In a previous article, I discussed the issue of revenue assurance and our involvement in the assurance of sales channels. As we considered in that article, it was clear that even though sales channels might be considered off the beaten path for the typical revenue assurance team, more and more telcos are realizing that:

a)     Breakdowns in sales channels can have an enormous negative effect on revenues.

b)    Revenue assurance teams are exceptionally good at addressing those risks.

As we said in that article, the decision to include Sales Channels within the charter of a revenue assurance group is not a spurious one, but when it is made, it is critical the revenue assurance team be prepared to do a good job.

The Role of Sales Commissions in Revenue Recognition

A naïve observer might propose that sales commissions and the payment of sales reps and channels for their activities are far removed from what we know as revenue assurance. Indeed, in the classical sense, the payment of commissions is simply a “cost of doing business” with no direct correlation with the delivery of the service.

That may have been true in the “old days”, but in today’s tight margin, highly competitive environment, sales commissions and channel incentives have become a major component in the overall strategy of how telecoms are run. If paying a channel an additional 5% for their efforts will yield an additional 30% in sales it makes good sense to do it. Unfortunately, as seductive as that simplistic logic is, it does not take into account the many perversions of logic that can creep into the organization.

As organizations get more creative in their compensations schemes, and as sales channels learn how to best “manipulate” the system, major revenue leakages can be generated. For example: assume we decide to offer a program that allows for sales channels to be paid $10 for every new sim card they sell. The marketing people do some quick math and say that since an average customer generates $100 (at $.10 per minute) in a year, then paying $10 bonus will be a good business activity. (We simply lower our margin by 10%).

• 1 customer = 1,000 minutes in a year. At $0.10 per minute that should result in a revenue of $100

• I give a commission of $10 for the sale.

• I now get 1,000 minutes in a year, but receive only $90 – meaning that I have reduced my revenue by $0.01 per minute.

Revenue went down a bit, but it is still good business and not a revenue assurance issue. What happens when I make this deal, but the customers that are attracted do not generate 1000 minutes? What happens when I offer this deal and the sales reps bring in customers who end up using only 100 minutes? (How can this happen? Easily–customers churn all the time based on aggressive sales promotions). I now have a customer who generates 100 minutes of traffic – which brings $10 of revenue. But, I paid the sales rep $10 for the commission. So now, is there even any revenue? No.

And taken to the extreme, you have cases where sales reps learn how to “fake” the activations to get the commissions resulting in a negative margin. In other words, you lose money on every sale. In this situation, the solution is a correction. Change the policy so that reps are not paid for the sale of a Sim, but for actual minutes delivered and paid for. While perhaps a bit extreme, our example demonstrates the problem a revenue assurance manager must face when asked to assure the sales commission area.

There are actually two things that revenue assurance needs to be concerned about:

1. The commission programs themselves.
2. The commission program accounting and crediting procedures.

Commission Program Assurance

Accounting for and assuring the composition of commission programs fits squarely under the domain of Marketing and Margin Assurance. (Readers are referred to the GRAPA standards, body of knowledge and certification training modules for details about these domains.) The foundational groundwork in the performance of market and margin assurance is for the revenue assurance professional to perform a complete “risk assessment” of every single program based upon the 6 major risk dimensions. These include:

• Subsidy Risk
• Network Risk
• Market Risk
• Sales Risk
• Billing and Assurance Risk
• Partner Risks

Once each of these risks is considered, a Revenue Model for the marketing initiative is prepared. This Revenue Model explains each of the assumptions that make up the marketing proposal, requires the marketer to provide forecasts along each of these dimensions, and defines the “controls” that need to be in place so the marketing manager can be warned when their forecasted levels are not being met.

It is the development of these models, and the initiation of these controls that define the revenue assurance professional’s job. Tracking the programs and responding to errors is the job of the marketing manager responsible for the program.

So how does this relate to Sales Commissions?

Simply stated, one of the principle “sales risks” to be considered is, “What happens if the sales that occur do not meet the conditions specified by the model”. In other words, if my marketing plan expects that each sale is going to be worth $100 in revenue, and that is how I justify the commission, then I need to be sure that I create some controls that make sure that this assumption ($100 in revenue) is the result.

The definition of the control involves:

a)      Measuring and tracking to make sure the assumption is actually happening.

b)      The definition of an alarm and thresholds that will notify the program manager when the assumptions have gone seriously wrong (when the failure of the assumption threatens the revenue in a significant way).

c)      Defining “remedies” and “adjustments” to be made when an alarm is triggered.

Sales Commission Plan Assurance: Summary

The first sub-domain under Sales and Commission Assurance is the Assurance of the Plan itself.
The purpose of the assurance activity is to provide management with clear information about:

1. The risk to revenue that the commission plan represents.
2. The establishment of objective measures that track the assumptions.
3. The creation of alarms and triggers to make everyone is aware when revenues are seriously jeopardized.

