Choose Quality with Cost JustificationPage 1 of 11 23/04/2009Choose Quality with cost justification!By David Rottmayer23 April 2009Many telecommunications companies are making a significant entryinto Africa. One of the key aspects of the entry though will be makingan investment in network infrastructure that will far exceed the ‘norm’of Africa however still allowing for a maximum return on investment(ROI) that justifies the capital outlay.“Innovative and quality products and services is key - to being able toaccomplish this is a solid commitment to quality!”One of the greatest myths in the ‘new’ telecommunications industry isthat quality must be compromised for timely delivery and budget.However, this is a myth. If companies perform a true ‘cost ofownership’ and ‘payback period’ (PP) for a network, the failure tomandate QUALITY results in shorter lifespan of the network thus failing tomaximize the ROI. This results in a significant increase in the Cost ofOwnership (or rate of return (ROR)) and failure to achieve a paybackperiod. Obviously, each type of network has different paybackperiods. GSM BSS target lifecycle is 5 years. However a fibre opticoutside plant (OSP) network lifecycle is 30 years. Thus the ROI, PP, andcost of ownership have varying degrees in which to consider.Unfortunately, the OSP network has a 30 year expectation but a 5 yearcapital costing model applied to it, resulting in quality being seriouslycompromised. Thus there are inherent problems that the carriers arefacing every day with their microwave and fibre transmission network.Carriers market entry, network growth, and build programs are centredon low cost, predominantly with disregard to quality. Worse yet, as Iwitnesses while conducting training with carrier staff, there is a lack ofunderstanding and skills to be able to understand how to build qualitynetworks, because they are predominantly ‘spoon-fed’ by the lowestcosts equipment vendors.As an experienced telecommunications professional with experience indeveloped and developing nations, we are aware that predominantlyequipment vendors build equipment – NOT networks. This anomalybegan in the mid-1990’s with the advent of de-regulation and the start-ups not having a solid capital base to start with. Vendor financingbecame the dominant funding mechanisms for network buildprograms. With this financing, equipment vendors started mandatingthe use of ‘them’ to ‘build’ the networks. But of course you also know,even today, that equipment vendors subcontract nearly 100% of allactual engineering, construction, and implementation work.
Choose Quality with Cost JustificationPage 2 of 11 23/04/2009While this may not seem to be an issue, when you consider that themature telecommunications equipment manufacturers use a 60%-40%(cost vs capabilities) and the new telecommunications equipmentmanufacturers use 70%-30% (cost vs capabilities) evaluation criteria toselect their subcontractors, then it does become an issue. Carriershave a tendency of depending upon the ‘new’ equipment vendorsdue to funding and price points, thus the resulting networks are thosethat are in operation today.While the networks perform, they are far from optimal, as I have beenable to verify in my discussions with several students in the varioustelecommunications courses I have conducted within Africa. Many ofthe problems that the students identified are a direct result ofsubstandard planning, engineering, construction, and installationpractices that if accomplished by skilled network engineers, build, andinstallation entities would have been identified and the propermechanisms put in place to overcome the majority of the issues thatcarriers are encountering routinely with their outside plant and fibrenetwork.Motorola, MTN Ghana sign multi-million dollar contract“…Motorola supported MTN Ghana in successfully managing millions of phone callsacross the network, improving perceived speech quality by 35% and reducing thenumber of dropped calls by 15% … The efficiency of our network directly impacts thequality of service experienced by our customers. With this contract with Motorola inplace, MTN customers can expect further improvements in reliability and call qualityacross Ghana. Eben Albertyn, CTO MTN Ghana”iStudy: Ghana yet to fully assess impact of cellular phones on small businesses“Dr. Godfred Frempong: …noted that it was imperative that innovative services weredeveloped to enhance activities of small businesses in less urban and rural areas…However, quality of service was a big issue and called on operators to establishfeedback systems … charged the National Communication Authority