on average, 7 percent to 12 percent of charges on invoices are incorrect.
Gartner analyst Eric Goodness says that from what he’s observed, “12 percent to 20 percent of telecom charges are in error, and 85 percent of the errors are in the carrier’s favor.” The perceived risk of overpaying may drive more businesses toward TEM. To date the industry has been hamstrung by its own fragmentary structure and the relative inexperience and insubstantial size of most players. The industry has lacked the proverbial 800-pound gorilla, says Goodness. But the monkeys are beginning to muscle up.
Within the past year, two large TEM players have been formed through consolidation. One Equity Partners, the private-equity arm of Bank One (which recently merged with JPMorgan Chase), has cobbled together five companies to create Denver-based MSS Group. Like most TEM vendors, MSS is private and will reveal little about its financials. But CEO Sean Erickson says he expects MSS to achieve revenues “in excess of $50 million this year” and predicts quickening consolidation that will result in “two or three major competitors.”
The other large player is Control Point Solutions, formed last August through the merger of Broadmargin and Teldata Control. The combined firm has more than 400 employees and, according to CEO Greg Carr, should do $50 million to $60 million in revenue this year. Carr claims that more than 100 Fortune 500 companies already use some Control Point Solutions service. He draws an analogy between the nascent TEM space and the payroll-processing business, saying, “We are to our space what ADP was to payroll 40 years ago.” Approaching $8 billion in revenue, ADP would make a more-than-adequate lodestar for almost any company.
Competitors might challenge Carr’s claim, but there’s little doubt that the emergence of larger players offering full outsourced solutions has begun to attract growing interest from large enterprise customers. Rick Valencia, CEO of ProfitLine, a TEM outsourcer based in San Diego, reports a boom in interest among potential customers, with requests for proposals in a recent 100-day period exceeding those issued in all of last year.
Before issuing that RFP, however, a company needs to understand its options. The many vendors in the TEM arena offer a range of products and services, from pure-play software companies (some that sell software outright; others that host it for you) to consultancies to outsourced services that can be either narrow or broad. Some specialize in wireless expenses; others address almost any form of network communication.
While MSS, Control Point Solutions, and ProfitLine all offer full-service outsourcing, software is the essential foundation of TEM services. At the very least, such software builds a database of vendor contracts and a customer’s telecom assets (phones, lines, circuits, and so on), receives all invoices from carriers, and examines those invoices for errors and to see if they are consistent with the vendor’s contracts.
Historically, the TEM industry has its roots in auditing, according to Alan Gold, senior vice president at Avotus, a Mississauga, Ontario-based TEM-software vendor. By embedding that auditing capability in software and augmenting it with additional functionality, an industry was born. “Automation is critical,” says Gold. “You must look at an entire network and how it’s tied together.”
Since the purchase of and payment for telecom services are usually decentralized across countless divisions and geographies, a prime focus of TEM software is the consolidation of all invoice receipt and bill payment. Such was the motivation of George Cinquegrana, vice president and chief information officer at United Rentals, a $3 billion renter of heavy equipment that recently licensed Avotus software. Until recently, United Rentals got telecom bills at 70 locations. Now all the bills go to its headquarters.
Along with the push it gives to centralized invoice management, TEM software consolidates all the information on carrier tariffs and contracts into a single database. This is no small task, explains Tangoe CEO Al Subbloie: “There are more than 2,000 rate categories in a standard contract with a major carrier. What we’ve done is made a science of systematizing the capture, categorization, and ongoing management of complex carrier contracted rate structures.”
Having consolidated all that information, TEM software can identify bills that do not conform to contract terms and even recommend different combinations of contracts that will save money. In addition to pinpointing bills that do not conform to contracts, such software can identify a surprisingly common phenomenon — billing for lines and phones that aren’t even in use.
Avotus’s Gold describes another type of phantom billing that TEM software can spot. Often times when an employee leaves a company, his cell phone expenses not only continue but increase. The reason? The departed employee left the building but kept the phone and isn’t shy about using it. TEM software can give customers visibility into those overly mobile assets and alert them to improper usage patterns.
CFOs might be particularly interested in another benefit Avotus offers: the ability to break out detailed data on use of telecom services within individual business units. United Rentals is using its Avotus software to track costs back to individual divisions, allowing it to allocate costs more efficiently. And Valencia says the software can get as granular as a CFO wants: “We can go down to the line level. Every line on every invoice can be charged to a particular department.”
Software vs. Outsourcing
For all its virtues, the software-only approach to TEM provides just a partial fix. That’s the argument made by companies that offer full outsourced solutions. Don Lynch, chairman of Control Point Solutions, says, “People can push invoices around, but in terms of managing cost, you need to have some industry expertise — domain knowledge. And that’s what you don’t get if you buy software.” A former finance executive at MCI, Lynch emphasizes the importance of having consultants who can analyze all the software-generated data and then apply their industry expertise to renegotiate existing contracts and find the optimal mix of new contracts and vendors for a particular enterprise.