Commission Accounting Assurance

The other major area of assurance for commissions is concerned with the accuracy of the commission (and sales tracking) and the accounting process itself. The best sales and commission program will be worthless if it does not accurately track the sales and services delivered, and provide for the accurate and timely assignment of compensation.

While the vast majority of issues concerning Sales and Commission accounting are a straightforward accounting function, revenue assurance will become involved when management has decided to use the sales and accounting system as the method for managing the sales and commission tracking controls. If sales and commissions accounting is not going to house and manage revenue assurance market and margin controls and alarms, then there is no reason for revenue assurance to be involved.

If, however, this system is going to be the way management automates these controls, then revenue assurance participation becomes critical. The ability of the sales and commission system or process to track the items and variables defined in the commission plan (the things being tracked in the forecast, triggers and alarms) is clearly going to define how well the revenue assurance controls will work in this environment. It will therefore, be up to the revenue assurance professional to get involved to the point where he is sure that they are in place.

Providing this assurance will be completely dependent on how the overall market/margin assurance process is managed. What the revenue assurance professional will need to do is:

1. Assure that those things identified within the Sales Risk component of the marketing model are being accurately fed into the commission/compensation system.
2. Assure that the method of computation for the compensation defined in the model is the method being utilized within the compensation / commission system.

If the revenue assurance practitioner has done these things, they will have met their responsibilities.

Summary:

Sales commissions are becoming a critical ingredient in the diverse “innovative new marketing schemes” being created by marketers and product developers. Assuring that these “crazy schemes” are viable, that they contribute positively to revenues, and that they are being accurately executed can make the difference between success and failure, profit and loss and negative vs. positive revenue margins.

As the industry increasingly puts its faith in these innovative strategic approaches, the ability of the revenue assurance team to get involved, and apply a strenuous revenue focus on these programs will be key.

That’s about enough for this installment, so until next time; this is Rob Mattison saying take it easy and…. Be SAFE.

One of the most exciting and challenging things about the revenue assurance world as we evolve as professionals, is how the scope of our responsibilities continues to expand. Few revenue assurance professionals do not understand the process of tracking and assuring the integrity of a CDR. But many of us are finding that following CDRs is a small part of the job.

Case in point is assuring sales channels. Not long ago people would tell you revenue assurance had no business poking around in the sales channel area. Indeed, Sales Managers did not want anyone else looking “under the covers” of their operations, and for many organizations accounting and internal audit was assumed to be “in control” of those areas.

Unfortunately, what happened to a lot of telcos was…well, what always happens. New sales channels sprang up overnight. Instead of managing one internal sales force, the telco now must manage dozens of teams along with partners, brokers, agents, pseudo-employees and mega channel partnerships. Creative, cost effective and incredibly complicated sales tracking and compensation plans were suddenly created.

In the wake of all of this change came leakage and fraud. In no time, telcos inadvertently invented dozens of ways to lose revenue, use sales tracking to give false information, give sales credit where it wasn’t earned and most critically, to fail to accurately and honestly report revenues.

When this happened, it wasn’t long before the CFOs came to realize the skills and capabilities of the revenue assurance team were the best available to address these issues. And so the “morphing” of the definition of revenue assurance began.

Early RA Efforts in Sales Channel Assurance

The first documented cases of allocating the responsibility for “leakage” in sales channels can be found in the South East Asian carriers. In these markets, the rapid expansion of the role of sales channels to fuel prepaid became the impetus for change. Over the past decade, the trend has grown to where the majority of telcos now include “sales channel assurance” as at least a part of the scope of the revenue assurance team.

Given that sales channel assurance has worked its way into the charter of many revenue assurance groups, what are the details behind it? Luckily, the GRAPA standards spell out the principles and approaches key to sales channel assurance and the GRAPA certification training classes review the standard controls and assurance points in detail. For those who have not had the chance to review those standards, or take the training, we will provide an overview here.

Assurance of Sales Channels – Domain Fit

The first issue for the revenue assurance professional faced with the job of sales channel assurance is to identify which domain it falls under. This is critical, because only by mapping a situation to our standards and body of knowledge can the revenue assurance professional gain any leverage or support for the areas they cover.

When you determine which domains a problem touches, you gain access to the standard controls, approaches, benchmarks and knowledge other revenue assurance professionals have gathered over time. Under the GRAPA standards, sales channel assurance can be positioned in several ways.

First – Channel Assurance is one of the four major domains required to assure the prepaid line of business. It is impossible to assure prepaid billing systems and the entire Prepaid LOB without assuring the company that the sales channels are tight, leak proof and feeding the voucher management system with integrity.

Second – Sales channel assurance fits under the subject of CRM assurance and assuring the different CRM value chains:

a) Sales

b) Customer Service

c) Marketing

Either way, sales channel assurance is critical, and definitely “in scope” according to the standards. When is the assurance of channels part of the charter of the revenue assurance group?  As for all revenue assurance domains, the domain comes “in scope” when:

a)      Management identifies it as a domain of concern.

b)      The operational team invites the revenue assurance team to help.

c)      The losses or risk of loss become pronounced.

