Choose Quality With Cost Justification Article


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Africa: Choose Quality Networks with Cost Justification

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Choose Quality With Cost Justification Article

  1. 1. Choose Quality with Cost Justification Choose Quality with cost justification! By David Rottmayer 23 April 2009 Many telecommunications companies are making a significant entry into Africa. One of the key aspects of the entry though will be making an 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 to accomplish this is a solid commitment to quality!” One of the greatest myths in the ‘new’ telecommunications industry is that quality must be compromised for timely delivery and budget. However, this is a myth. If companies perform a true ‘cost of ownership’ and ‘payback period’ (PP) for a network, the failure to mandate QUALITY results in shorter lifespan of the network thus failing to maximize the ROI. This results in a significant increase in the Cost of Ownership (or rate of return (ROR)) and failure to achieve a payback period. Obviously, each type of network has different payback periods. GSM BSS target lifecycle is 5 years. However a fibre optic outside plant (OSP) network lifecycle is 30 years. Thus the ROI, PP, and cost of ownership have varying degrees in which to consider. Unfortunately, the OSP network has a 30 year expectation but a 5 year capital costing model applied to it, resulting in quality being seriously compromised. Thus there are inherent problems that the carriers are facing every day with their microwave and fibre transmission network. Carriers market entry, network growth, and build programs are centred on low cost, predominantly with disregard to quality. Worse yet, as I witnesses while conducting training with carrier staff, there is a lack of understanding and skills to be able to understand how to build quality networks, because they are predominantly ‘spoon-fed’ by the lowest costs equipment vendors. As an experienced telecommunications professional with experience in developed and developing nations, we are aware that predominantly equipment vendors build equipment – NOT networks. This anomaly began 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 financing became the dominant funding mechanisms for network build programs. With this financing, equipment vendors started mandating the use of ‘them’ to ‘build’ the networks. But of course you also know, even today, that equipment vendors subcontract nearly 100% of all actual engineering, construction, and implementation work. Page 1 of 11 23/04/2009
  2. 2. Choose Quality with Cost Justification While this may not seem to be an issue, when you consider that the mature telecommunications equipment manufacturers use a 60%-40% (cost vs capabilities) and the new telecommunications equipment manufacturers use 70%-30% (cost vs capabilities) evaluation criteria to select their subcontractors, then it does become an issue. Carriers have a tendency of depending upon the ‘new’ equipment vendors due to funding and price points, thus the resulting networks are those that are in operation today. While the networks perform, they are far from optimal, as I have been able to verify in my discussions with several students in the various telecommunications courses I have conducted within Africa. Many of the problems that the students identified are a direct result of substandard planning, engineering, construction, and installation practices that if accomplished by skilled network engineers, build, and installation entities would have been identified and the proper mechanisms put in place to overcome the majority of the issues that carriers are encountering routinely with their outside plant and fibre network. Motorola, MTN Ghana sign multi-million dollar contract “…Motorola supported MTN Ghana in successfully managing millions of phone calls across the network, improving perceived speech quality by 35% and reducing the number of dropped calls by 15% … The efficiency of our network directly impacts the quality of service experienced by our customers. With this contract with Motorola in place, MTN customers can expect further improvements in reliability and call quality across Ghana. Eben Albertyn, CTO MTN Ghana”i Study: Ghana yet to fully assess impact of cellular phones on small businesses “Dr. Godfred Frempong: …noted that it was imperative that innovative services were developed 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 establish feedback systems … charged the National Communication Authority to continue to penalise operators whose service were below the required standard…”ii Box Clever “… CFOs are likely to take one look at the cost of hiring, say 150 new staff to manage a technology upgrade and recoil in horror. “If you take traditional 2G networks,…all operators 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 the basis of quality – not simply to fend off the competition, but also to increase end-user spend …”iii As reflected in the above, a commitment to quality is critical in meeting expectations. Unfortunately, while it is recognised that quality and innovation is key, the follow-through has been waning. This is partially due to the use of less than qualified engineers and installation entities in the initial stage of network deployment due to the dependencies on equipment vendors as the network BUILD entities, Page 2 of 11 23/04/2009