to continue topenalise operators whose service were below the required standard…”iiBox Clever“… CFOs are likely to take one look at the cost of hiring, say 150 new staff to managea technology upgrade and recoil in horror. “If you take traditional 2G networks,…alloperators would say that they are highly skilled. However, with emerging technology,that is not the case”. In Dolton’s view, networks need to distinguish their offer on thebasis of quality – not simply to fend off the competition, but also to increase end-userspend …”iiiAs reflected in the above, a commitment to quality is critical inmeeting expectations. Unfortunately, while it is recognised that qualityand innovation is key, the follow-through has been waning. This ispartially due to the use of less than qualified engineers and installationentities in the initial stage of network deployment due to thedependencies on equipment vendors as the network BUILD entities,
Choose Quality with Cost JustificationPage 3 of 11 23/04/2009and then the continuation of utilising equipment vendors to MAINTAINthe network infrastructure.It is standard practice in the developed nations (and there is NO realreason it is not in the African nations) that all outside plant infrastructure(conduit/UCV systems, Aerial systems, or direct-buried systems) has atwenty-five (25) year-warranty on workmanship and materials providedwhen utilising a professional quality-driven design-build Turnkey EF&IConstruction Company. Unfortunately, the equipment vendors willnormally only provide a maximum of one (1) year-warranty onworkmanship and materials and normally with caveats. Some won’teven provide this type of limited-caveat driven warranty and provide a‘one-day walk-away warranty’!ivIf quality of service is a major consideration for subscriber capture andretention, then all aspects of the network must be built with quality.One of the flaws of many companies is that they do not properlydevelop a full ‘cost of goods sold’ (COGS) model when developingproducts, thus overlooking many elements of the network and OpExthat is linked to that product. But let a transmission interruption happenand it becomes obvious that the network infrastructure (OSP, Fibre,Microwave, SDH, PDH) is a critical element of the revenue generationnetwork!Subscribers ’Take-Rate’When considering the high ‘take-rate’ within the African market,saturation of new subscribers is quickly becoming a reality, thus therequirement to capture other carrier’s subscribers is now becoming therequirement within the African marketplace. The dominant carrierrepresents a greater market penetration rate than new entrants, thustheir subscribers are the primary target for the new entrants to capturetheir subscribers.Add to that the fact that several carriers’ networks (within the Africancountries) are predominantly substandard and has been the subject ofnumerous regulators fines and criticism. The question is:Will carriers continue down the same pathway when it comes to itsNetwork Deployment or will they choose a quality path – thusdemonstrating that quality of service is a real commitment not justwords to the regulator and press?Network Quality of ServiceAfrican regulators to impose fines for poor mobile services“…MTN fined twice in 2008 for providing poor network services to its customers inNigeria and Rwanda…In Zambia, the company has already been threatened withheavy penalties if it continues providing poor services…MTN Rwandacell finedUS$127,000 in 2008…March 2008: Nigerian Communication Commission fined MTNabout US$24million in compensation to subscribers after the company’s mobileservices fell short of providing quality standards…”v
Choose Quality with Cost JustificationPage 4 of 11 23/04/2009NCA raps MTN, OneTouch for poor service quality“…the NCA has given domestic mobile operators MTN,… and GT-OneTouch,… aformal warning over the poor level of services on their respective networks. In a pressstatement dated 10 October, the NSA noted the gains being made in the sector, butadded that in some cases the Quality of Service was ‘anything but good’ … ‘In ourmarket assessment, both qualitative and quantitative, we have concluded that theservices of of MTN and OneTouch need improvement, particularly when these partiescarry 88% of total mobile network traffic. MTNs network in particular has to drasticallyimprove to address their growing traffic and resultant complaints of various types bythe public. We call on the management of MTN to rectify the quality of serviceproblems, particularly their on-net challenges … If the two companies fail to put theirhouse in order…they could attract severe sanctions