I sometimes wonder if I was fated to work in revenue assurance, possibly as punishment for the misdemeanours of a previous life. My middle initials are R and A. I am an insanely stubborn outspoken pedant. Whilst these are weaknesses in other walks of life, they were useful attributes for an RA pro. And as an individual customer, I have been plagued by incorrect bills. I have received so many incorrect bills in my life, that one of two things must be occurring in the universe. Either public claims made about the almost perfect accuracy of bills must be complete nonsense, or the cosmos is having a joke at my expense. On one occasion, I tracked a mistake for 16 consecutive months, as BT repeatedly carried the error forward to the following month’s bill. Another time, T-Mobile said sorry for a billing mistake by… drum roll please… levying a goodwill fee. They had mixed up their credits and their debits. Needless to say, I had to be very stubborn when demanding my goodwill debit be reversed into a goodwill credit, and then demanding a second goodwill credit because of the mistake with the first goodwill credit.
Sitting on the other side of the fence, I have seen telcos make extraordinarily simple mistakes with their tariffs. One of my favourites occurs when a pricing team stipulates a price in dollars, but the implementation team enters the same number in reference data as a price in cents, or vice versa. I find this error to be beautiful for several reasons. Firstly, it can be found by a human being with common sense – “this price looks 100 times too high/low!” – but this goof is invisible to software. Secondly, everyone is always amazed when I find such an error, though I expect people to make mistakes like this. I expect this error so very much, that I have found the same kind of mistake in four separate telcos. This neatly explains why the main obstacle to finding problems is convincing yourself to look for them, and that tariff slip-ups can occur without garbling numbers. Consider the phrases ‘on net’ and ‘off net’, as used in some telcos. The telco’s best marketing and legal minds draw up a price list, placed in the public domain, telling them about the prices for calls to their customers, and to customers of other operators. The telco’s best technical minds will implement the prices, having been told there is a difference in price for calls that are ‘on net’ – calls that start and terminate on the telco’s network – and those which are ‘off net’. And then, much later, an outspoken pedant comes along, and points out that a call made by one of the telco’s customers to one of its MVNO’s customers is ‘on net’, per the interpretation used by the technical guys, although the marketing and legals bods had meant those calls to be charged at the rate which applies to calling a different ‘operator’.
It is for these reasons that I intuitively obey the KISS principle: Keep It Simple, Stupid. Even the simplest things can go wrong, and those faults can be hard enough to identify. And yet, tariffs tend to be complicated. I know why. Everyone knows why. But very few people with proper jobs feel free to say why. So let me say why: complicated tariffs lead to greater profits. One big story of last year was that UK telco customers were supposedly spending an extra GBP6mn (USD9mn) just because they were on the wrong tariffs.
From the perspective of the telcos, that sounds like a great way to make money. The wrong tariff simply means the customer pays more than they needed to. In other words, wrong tariffs leave the telco’s costs unchanged, whilst boosting their revenues. Based on the UK example, this inverse leakage from customer to telco is worth 15 percent of telco revenues. If every telco customer was always on the ‘right’ tariff, there would be very few profitable telcos.
If we compare that 15 percent gain to revenue leakages that are now typically well below 1 percent, we end up with a pretty convincing argument: complicated tariffs are a good thing for telcos. Simplification might reduce mistakes, and make life easier for customers. However, telcos are running a business in the interests of their shareholders. But like I mentioned before, I am stubborn. I am loyal to the KISS principle. Although this numerical data is strong, there are other reasons to keep tariffs simple. For a start, I have yet to see much good analysis of the cost of customer dissatisfaction, when billing goes awry. Even at minimum wage, T-Mobile’s staff spent as much arguing with me about a second goodwill credit as was eventually spent on the credit itself. On a bigger scale, the recent surge in billing complaints for UK utility Npower prompted them to cut jobs and offshore back office functions whilst handling the PR fallout. But to be honest, I do not believe big businesses could cut costs by anywhere near 15 percent, as a result of simplifying tariffs. So if I am going to argue that the KISS principle applies to tariffs too, I should look elsewhere.
The methodological flaw behind a lot of so-called analytics involves trying to decide how to run a business based solely on internal and historical data. To understand why tariffs need to be kept simple, we need to include external factors, and to anticipate change. Consider Tony Poulos, and his tenacious campaign against bill shock. His argument was simple: it is bad for business to whack people with very big, very unexpected, but perfectly accurate bills. The damage it caused built up invisibly, over time. This more than offset the boost to the bottom line in the current year. Bill shock upsets people. Tony was trying to help telcos by getting them to change before they were forced to change. Though the impact is not immediate, if you upset enough people, for long enough, then governments and regulators will eventually get involved. And when they get involved, the results may be much worse than by voluntarily making changes that keep customers happy. The EU will scrap all roaming charges this year. There is no way to prove a causal link between bill shock, most typically caused by using data services whilst roaming, and the desire of politicians to intervene in a free market by exerting control over prices. And yet, does anyone believe the EU politicians would be so eager to impose new price controls, without the publicity boost of being seen to respond to widespread dissatisfaction amongst the general public?