  3. 3. Choose Quality with Cost Justification and then the continuation of utilising equipment vendors to MAINTAIN the network infrastructure. It is standard practice in the developed nations (and there is NO real reason it is not in the African nations) that all outside plant infrastructure (conduit/UCV systems, Aerial systems, or direct-buried systems) has a twenty-five (25) year-warranty on workmanship and materials provided when utilising a professional quality-driven design-build Turnkey EF&I Construction Company. Unfortunately, the equipment vendors will normally only provide a maximum of one (1) year-warranty on workmanship and materials and normally with caveats. Some won’t even provide this type of limited-caveat driven warranty and provide a ‘one-day walk-away warranty’!iv If quality of service is a major consideration for subscriber capture and retention, then all aspects of the network must be built with quality. One of the flaws of many companies is that they do not properly develop a full ‘cost of goods sold’ (COGS) model when developing products, thus overlooking many elements of the network and OpEx that is linked to that product. But let a transmission interruption happen and it becomes obvious that the network infrastructure (OSP, Fibre, Microwave, SDH, PDH) is a critical element of the revenue generation network! Subscribers ’Take-Rate’ When considering the high ‘take-rate’ within the African market, saturation of new subscribers is quickly becoming a reality, thus the requirement to capture other carrier’s subscribers is now becoming the requirement within the African marketplace. The dominant carrier represents a greater market penetration rate than new entrants, thus their subscribers are the primary target for the new entrants to capture their subscribers. Add to that the fact that several carriers’ networks (within the African countries) are predominantly substandard and has been the subject of numerous regulators fines and criticism. The question is: Will carriers continue down the same pathway when it comes to its Network Deployment or will they choose a quality path – thus demonstrating that quality of service is a real commitment not just words to the regulator and press? Network Quality of Service African regulators to impose fines for poor mobile services “…MTN fined twice in 2008 for providing poor network services to its customers in Nigeria and Rwanda…In Zambia, the company has already been threatened with heavy penalties if it continues providing poor services…MTN Rwandacell fined US$127,000 in 2008…March 2008: Nigerian Communication Commission fined MTN about US$24million in compensation to subscribers after the company’s mobile services fell short of providing quality standards…”v Page 3 of 11 23/04/2009
  4. 4. Choose Quality with Cost Justification NCA raps MTN, OneTouch for poor service quality “…the NCA has given domestic mobile operators MTN,… and GT-OneTouch,… a formal warning over the poor level of services on their respective networks. In a press statement dated 10 October, the NSA noted the gains being made in the sector, but added that in some cases the Quality of Service was ‘anything but good’ … ‘In our market assessment, both qualitative and quantitative, we have concluded that the services of of MTN and OneTouch need improvement, particularly when these parties carry 88% of total mobile network traffic. MTNs network in particular has to drastically improve to address their growing traffic and resultant complaints of various types by the public. We call on the management of MTN to rectify the quality of service problems, particularly their on-net challenges … If the two companies fail to put their house in order…they could attract severe sanctions from the NCA … NCA has also directed MTN and GT-OneTouch to stop signing up new accounts until their networks are able to cope with the additional capacity …”vi Telecom authorities criticized “…the National Communications Authority and other stakeholders in the telecommunications business have been called upon to wake up from their slumber and ensure that service providers in the country give consumers value for their money … The authorities’ inability to put pressure on service providers in the mobile telephony industry to give quality services to loyal customers is seen as a mark of irresponsibility on their part … Operations of these mobile telecommunications networks especially MTN have in recent times been widely condemned due to their abysmal performance … ‘MTNs the worst culprit when it comes to dissatisfying customers’ … ‘they have failed woefully in meeting the needs of their numerous customers’…”vii Carriers’ greatest challenge will be the significant retrofit and major expansion 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, site selection/acquisition, etc. 2. Broadband/Data: cabinet placement, MSAN, power, copper plant, fibre backhaul, Internet gateway, DNS, right-of-ways, FTTx, WiMAX/WiFi, etc. 3. Fixed Line Service offerings: switch capacity, replacement of TDM 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 that they can be optimised to deliver the best network at the most efficient cost that allows the carriers to compete competitively against the other carriers within that country. Page 4 of 11 23/04/2009
