A Better Way to Report on Communications Cost Management

Typical though it may be and grounded in past practice when telephone service was only available from one source like water and power, just paying the telephone bill is far from adequate for effective communications cost management, now and in the future. However, it’s a good start and it’s not difficult to make incremental improvements over a reasonable time. At a high level, here’s what’s needed:

• Telephone expense needs to be accounted for in more detailed ways by purchasing and paying for all items of goods and services followed by coding and entry into the accounting system to drive expense reporting categories built around voice, data, paging, Internet access and function specific circuits, equipment, facilities and services such as two-way radio, paging, wireless network access, satellite transponders, and other items that find their way in haphazard fashion into the telephone expense subaccount. Once the basic capability to code, classify, and record the expenses in individual accounts, it’s highly likely the reporting side of the system will report in more detail.
• A second, or similar, version of the same form showing total telephone services expense, by department and location. This can provide the communications manager and corporate executives with a clear picture of the level of spending for each category of services across the organization’s sphere of operations.
• Addition of an asset category or list of all items of equipment driving depreciation accounts included in the expense summaries, by department or cost center, by location. This information should be equally available and apparent to anyone charged with budgeting, planning, and managing communications cost. Managing the cost of communications is not just paying the telephone bill anymore. It requires capital expenditure, and typically involves consultants and contractors. Moreover, there are strategic implications where call centers and Internet websites sell directly, or support customers.
• Separate administrative equipment and application specific or functional equipment. For example, if a real communications cost management department exists, its administrative equipment and software assets should be budgeted and reported separately from common communications equipment such as voice switches, routers, data switches, network interface devices, local area network (LAN) equipment, etc. This extends to news and other program centric production operations and facilities where communications circuits, equipment, facilities, and services are used to transport content.
• Depreciation expense should be derived from the asset category and given the same classification as basic communications expenses, broken out by voice, data, Internet access, and functional subcategories.
• Break out of maintenance contracts for software and hardware.

Before launching off into the budgeting and planning waters, let’s step back and make a point or two about what has been described and restate the importance of recording communications expenses and assets with sufficient clarity, and detail so they are clear and presentable to the executive bearing responsibility for making sure the organizations money is spent wisely and recorded properly.

Many organizations spend significantly more money than they should for communications equipment and services. Potential savings can range into the tens of millions of dollars or the order of 10% of earnings for the average Fortune 500 company each year. Most executives don’t like to hear this; they want to believe they have the best accounting and purchasing available. Others rely on outsourcing solutions or consultants working for contingency fees. Regardless of approach and level of success achieved, it is prudent to examine and review the organizations communications cost management process and practices. Properly conducted, it will ensure accurate, valid, proper accounting for and expenditure of the organization’s money.

Ideally, there are two versions of the departmental expenses summary. One is reality-based—accounting history—and the other is forward-looking—the approved budget. The rest of this chapter is devoted to describing each and how to build and use both of them to manage communications cost and effectiveness. First we will describe and define the ideal reports, then go into how to use them to get through the budgeting and planning process every organization goes through on an annual basis.

SEVEN STEPS TO PRACTICAL COMMUNICATIONS COST MANAGEMENT

• Invoice validation against standard cost
• Day-to-day order administration—moves, adds, and changes
• Initiating and managing capital projects
• Analysis of spending and resource utilization
• Monthly, quarterly, and annual reporting
• Development of annual budget and business plan
• Development and ownership of technology plan and long-range strategic plan

Invoice Validation Against Standard Cost

The first step in good CCM is validation and verification of all invoices. This requires an accurate, stable cost reference database. This must be established through a process commonly referred to as an audit. Notice that these two steps are independent, yet closely intertwined, and require interaction between accounting, communications technical, procurement, and vendors.

In addition to charges for the service, there are a myriad of service fees, taxes, and other charges imposed on the service by federal, state, and local municipal governments. Further complicating the matter is the fact that contractual agreements covering telephone service are a mix of private one-time agreements, multi-year service contracts, and public tariffs on file with the FCC and state PUCs. Presenting a bill that will be paid on presentation is a balancing act between providing enough information to justify the total amount due and simplifying or summarizing the details so the information will fit onto a reasonable amount of paper or in a reasonable size file, and not seem overly complex.