from the NCA … NCA has alsodirected MTN and GT-OneTouch to stop signing up new accounts until their networksare able to cope with the additional capacity …”viTelecom authorities criticized“…the National Communications Authority and other stakeholders in thetelecommunications business have been called upon to wake up from their slumberand ensure that service providers in the country give consumers value for their money… The authorities’ inability to put pressure on service providers in the mobiletelephony industry to give quality services to loyal customers is seen as a mark ofirresponsibility on their part … Operations of these mobile telecommunicationsnetworks especially MTN have in recent times been widely condemned due to theirabysmal performance … ‘MTNs the worst culprit when it comes to dissatisfyingcustomers’ … ‘they have failed woefully in meeting the needs of their numerouscustomers’…”viiCarriers’ greatest challenge will be the significant retrofit and majorexpansion of its inherited and newly built networks.1. Cellular: 3G deployment, call blockage, power, mast permits,quality installation, RF coverage, bandwidth in backhaul,MGW/MSC, SGSN/GGSN, HLR/VLR, BTS/NodeB, BSC/RAN,CERAN/UTRAN, new products, EDGE/EDVO/HSPA, siteselection/acquisition, etc.2. Broadband/Data: cabinet placement, MSAN, power, copperplant, fibre backhaul, Internet gateway, DNS, right-of-ways, FTTx,WiMAX/WiFi, etc.3. Fixed Line Service offerings: switch capacity, replacement ofTDM Class4/5 switches with NGN Class 4/5 Soft-switches, CCS7,Pay-Phones, power, etc.4. Outside Plant Fibre and Copper Network(s): right-of-ways,expansion, retrofit, rebuild, maintenance, metro roll-out, long-haul roll-out, PoPs, active equipment, power, etc.Each of these network elements require special consideration so thatthey can be optimised to deliver the best network at the most efficientcost that allows the carriers to compete competitively against theother carriers within that country.
Choose Quality with Cost JustificationPage 5 of 11 23/04/2009Some African carriers are facing numerous quality problems with theirnetworks and some has adopted a series of solutions that areequipment vendor driven:? Motorola BSS/NSS Optimisation? Huawei for national fibre network buildHowever, all African carriers still have the possibility to make the rightchoices so that their network will far surpass other carriers and the othercompetitor networks. Ultimately this will allow for greater ROI withhigher Quality and greater customer satisfaction.Greater customer satisfaction results in increased revenue by newsubscriber ‘take’ rates, reduction of subscriber ‘churn,’ and existingsubscribers ‘up-sell’ potential for enhanced product offerings.Choosing quality over reduction of network quality allows for thisincrease in revenue potential. While initially it is at a higher entry cost,the payback period and cost of ownership is improved due to theincrease in revenue and the significant reduction in operatingexpenditure (OpEx) to support the network. A properly engineered,constructed, and maintained network will significantly increase the ROIwhile reducing the overall lifecycle cost to maintain.MTN confident of Ghanaian Market“…MTN Ghana is set to maintain market lead despite the presence of other big multi-national firms … MTN was confident that it would maintain its lead in Ghana throughquality of service, innovation, strategic engagements with its subscribers andcommitment to national development … the company had addressed itself to thechanging situations in Ghanaian industry and was putting necessary measures inplace to consolidate its position … We have and will continue to set trends inleveraging our strength as the top mobile telecom player in emerging markets bybuilding on the capacity and coverage of our network, developing products andservices that are relevant for Ghanaian subscribers and devoting resources tonational development … beyond increasing the number of cell sites across Ghana byover 1,200 in two years, MTN was also installing its own fibre optic cables to ensurethat in the near future it would provide better, faster, and cheaper services usingmore advance technology … MT infrastructure and data services over the past ninemonths indicates that the company had rolled out at least 492km of fibre opticcable, introduced Blackberry services, new data products for higher value customersand strategically extended its EDGE…deployment…”viiiGhana: MTN assures Northern Region Subscribers of Quality Services“…MTN has experienced challenges with service disruptions in the Northern Regiondue to the cuts made in its fibre by contractors from other competitororganizations…”ix- - - - - - - - - - - - - - - - - - - - - - -Globacom, ZTE bring more ICT infrastructure to Ghana“…In a move that will see additional mobile network infrastructure deployed inGhana, Glo Mobile Ghana has engaged Chinese telecoms equipment firm ZTE toinstall indoor and outdoor transceiver station in the country … deployment will also