  5. 5. Choose Quality with Cost Justification Some African carriers are facing numerous quality problems with their networks and some has adopted a series of solutions that are equipment vendor driven: Motorola BSS/NSS Optimisation ? Huawei for national fibre network build ? However, all African carriers still have the possibility to make the right choices so that their network will far surpass other carriers and the other competitor networks. Ultimately this will allow for greater ROI with higher Quality and greater customer satisfaction. Greater customer satisfaction results in increased revenue by new subscriber ‘take’ rates, reduction of subscriber ‘churn,’ and existing subscribers ‘up-sell’ potential for enhanced product offerings. Choosing quality over reduction of network quality allows for this increase in revenue potential. While initially it is at a higher entry cost, the payback period and cost of ownership is improved due to the increase in revenue and the significant reduction in operating expenditure (OpEx) to support the network. A properly engineered, constructed, and maintained network will significantly increase the ROI while 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 through quality of service, innovation, strategic engagements with its subscribers and commitment to national development … the company had addressed itself to the changing situations in Ghanaian industry and was putting necessary measures in place to consolidate its position … We have and will continue to set trends in leveraging our strength as the top mobile telecom player in emerging markets by building on the capacity and coverage of our network, developing products and services that are relevant for Ghanaian subscribers and devoting resources to national development … beyond increasing the number of cell sites across Ghana by over 1,200 in two years, MTN was also installing its own fibre optic cables to ensure that in the near future it would provide better, faster, and cheaper services using more advance technology … MT infrastructure and data services over the past nine months indicates that the company had rolled out at least 492km of fibre optic cable, introduced Blackberry services, new data products for higher value customers and strategically extended its EDGE…deployment…”viii Ghana: MTN assures Northern Region Subscribers of Quality Services “…MTN has experienced challenges with service disruptions in the Northern Region due to the cuts made in its fibre by contractors from other competitor organizations…”ix ----------------------- Globacom, ZTE bring more ICT infrastructure to Ghana “…In a move that will see additional mobile network infrastructure deployed in Ghana, Glo Mobile Ghana has engaged Chinese telecoms equipment firm ZTE to install indoor and outdoor transceiver station in the country … deployment will also Page 5 of 11 23/04/2009
  6. 6. Choose Quality with Cost Justification include 3G, EDGE, and HSPA infrastructure, along with Glo’s fibre data backbone … deployment would eliminate bandwidth bottlenecks and ensure voice and data clarity…”x Nigeria: Glo explain drop call saga “… having the highest call drops in January this year … saying the situation could have been worse if it never had the ubiquitous service platform and quick salvaging mechanisms in place … within the period, the call drop statistics were being collated for 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 contractors handling government road projects or other factors … of a truth, we had major challenges in out fibre ring at the time … The contractors in Epe expressway damaged most of our facilities … Again at Uyo axis … other issues the company faces on nearly a daily basis to include forced closure of cell sites by communities/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 anf for the first time in Ghana the ability to make video-calls and use rich multi-media content including the ability to send video clips, music and pictures at the touch of a button … The company has so far invested over $420million in rapidly rolling out the network across the country …”xii Zain wins best Telecom Operator Award “… Zain won the Best Telecom Operator in Africa at the prestigious 2008 Business in Africa Awards held in London … This award reaffirms the reasons why Zain is launching its network in Ghana to give Ghanaians access to the top quality telecommunications services available through Zain Operations in Africa…”xiii Zain will be number 1 in Nigeria “… Zain Nigeria had embarked on building 4,000 kilometre optic fibre nationwide network … He warned that recent disruptions in services caused by fire outbreak and fibre cuts, might persist, pending the time the problem would be rectified by the agencies concerned …”xiv Even if a company is not concerned with the potential regulatory fines due to a substandard network, even if a company is not concerned with customer satisfaction (after all we are the biggest – new subscribers 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 not built with quality at the beginning, then service disruptions will occur! A properly designed and constructed network, will take into consideration the major aspects that could potentially cause a service disruption and design against it. While nothing is 100%, the number of service disruptions that carriers are having at present is due to substandard design and installation practices.xv Specifically most of the outside plant and fibre networks have been placed in a completely inappropriate manner that is allowing for Page 6 of 11 23/04/2009