Telephone service invoices, especially for long distance service, are complex, lengthy, and involve very complex rating, pricing, and tax and other assessments such as access charges and universal service charges. Manual verification of the amounts on the typical number of invoices, and the level of detail is next to impossible. It would be easy to just blame the telephone company for the situation, but that wouldn’t be quite accurate because they are required to collect and remit taxes and assessments levied by federal, state, and municipal governments. The telephone company designs and builds billing systems to generate these complex and massive invoices. Given all the complexity, and the fact that the systems evolved over time, mistakes are highly probable, especially with respect to taxes imposed by so many jurisdictions. Successfully coping with this situation is potentially lucrative in terms of credits and reduction of future charges. The most effective way is to fight fire with fire in the sense that it requires well-written application software, significant computing power, accurate rating tables, and constant maintenance of records.

Day-to-Day Order Administration—Moves, Adds, and Changes

Day-to-day moves, adds, and changes may appear simple, but that doesn’t mean it is. Across the spectrum, it is in reality like leading an orchestra because it can vary from installing a new telephone for a new employee or contractor to moving entire work groups over a weekend, while at the same time managing multiple contractors in one or more capital construction projects. If the work is not planned and coordinated properly, telephones, LANs, and the entire network service capability can seriously impair business operations. One of the keys to saving money and making sure the invoices are validated and paid promptly is solid technical work planning, using standard processes and dependable sources of supply. The level of effort and resources required to support this step is also dependent upon how many service locations are included, organizational or business growth rate, and the amount of time allowed to properly plan the work.

Initiating and Managing Capital Projects

If communications facilities and services can be considered the lifeblood of a business, project implementation has to be the heart and soul of organizational growth. Establishing an operation in a new location after renovation or during new construction starts before the first wall is knocked down or shovel full of dirt is dug. Making sure the wire is in the wall, ceiling, or underground at the right time can cost or save thousands of dollars, and delay the overall project. Making sure the right thing is in the right place at the right time requires good relationships with dependable suppliers, standardized requests for proposals (RFPs), timely evaluation, and due diligence followed by supervision and acceptance of timely deliverables.

Analysis of Spending and Resource Utilization

Knowing where you stand with all facilities and resources in a so-called fast-paced environment requires stopping to analyze where the business is at on a periodic basis. Good management of financial resources requires good budgeting in the first place, but good budgeting doesn’t lead to good performance without constant attention and awareness of needs against available resources, spare capacity, and what’s in the pipeline for both.

Supplier Evaluation and Selection

Serving a customer is about the only thing more valuable than having strong working relationships with a range of competent, dependable suppliers. Achieving the lowest possible cost is best served with competition. Open, fair, and honest competition happens when suppliers are engaged in a balance between informal give- and-take as well as formal RFPs and organized presentations and proposal responses. Suppliers are where the new technology comes from. Understanding their value chain, timing, and content can provide marketplace intelligence that money can’t buy.

Development of Annual Budget and Business Plan

No single department should undertake to strike an annual budget and develop next year’s business plan without consideration of current and possible communications products, services, and emerging technology. Communications technical and accounting professionals can provide invaluable insight and knowledge that will allow the line manager and the entire management chain to understand their competitive position and make rational, informed decisions about changing or not changing the way they do business.

In addition, the CCM function should draw up an annual communications plan that covers the organizations initiatives and plans to communicate internally and externally, and show how it will leverage expense and capital across all the functions of the business—sales, marketing, engineering, IT, as well as public and media interests.

Development and Ownership of Technology Plan and Long-Range Strategic Plan

 For now, just realize that the forces acting on your organization include competition, regulation, and technology. Establishing a credible long-term strategic plan requires a sound knowledge of emerging standards and technology. Technology is at the root of the continuing change and generally drives regulatory and business change, especially changes brought on by competition.

A well thought-out technology plan should be developed in between annual business plans and bridge the current business operations cycle by 6 months. For example, if your organization begins its annual business planning cycle in mid-year and obtains management approval in the last month of its fiscal year, then ideal completion of the technology plan should be coincident with the start of the annual business plan. Bridging technology and real-world business planning and execution is key to long-term survival.