When the domain is added to the revenue assurance group’s charter the revenue assurance manager must:

a)      Perform an initial forensic analysis of the domain to rationalize and quantify the extent and nature of the revenue risk and loss.

b)      Prepare a set of recommendations and relate them to specific quantified risk areas.

c)      Review the recommendations with top management and the operational teams concerned.

d)      Implement actions based on management decisions.

Channel Assurance – Objectives

What are we supposed to accomplish when we assure this area? After all, there are no CDRs in a sales channel. What leakage are we trying to address? Experience has shown that when a CFO wants the revenue assurance team to “assure” a sales area, they have some specific problems in mind.

The nature of revenue leakage and revenue loss protection when sales channels are involved has taken a couple of major forms:

1. Inventory and “virtual inventory” related losses – When top-ups and sim cards are not adequately accounted for (revenue producing assets are mismanaged, resulting in the false accounting of revenues, or the “giving away” of services) There are three operational sub-domains to consider in these cases:
   1. Outbound Asset Management Failure – Faults in the process of accounting for the creation and delivery of revenue generating assets (virtual and physical) to the point of sale.
   2. Boundary/Exchange Failure – Fraud or error in execution of exchanges of value with sales persons – when sales channels (internal and external) accept responsibility for revenue producing assets, and they are not accounted for properly.
   3. Inbound – Accounting Failure – Failure to get funds collected properly allocated to the Account Management System and the bank account.
2. Post sales accounting – Inaccurate sales reporting/commission pay out – When the payment of commissions or the allocation of sales credit becomes part of the overall profitability of a service area, then the accuracy of the sales tracking and commission payment domains fall under the charter of revenue assurance as well.

How is this Revenue Assurance?

So now we get to the heart of the controversy for some carriers and CFO’s. How can we justify the inclusion of the assurance of these areas as part of the mission of revenue assurance? After all, these are not direct revenue issues are they? At this point, we are forced to go back to some basic definition of revenue. Under the “Old School” Revenue Assurance definitions the term revenue is used to refer to the monies received for the delivery of a service. Revenue is the money we receive from the customer.

In the good old days of telecoms, when all revenues were postpaid, we provided a service to the customer, we collected CDRs that we used to make a bill, and the customer paid us. In this revenue management chain scenario, revenue assurance was ensuring the CDRs are collected, processed, billed and monies collected from the customer.

The Prepaid “Spin” On The Definition Of Revenue

In the modern telecommunications world, revenue is not that simple to understand. In a large number of carriers, the primary form of business is not postpaid but prepaid. In the prepaid world, monies are collected far in advance of service delivery.

I get client money and they receive a “token in exchange” (i.e.: a top-up card), that is used to top up their online account. When they use the service, an amount is deducted from the account management system. In the prepaid world, in the “purist” sense, revenue assurance is a very trivial process, making sure the account management system decrements the balance correctly. There is no long revenue stream or CDRs, just a brief, instantaneous online transaction. That should mean the revenue assurance job is small and specific. However, it is not that simple.

In the postpaid world, losing money because you didn’t collect from the customer reduces your company’s revenues. Errors in collections come “out” of the revenues counted. Because of that, most people consider the job of revenue assurance to be the assurance of the real revenues, not the legalistic definition of revenue under accounting principles. Whether I am worrying about the “watering down” of my full revenue realized from a failure to collect from a postpaid customer, or a breakdown in the collection of prepaid monies, it amounts to the same thing.

The question is not whether this is a problem, nor is the question whether this has a negative impact on revenues. The question is whether the CFO should include that within the scope of revenue assurance, and is a decision they need to make based upon need, skills and the depth and breadth of the problem.

Once that decision is made, it means revenue assurance must concern itself with the integrity of the process of getting the money from the customer and getting it into the Account Management Systems intact as well as making sure  the “moment of truth” that occurs at the point of revenue recognition is accurate.

And so the “channel assurance” domain of Prepaid Assurance is born.

Objectives of Channel Assurance

The mission of revenue assurance when it comes to channels is fundamentally no different than it is anywhere else. The GRAPA standards specify the particulars. Our job is to:

a)      Identify any and all “risks to the loss of revenues” that the domain represents to the company.

b)      Quantify that risk, both in terms of the amount of money at risk and the probability of that loss occurring

c)      Recommend remedies to management (recommend changes to procedures, or the implementation of controls)

d)      Implement the recommendations that management chooses based upon their appetite for risk.

That’s enough I think for this installment. We will continue to explore these issues by taking a closer look at a couple of the sub-domains under channel assurance, namely, Prepaid Time Assurance and Sales and Commissions Assurance.

Until then, this is Rob Mattison saying… be safe.