  7. 7. Choose Quality with Cost Justification constant fibre cuts that cause service disruptions (LOSS REVENUE), increase in operating costs (truck rolls), degradation of the lifecycle of the fibre plant, and the very real but intangible costs of customer dissatisfaction! A continuation down this pathway of substandard design-build-operate will seriously hamper carriers from overtaking the market place and recognising the true revenue potential of its investment in the respective African country. However, should carriers choose 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 of cheap – cheap – cheap; carriers have an opportunity to make strategic long-term investments into their networks and potentially be able to realise the same percentages of ARPU (average revenue per user) as in its developed country networks. Costing Model Development to cost justify Quality! Most engineers do not want to be accountants, but OSP engineers and facility planners have a considerable impact on capital budgets and may not even know it. Despite constantly weighing financial analysis decisions in OSP design that maximise capacity under the constraint of minimised cost, many key designers and planners are not trained in financial management, and thus maintain a minimal understanding of what capital is and why it is important to the telecom business! The bottom line of any business is to PERPETUATE GROWTH! There are two kinds of costs to any enterprise: Capital Expenditures (CapEx) and Operational Expenses (OpEx). CapEx grows the business; OpEx does not. OpEx (expenses) are costs spent to run the daily operations; they do 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 add new value to the company; rather it RESTORES the value of the asset to an EXISTING condition that has already been booked by the company.xvi Whether borrowed from creditors or from shareholders, how a company spends money communicates to its investors the company’s vision for survival. Deployment of capital is one of the most important decisions corporations can make. Investors’ looks closely at a company’s CapEx to determine not only its exposure to risk and debt but also how it views future economic conditions. When companies increase their capital spending from prior years, it indicates optimism with future borrowing conditions and a possible stronger upcoming economy. Increased capital spending means a company is trying to enter a new venture or is encountering financial Page 7 of 11 23/04/2009
  8. 8. Choose Quality with Cost Justification fatigue with its existing assets and needs to replace them. Either way, increased capital spending is not necessarily a bad sign. It means a company is attempting to redefine itself as all enterprises must do to stay competitive.xvii Justifying how capital is spent within a company is CRUCIAL, and it involves identifying the Cost of Capital. The idea is simple, since the money for capital spending is essentially borrowed, the cost of capital is best thought of as the interest owed for the money borrowed. Companies have only two sources for capital: creditors and stockholders. Each are paid a different Rate of Return for use of their money. The Cost of Capital is the average rate a company pays to its investors. Spending capital on OSP makes sense only if it earns more than the cost of installation within an acceptable Payback Period. Capital spending involves long-term assets that must achieve a minimal Rate of Return. Capital expenditures in telecom are triggered mostly by growth forecasts whether for new subscribers on existing service platforms or for a new service type. Capital is also driven by the failure of a significant segment of existing plant. Since OSP engineers and facility planners initiate the work authorities for material and labour, the RESPONSIBILITY of ACCURATELY coding the COSTS properly to CAPITAL or EXPENSE lies with them. They are the gatekeepers of a very important decision that can affect the long-term commitment of funds on the financial statements for many years. Request for Proposal Development Developing a well-written request for proposal can be a daunting task. It takes time, careful thought, and planning. However, a well-written RFP can help form the foundation of a successful relationship with a bidder and provide important goods and services to your company. A request for proposal (RFP) is a document that an organization develops to elicit bids from potential bidders for a product or service. The quality of an RFP is very important to successful product or service delivery because it clearly delineates the deliverables associated with the project and establishes a framework for execution. RFPs must stipulate the requesting organization's requirements and the conditions demanded of bidders clearly enough to minimize the possibility of misunderstandings 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 responsibilities agreed to, a timeframe for developmental stages, and an overview of the bidders’ company and prior experience in the area Page 8 of 11 23/04/2009