“There’s no magic bullet with software,” claims MSS’s Erickson, who says that it was the recognition of the limitations of a technology-only solution that led the company to acquire Telwares, whose prime expertise lies in negotiating contracts with carriers. Once a company centralizes invoice receipt and payment, takes inventory of its telecom assets, and begins the process of evaluating carrier compliance with contracts and tariffs, Erickson says, the focus should turn to negotiating new contracts in order to lock in future savings.
Companies such as MBG Inc. offer TEM in a managed-services model in which they handle the data feeds from telecom carriers, but their clients have the option of managing the software themselves or having the provider do it. Despite the flexibility of that model, some analysts believe the market will eventually split between licensed software and fully outsourced services. Expect vendors to adjust as the market matures.
Pete Wilson, founder and CEO of Telwares, says that two important negotiable features in new contracts are annual price reviews (even three-year contracts offer wiggle room at the one- and two-year marks, thanks to declining costs and fierce competition) and protective escape clauses based on “degradation of services” or the discontinuation of specific carrier offerings.
One customer who found value in Telwares’s services is Bob Zumwalt, director of technology at Norcross, Georgia-based Rock-Tenn Co., a manufacturer of packaging products, merchandising displays, and recycled paperboard. Rock-Tenn, says Zumwalt, has an annual telecom budget of roughly $3.5 million, and engaged Telwares because its telecom contracts for long-distance, data, and wireless services were all expiring at the same time. “We didn’t feel comfortable that we had the expertise necessary to get maximum results from the RFP process and contract negotiations,” he explains.
To prepare for effective negotiations, Rock-Tenn validated its inventory of telecom assets and services broken down by individual locations. As a result, says Zumwalt, the company could approach carriers with a clear message: “This is what we have. This is where we’re starting.” He adds, “The purpose was to provide the carriers with a specific package of services for which they could bid.”
With Telwares’s help, Rock-Tenn then announced to carriers that its business was up for bids and organized “bidders’ conferences” in which Telwares met with 10 carriers interested in Rock-Tenn’s long-distance and wireline business, along with another 7 interested in its wireless contract. After the company presented carrier hopefuls with RFPs, they submitted bids. Rock-Tenn chose MCI for long-distance and data, saving 40 percent to 50 percent over its old contract with AT&T, says Zumwalt. For wireless, Rock-Tenn stayed with AT&T Wireless, but lowered its spend by “30 to 40 percent.”
The process resulted in not only better contractual terms but also other benefits. Rock-Tenn was able to negotiate a national flat rate for local access on its wide-area network. Previously, the firm was charged widely varying local access rates depending on the geography (and local service provider) each time it hooked a local site to its WAN. The flat rate lowered overall access charges and provided simplification, says Zumwalt. Another concession won on the new contracts: penalties for failure to deliver new services in a timely manner. Rock-Tenn had often experienced delays in getting new services up and running. The new contracts require carriers to meet specific deadlines or pay financial penalties.
If TEM vendors can produce the sorts of savings some customers report, they may eventually attract competition from the Goliaths of IT outsourcing. Analysts expect such major outsourcers as IBM, EDS, and CSC to become more active in the market, perhaps through acquisition. For its part, HP was so pleased with the Tangoe software that it has taken out a separate license that will enable it to offer TEM services to its own customers. Who would have guessed that, amid all the hoopla about camera phones and ring tones, that the next big thing in telecom would be how to pay for it?
Norm Alster has worked for Forbes and BusinessWeek and is a contributor to The New York Times.
Businesses that want to implement technology to support telecom-expense management have generally had three options: license software and run it themselves, subscribe to externally hosted software, or sign on for some level of business-process outsourcing that can encompass everything from software to a range of consulting services.
But as TEM companies grow, the distinctions among these options have begun to blur. Some software vendors, for example, are beefing up to provide full outsourced solutions. Tangoe Inc., whose software licenses typically run from $150,000 to $500,000 (depending on the customer’s telecom budget), hopes to eventually derive substantial revenue from outsourcing. Acquisitions and strategic partnerships are certain to increase, and companies that make other forms of expense-management software may see telecom as a logical extension of what they offer.
Meanwhile, companies that offer outsourcing services will, to varying degrees, sell their software either as a product in its own right or in a managed (that is, hosted) model, although Gartner predicts that such an approach, currently the most popular, will decline in favor of a software-only or an outsourced approach (see chart).
Many TEM service contracts are priced as a percentage of a customer’s telecom spending — running anywhere from just over 1 percent to 2.5 percent. But some contracts are based on the savings a customer realizes. Pricing strategies seem to be in flux. MSS Group, for example, currently prices the majority of its services as a percent of telecom spend, but over time may move to a model that reflects customer savings or return on investment, according to CEO Sean Erickson.
Don’t be surprised, therefore, if the dozens of relatively small firms in this space each seem to be offering something slightly different. The right choice may come down to a client company’s telecom and IT infrastructure (can it run TEM software effectively?) and the complexity and scope of its telecom spending. —N.A.