CONTINUING THROUGH TO OVERALL COMMUNICATIONS COST MANAGEMENT

Machine-based invoice validation is a required first step in successful, long-term continuing cost management. Don’t forget the first objective is to reduce expenses and at the same time build a system to maintain good expense control. Overall, the work involves good accounting practices to analyze, classify, and quantify direct and indirect expense and capital investment in areas such as each of the following:

• Cable TV service
• Cable modem service (Internet access)
• Cellular telephone service
• Conferencing services
• Content distribution and delivery
• Fax machines
• Hosting facility use
• Internet access facilities
• Pagers
• Private line data services
• Telephone service
• Website developers

Although it’s tempting to make judgments about the value of each while making and completing a list, resist this inclination in favor of focusing on defining the details of how many, how much, how used, and by whom on the first pass. Try to make the list as complete and definitive as possible in terms of equipment, stand-alone application software, facilities, and services. Another important point is to capture the function or functions of each, and do your best to map that function to a business process because sooner or later it will be time to evaluate its impact on the business compared to other expenses or investments.

Get answers to the following questions:

• How are communications circuits, equipment, facilities, and services being used?
• What are the components of each circuit, piece of equipment, facility, or service?
• What are the units of usage and attendant cost?
• What is the volume and total cost of use/ownership?
• Is the cost fixed or variable, and if it’s variable what is/are the variable parameters?

Once the answers are placed into a spreadsheet and understood, consider them in light of other questions such as:

• What business are we in, or what’s the mission of our enterprise?
• What is each department’s role in that mission?
• What is the responsibility of each head on the payroll?
• How does their use, or lack thereof, impact communications cost?
• How can current communications unit cost be reduced?
• How will any considered change impact the ability to deal with suppliers and customers?
• What are the potential risks and rewards from any proposed change?

Satisfactorily addressing the above landscape puts you in a position to consider and undertake several next steps. These include:

• Validate monthly billing (i.e., make sure specific items of equipment, facilities, and services being billed match what is actually in use or in accordance with an appropriate service agreement, contract, order, tariff filing, or whatever caused the billing).
• Make a list of all circuits and facilities terminated in the telephone room. This is a room in each building where telephone company wiring enters the building from the outside. Sometimes there is more than one such room in a single building. More often, one room in a single building serves multiple nearby buildings on the same or directly related owner’s property. Prepare the list so it shows unused capacity. For example, in the case of copper cable, the telephone company typically installs what it calls an entrance facility, which is a terminal block on the wall with every single pair of wires in the cable connected to the terminal block. The other end of the cable is terminated on a block in a cabinet, or spliced into a larger cable connecting it to the nearest wire center or controlled environmental vault. In the case of fiber entrance facilities, there will be light wave terminal equipment mounted in a rack or on a wall. This equipment can be used to provision T1, DS3, OC3, or OC12 transmission capacity. Record circuit identification details and get an explanation of the amount of capacity in use and available for future use.
• Compare the circuit list with the items being billed. Many times service is disconnected, but the billing continues. If circuits, facilities, or service is being billed but not delivered (i.e., billing for a fax line, but the line is physically disconnected), you are due a refund. Getting the refund can be challenge without a disconnect order. It is not unusual to find billing errors. Be cautious about use of the term disconnected. A telephone line, which may serve or have served a fax machine, may not be disconnected from the service provider’s perspective. However, it is an entirely different matter for billing for the line to appear on the bill, and the line not available for use because service was interrupted or discontinued at some point in the past. If a valid disconnect order exists and service was not discontinued, the refund is due.
• Recognize and understand the importance, relationship to, and difference between unit cost and departmental and enterprise wide expense. How expenses are classified and tracked by a department and then rolled up into the overall picture is important because it’s easy to lose sight of duplication and individual item unit cost. For example, it is a common practice to include volume discount from basic pricing in contracts for most all equipment, facilities, and services in use. Don’t be surprised if this escapes the attention of the person who writes each service order change or the person who pays the bill each month.