Choose Quality with Cost JustificationPage 6 of 11 23/04/2009include 3G, EDGE, and HSPA infrastructure, along with Glo’s fibre data backbone …deployment would eliminate bandwidth bottlenecks and ensure voice and dataclarity…”xNigeria: Glo explain drop call saga“… having the highest call drops in January this year … saying the situation couldhave been worse if it never had the ubiquitous service platform and quick salvagingmechanisms in place … within the period, the call drop statistics were being collatedfor the month of January, its facilities in about three regions of the country, Lagos,Ulyo, and Aba were severely affected by cuts occasioned by either contractorshandling government road projects or other factors … of a truth, we had majorchallenges in out fibre ring at the time … The contractors in Epe expresswaydamaged most of our facilities … Again at Uyo axis … other issues the companyfaces on nearly a daily basis to include forced closure of cell sites bycommunities/miscreants, frequent fibre cuts with 32 of such in February alone …”xi- - - - - - - - - - - - - - - - - - - - - - -Zain Ghana Begins Operations“…Zain Ghana’s network will offer its customers ultra high-speed Internet access anffor the first time in Ghana the ability to make video-calls and use rich multi-mediacontent including the ability to send video clips, music and pictures at the touch of abutton … The company has so far invested over $420million in rapidly rolling out thenetwork across the country …”xiiZain wins best Telecom Operator Award“… Zain won the Best Telecom Operator in Africa at the prestigious 2008 Business inAfrica Awards held in London … This award reaffirms the reasons why Zain islaunching its network in Ghana to give Ghanaians access to the top qualitytelecommunications services available through Zain Operations in Africa…”xiiiZain will be number 1 in Nigeria“… Zain Nigeria had embarked on building 4,000 kilometre optic fibre nationwidenetwork … He warned that recent disruptions in services caused by fire outbreak andfibre cuts, might persist, pending the time the problem would be rectified by theagencies concerned …”xivEven if a company is not concerned with the potential regulatory finesdue to a substandard network, even if a company is not concernedwith customer satisfaction (after all we are the biggest – newsubscribers keep coming – even though our network is substandard)service disruptions on a normal basis does concern companies.Service disruptions directly affect revenue – if a call can not be made –revenue is not realised. However, the problem is that if a network is notbuilt with quality at the beginning, then service disruptions will occur! Aproperly designed and constructed network, will take intoconsideration the major aspects that could potentially cause a servicedisruption and design against it. While nothing is 100%, the number ofservice disruptions that carriers are having at present is due tosubstandard design and installation practices.xvSpecifically most of the outside plant and fibre networks have beenplaced in a completely inappropriate manner that is allowing for
Choose Quality with Cost JustificationPage 7 of 11 23/04/2009constant fibre cuts that cause service disruptions (LOSS REVENUE),increase in operating costs (truck rolls), degradation of the lifecycle ofthe fibre plant, and the very real but intangible costs of customerdissatisfaction! A continuation down this pathway of substandarddesign-build-operate will seriously hamper carriers from overtaking themarket place and recognising the true revenue potential of itsinvestment in the respective African country. However, should carrierschoose to go down the pathway that has been chosen in the USA,Western Europe, Australia, and Japan – where quality design, build,and operate is mandatory – not the ‘developing country’ way ofcheap – cheap – cheap; carriers have an opportunity to makestrategic long-term investments into their networks and potentially beable to realise the same percentages of ARPU (average revenue peruser) as in its developed country networks.Costing Model Development to cost justify Quality!Most engineers do not want to be accountants, but OSP engineers andfacility planners have a considerable impact on capital