  9. 9. Choose Quality with Cost Justification Any criteria for bidder eligibility or disqualification ? Relevant dates, including the deadline for application, the deadline ? for submission of supplemental information, dates for any associated interviews or open meetings, the date when the decision will be made, and the desired timeframe for the project Any requirements of confidentiality ? Stipulation of any legally binding commitments, such as adherence ? to dates or criteria on which the final decision will be based. An RFP is part of an organization's procurement process, which begins with an assessment of needs and ends with delivery and/or support of the finished product or service. As such, the requirements of an RFP are likely to vary depending on the complexity of the product or service required. It is very important to provide enough details in your RFP to allow bidders to write a good proposal. The more detail you provide, the more accurately bidders will be able to respond. In particular, you must define the scope and boundaries of the project in detail, thus ensuring bidders will be able to more accurately estimate the resources they will need to commit to the project, resulting in a more accurate bid proposal and reducing the potential for ‘change orders.’ For each RFP issued, carriers must develop a costing model that reflects the following items for the project: 1. Estimated cost of project a. Materials: Civils, OSP, Fibre, Cabinets, Shelters, etc. b. Labour c. Permissions d. Rights-of-Way e. Carriers Manpower (supporting project) f. ‘New’ tools to support infrastructure 2. Costing Model a. Cash Flow b. Return on Investment (ROI) c. Payback Period (PP) d. Cost of Ownership (Lifecycle costing) i. Forecasted operational expenses (OpEx) to support infrastructure e. Net Present Value (NPV) f. Internal Rate of Return (IRR) g. Profitability Index (PI) 3. Project Cost-Benefit Analysis (CBA) Page 9 of 11 23/04/2009
  10. 10. Choose Quality with Cost Justification Summary When a carrier enters into or as they operate within the African market, a clear decision must be made on what quality standards they are going to commit to. At present the quality standards are substandard – carriers just want to get as much revenue with as little of a capital outlay as is possible. While this strategy has been working, the African people are starting to demand quality and slowly the regulators are starting to act by placing nuisance fines on offending carriers. However, this lackadaisical approach by the Regulatory groups must come to an end and the carrier that has been proactive and started building their networks with a long-term strategical view with proper costing models justifying the QUALITY standards will ultimately become the leading African carrier(s). The question is: Of all of the carriers operating in Africa, which one will step up and become the leader? ITNEWSAFRICA.COM, April 7, 2009, “Motorola, MTN Ghana sign multi-million dollar i contract” The Statesman, November 30, 2007, “Study: Ghana yet to fully assess impact of ii cellular phones on small businesses” Telecommunications Online, December 2, 2005, “Box Clever”, by Ouida Taafe iii One day I will walk away but I won’t really tell you when that is until the warranty is iv requested to be utilized and then I will tell you that it is no longer valid! ITNEWSAFRICA.COM, October 2, 2008, “African regulators to impose fines for poor v mobile services” Telegeography, October 15, 2007, “NCA raps MTN, OneTouch for poor service vi quality” Daily Guide, March 26, 2009, “Telecom authorities criticized”, by Nathaniel Y vii Yankson ITNEWSAFRICA.COM, September 25, 2008, “MTN Confident of Ghanaian Market” viii The Chronicle, March 16, 2009, “Ghana: MTN assures Northern Region Subscribers of ix Quality Services” ITNEWSAFRICA.COM, March 13, 2009, “Globacom, ZTE bring more ICT Infrastructure x to Ghana” Vanguard, April 6, 2009, “Nigeria: Glo explain drop call saga” xi Daily Guide, December 16, 2008, “Zain Ghana Begins Operations” xii Think Ghana, July 25 2008, “Zain wins best telecom operator Award” xiii, August 11, 2008, “Zain will be number 1 in Nigeria” xiv Page 10 of 11 23/04/2009
  11. 11. Choose Quality with Cost Justification Compared to the ‘developed’ nations (USA, Western Europe, Japan, Australia) OSP xv infrastructure the developing nations OSP service disruptions are in excess of 1000% greater than these developed nations. Why? Developed nations OSP networks were built based on quality materials and workmanship and standards that are demanding. xvi Thus the quality of the original materials, workmanship, and construction techniques are critical, substandard quality = increased OpEx costs. Many carriers are financially constrained thus unable to expand or improve their xvii network adequately to meet the country’s demands or to stay competitive with the new market place because they have not done their costing models Page 11 of 11 23/04/2009