INITIATING COMMUNICATIONS COST MANAGEMENT

Communications cost management (CCM) should be initiated or approved by a senior executive or officer equivalent responsible for ensuring organizational expenditures and accounting are in compliance with accounting and financial rules applicable to the organization. This individual should request or be provided with a briefing on known and suspected level of expenditures directly attributable to telephone service (i.e., data communications, website development, deployment, web publishing, content distribution, delivery, e-commerce, two-way radio, satellite, cable television, and any other service that could be deemed to be or directly support the organization’s internal and outside communications).

Communications Cost Management Executive Briefing Content Preparation

An executive briefing should be prepared for by researching basic facts and parameters of the organization’s communications cost accounting and operating practices. The following list of high level actions, analysis, and summary outlines what and how to prepare and present the information:

• Gather all known contracts and billing agreements for voice, data, video, and Internet equipment, facilities, and services. If there are bills being paid according to tariffs on file with the FCC or PUC, obtain a copy of all the tariffs referenced in each billing. If it’s convenient and easy to get, include postage meter usage and overnight shipping, especially departments whose work output is not something physical other than paper documents. Every paper document is a candidate for electronic transmission at a fraction of the cost. And don’t forget that compact discs and other magnetic or optical media contain files that go quicker through the network at a similar fraction of the cost of paper.
  
  
• Gather up at least 3, preferably 6 months worth of paid bills. Each bill should show circuit identification or other deliverable being billed. If the individual items on the invoices are not clear, get an explanation of the item, function, or purpose from the service provider. This should be a written service description that provides greater detail than what is included on the invoice. Usually the invoice references some kind of service description. If the unit price of the deliverable is not included on the invoice or in the service description, request this information from the service provider specific to each invoice.
  
  
• Make a list of all billed deliverables paid for and include department, location, and name of the employee using the item. If it is a common item, such as a data line, list all the computer applications using the facility. Accounting might be able to provide a file or printout with this level of detail.
  
  
• Find out how the organization acquires or otherwise commits to pay for communications services. The two best places to start are purchasing and accounts payable. Is there a central source for coordinating and consolidating service ordering and terminations? Does each department just order a telephone line or other service or facility when they need it and then pay the bill when it comes in?
  
  
• Make a list of all equipment owned or leased and include year acquired, current book value, or unpaid lease obligation, monthly depreciation or lease payment, monthly maintenance cost, and planned replacement date if any. Some or all of this information may be available from accounting asset records or inventory files.
  
  
• Summarize all known vendors by service, equipment, and estimated annual unit and dollar volume.
  
  
• If cost management is an internal function, summarize headcount, professional specialty, and job responsibility of each individual directly attributable to CCM.
  
  
• If a significant level of expenditure is attributable to outsourced or vendor-provided CCM exists, summarize the specific vendors, term of contract, monthly or annual cost, list of work activities and deliverables, and names of key individual contributors responsible for the deliverable, their professional specialty and job title, pay grade, and responsibilities.

The briefing should provide a complete picture of how much money is at stake, what it’s being spent for, and the value of the assets attributable to communications functions by department and organizational function. For example, if a set of server hardware and software exists that is used by a single department in engineering, marketing, sales or other area, make sure that department and the function for which it is used is very succinct and clear.

In addition to being clear and succinct about the cost and use of communications assets and expenditures, it is critical that the process and practices being followed be equally clear. This knowledge and information can be used to rationalize next steps and characterize current status. The outcome should be a realistic assessment of the process and practices with respect to compliance with applicable accounting and reporting rules under which the organization operates. Recognition of potential savings is important because real money is at stake. If changes need to be made in operating practices or procedures to improve the competitive or strategic position of the organization, this is the time to get that on the table for consideration as well.

Next Steps

By the time the work in the executive briefing is completed, it is highly likely that additional steps will have been taken, but not included in the briefing. What needs to be done is to take the high level work items, and expand the details of each to gain deeper insight and understanding of how much money is at stake, potential savings, improvement in service levels, better use of human resources and assets, and the limits of flexibility as represented by spare or unused capacity for growth.

Once you have an overall picture of how much money is at stake, and what it’s being spent for, you can consider and decide the level and timing of effort appropriate for further work because you are now ready to take constructive, proactive ownership and management of communications cost in the enterprise you’re part of. Here’s a high-level list of topics and an explanation of what needs to be done, how to go about it, and a view of value or impact on the organization’s ability to accomplish its mission.