budgets andmay not even know it. Despite constantly weighing financial analysisdecisions in OSP design that maximise capacity under the constraint ofminimised cost, many key designers and planners are not trained infinancial management, and thus maintain a minimal understanding ofwhat capital is and why it is important to the telecom business!The bottom line of any business is to PERPETUATE GROWTH! There aretwo kinds of costs to any enterprise: Capital Expenditures (CapEx) andOperational Expenses (OpEx). CapEx grows the business; OpEx doesnot. OpEx (expenses) are costs spent to run the daily operations; theydo not provide REVENUE to the company. OpEx does not add long-term value to the company! CapEx are costs spent on long-term assets(fixed assets) that generate revenue to the company.Repairing existing plant in OSP is considered an EXPENSE (or OpEx)because it is work done to MAINTAIN an existing asset. It does not addnew value to the company; rather it RESTORES the value of the asset toan EXISTING condition that has already been booked by thecompany.xviWhether borrowed from creditors or from shareholders, how acompany spends money communicates to its investors the company’svision for survival. Deployment of capital is one of the most importantdecisions corporations can make. Investors’ looks closely at acompany’s CapEx to determine not only its exposure to risk and debtbut also how it views future economic conditions.When companies increase their capital spending from prior years, itindicates optimism with future borrowing conditions and a possiblestronger upcoming economy. Increased capital spending means acompany is trying to enter a new venture or is encountering financial
Choose Quality with Cost JustificationPage 8 of 11 23/04/2009fatigue with its existing assets and needs to replace them. Either way,increased capital spending is not necessarily a bad sign. It means acompany is attempting to redefine itself as all enterprises must do tostay competitive.xviiJustifying how capital is spent within a company is CRUCIAL, and itinvolves identifying the Cost of Capital. The idea is simple, since themoney for capital spending is essentially borrowed, the cost of capitalis best thought of as the interest owed for the money borrowed.Companies have only two sources for capital: creditors andstockholders. Each are paid a different Rate of Return for use of theirmoney. The Cost of Capital is the average rate a company pays to itsinvestors.Spending capital on OSP makes sense only if it earns more than thecost of installation within an acceptable Payback Period. Capitalspending involves long-term assets that must achieve a minimal Rateof Return.Capital expenditures in telecom are triggered mostly by growthforecasts whether for new subscribers on existing service platforms orfor a new service type. Capital is also driven by the failure of asignificant segment of existing plant.Since OSP engineers and facility planners initiate the work authoritiesfor material and labour, the RESPONSIBILITY of ACCURATELY coding theCOSTS properly to CAPITAL or EXPENSE lies with them. They are thegatekeepers of a very important decision that can affect the long-termcommitment of funds on the financial statements for many years.Request for Proposal DevelopmentDeveloping a well-written request for proposal can be a daunting task.It takes time, careful thought, and planning. However, a well-written RFPcan help form the foundation of a successful relationship with a bidderand provide important goods and services to your company.A request for proposal (RFP) is a document that an organizationdevelops to elicit bids from potential bidders for a product or service.The quality of an RFP is very important to successful product or servicedelivery because it clearly delineates the deliverables associated withthe project and establishes a framework for execution. RFPs muststipulate the requesting organizations requirements and the conditionsdemanded of bidders clearly enough to minimize the possibility ofmisunderstandings and errors. To that end, an RFP should include:? Specification of the product or service required, in great detail? Information required about the bidder, including the amount bid,information about the proposed project leader, the responsibilitiesagreed to, a timeframe for developmental stages, and an overviewof the bidders’ company and prior experience in the area
Choose Quality with Cost JustificationPage 9 of 11 23/04/2009? Any criteria for bidder eligibility or disqualification? Relevant dates, including the deadline for application, the deadlinefor submission of supplemental information, dates for any associatedinterviews or open meetings, the date when the decision will bemade, and the desired timeframe for the project? Any requirements of confidentiality? Stipulation of any legally binding commitments, such as adherenceto dates or criteria on which the final decision will be based.An RFP is part of an organizations procurement process, which beginswith an assessment of needs and ends with delivery and/or support ofthe finished product or service. As such, the requirements of an RFP arelikely to vary depending on the complexity of the product or servicerequired.It is very important to provide enough details in your RFP to allowbidders to write a good proposal. The more detail you provide, themore accurately bidders will be able to respond. In particular, you mustdefine the scope and boundaries of the project in detail, thus ensuringbidders will be able to more accurately estimate the resources they willneed to commit to the project, resulting in a more accurate bidproposal and reducing the potential for ‘change orders.’For each RFP issued, carriers must develop a costing model that reflectsthe following items for the project:1. Estimated cost of projecta. Materials: Civils, OSP, Fibre, Cabinets, Shelters, etc.b. Labourc. Permissionsd. Rights-of-Waye. Carriers Manpower (supporting project)f. ‘New’ tools to support infrastructure2. Costing Modela. Cash Flowb. Return on Investment (ROI)c. Payback Period (PP)d. Cost of Ownership (Lifecycle costing)i. Forecasted operational expenses (OpEx) to supportinfrastructuree. Net Present Value (NPV)f. Internal Rate of Return (IRR)g. Profitability Index (PI)3. Project Cost-Benefit Analysis (CBA)
Choose Quality with Cost JustificationPage 10 of 11 23/04/2009SummaryWhen a carrier enters into or as they operate within the African market,a clear decision must be made on what quality standards they aregoing to commit to. At present the quality standards are substandard –carriers just want to get as much revenue with as little of a capitaloutlay as is possible.While this strategy has been working, the African people are starting todemand quality and slowly the regulators are starting to act by placingnuisance fines on offending carriers. However, this lackadaisicalapproach by the Regulatory groups must come to an end and thecarrier that has been proactive and started building their networks witha long-term strategical view with proper costing models justifying theQUALITY standards will ultimately become the leading African carrier(s).The question is: Of all of the carriers operating in Africa, which one willstep up and become the leader?i ITNEWSAFRICA.COM, April 7, 2009, “Motorola, MTN Ghana sign multi-million dollarcontract”ii The Statesman, November 30, 2007, “Study: Ghana yet to fully assess impact ofcellular phones on small businesses”iii Telecommunications Online, December 2, 2005, “Box Clever”, by Ouida Taafeiv One day I will walk away but I won’t really tell you when that is until the warranty isrequested to be utilized and then I will tell you that it is no longer valid!v ITNEWSAFRICA.COM, October 2, 2008, “African regulators to impose fines for poormobile services”vi Telegeography, October 15, 2007, “NCA raps MTN, OneTouch for poor servicequality”vii Daily Guide, March 26, 2009, “Telecom authorities criticized”, by Nathaniel YYanksonviii ITNEWSAFRICA.COM, September 25, 2008, “MTN Confident of Ghanaian Market”ix The Chronicle, March 16, 2009, “Ghana: MTN assures Northern Region Subscribers ofQuality Services”x ITNEWSAFRICA.COM, March 13, 2009, “Globacom, ZTE bring more ICT Infrastructureto Ghana”xi Vanguard, April 6, 2009, “Nigeria: Glo explain drop call saga”xii Daily Guide, December 16, 2008, “Zain Ghana Begins Operations”xiii Think Ghana, July 25 2008, “Zain wins best telecom operator Award”xiv Gulfbase.com, August 11, 2008, “Zain will be number 1 in Nigeria”
Choose Quality with Cost JustificationPage 11 of 11 23/04/2009xv Compared to the ‘developed’ nations (USA, Western Europe, Japan, Australia) OSPinfrastructure the developing nations OSP service disruptions are in excess of 1000%greater than these developed nations. Why? Developed nations OSP networks werebuilt based on quality materials and workmanship and standards that aredemanding.xvi Thus the quality of the original materials, workmanship, and construction techniquesare critical, substandard quality = increased OpEx costs.xvii Many carriers are financially constrained thus unable to expand or improve theirnetwork adequately to meet the country’s demands or to stay competitive with thenew market place because they have not done their costing models