Political tides change. Most telcos were born, and many others were liberalized, during a political wave that began in the 1980’s and which continued through the 1990’s. State-owned incumbents were sold off, monopolies broken up, and markets made free. Competition was encouraged, and price controls were repeatedly loosened. The spirit of that time has perhaps shaped the way that telco people think about their business. But nothing ordains that the political framework of the late 20th century should persist forever. The political appeal of price controls is making a comeback. Examples include the global response to bill shock, and the EU’s ending of roaming charges. Energy prices are also under scrutiny. For example, Ofgem, the UK’s energy regulator, is taking an increasingly tough line on prices. In November it told 5 out of 6 electricity distribution companies that their costs were too high. And it started the new year by banning complex tariffs.
Without wanting to sound nationalistic, it is worth making an observation about Britain’s role as a pacemaker for other governments, in the field of utilities and telcos. In the 1980’s, Britain led the way with privatizing state-owned companies and encouraging competition in sectors like energy and telecoms. The consequences of this head start could still be felt in the 21st century, as the UK continued to set trends, such as the auctioning of radio spectrum. UK regulation of telecoms has declined in importance as pan-European regulation has risen, but there will still be situations where the UK’s experiments with market intervention and liberalization are observed, then followed, by other countries. If banning complex energy tariffs proves to be a popular move in the UK, and if it is sufficient to stymie demands for more direct price controls, other countries will definitely notice. This may be a small news story now, but the idea of banning complexity may evolve into a political sweet spot, allowing governments to show they care about protecting customers, whilst avoiding the further step of dictating the prices charged by private companies. And there is no reason why this approach to controlling tariffs cannot cross over from energy to other utilities, and to telecoms.
Perhaps the shift towards increased price controls will be small, with governments and regulators still preferring to exercise a light touch. The surest way to encourage a heavier touch is for a business to be unpopular with the general public. Though the numerical data might suggest complexity is good for profits, customers prefer simple tariffs that they fully understand. Given the political context, companies need to look beyond this year’s profit and loss statement, and think about the risks of increased market intervention that will lower next year’s profits. When it comes to tariffs, I believe the best current advice is to keep it simple, stupid. Either we kiss our own tariffs, or somebody else will kiss our tariffs for us… and we may not like that.
In terms of intervention by governments, for telco’s specifically, I believe that it is required, as the market is limited to few players due to the structure, barriers to entry (high cost) and the fact that they are using a public resource (spectrum). Therefore, as much as I advocate for free markets myself, the telecoms market is not even close to having enough players to reach perfect competition – and never will – due to the reasons mentioned previously. Furthermore, letting telco’s handle roaming/interconnection etc will only lead to manipulation and collusion. I am all for being open and transparent, but I doubt any consumer really gets what happens in the case of roaming/interconnection (which is where a telco makes a large chunk of its revenues). So Neelie Kroes has a vital role to play.
In addition, subsidized handsets are an area where telco’s themselves get in over their head; on the one hand they increase the likelihood of subscription fraud and on the other they create complexity in terms of billing, installments, bad debts. The playing field is this however: to gain more subscribers than the competitor based on price. We all know that telco’s don’t sell phones, nor should they – they sell (or rent) access to a network. And obviously when a tower is shared by 1000 people instead of 10 the average cost is lower and it seems that one subscriber is subsidizing another. Should they pay what they are actually costing? Possibly, but there are many more things to consider as well. If I am letting private companies provide a service which I want to give to everyone, then these things will happen. There could be/should be a way to deal with this.
Finally, regarding regulation it would be most beneficial, as you point out to use analytics and an understanding of external factors to “anticipate change” and preempt regulations. However, I feel that many execs would operate as is, “skim the froth” of the subscribers (adn their wallets) and then just deal with any future regulations as a given. In the end, the point being made is that we need to keep an eye on the ball, i.e. the ultimate goal, which is to provide a service in the best way possible; this way begins and ends with KISS – in spite of all the stuff going on around the main function of a telco someone should be focused on that ultimate goal and reminding everyone else. Now, to put this into practice… a whole other story.
@ Michael, I agree with you. Telcos need to be regulated. There is not enough competition for a completely free market to operate without some degree of government influence. So don’t get me wrong. I’m as cynical about big business as I am about big government 😉
There is an inherent ‘problem’ with the ideal of transparent relationships between telco costs and telco prices, for those telcos that own and run networks. The investment in a network is a long-term deal. Before the network reaches the point of full capacity, there is barely any meaningful relationship between the marginal cost of providing an additional call and what each customer is paying for it. It is like paying a toll to use a road. We want the overall investment to be covered by the individual tolls levied on users, but when do we say the investment has been paid off, and the tolls should be reduced? This is an equation that governments get involved in, but some governments fail to be fully transparent about how, when and why they get involved in this equation. This might mean the telco does not get a fair deal, because prices are lowered too rapidly, denying a fair return on the cost of investment. Or it might mean that tolls remain too high for too long, used to make unreasonable profits, or to cross-subsidize other activities that governments do like. To give a simple example, irrespective of the NSA-style spying scandals, the volume of work that telcos do for law enforcement agencies has grown enormously over the years. Is it obvious to customers that they pay for law enforcement not only through their taxes, but also through their phone bills? In democratic countries, when they vote about such topics, do they consider the possibility that a politician may be saying they care about the cost of living, and how they want to help people manage those costs, whilst in the background the politician also demands that businesses do things which drive up costs for consumers?
To my mind, a perfect world involves a perfect balance of conflicting forces that pull against each other. Shareholders deserve a fair return. Managers deserve fair remuneration. Governments deserve fair appraisal for all the things they do, and only for the things they do. But one way to make that more likely is perfect, beautiful, uncorrupted information. In that sense, telcos can also play a very positive role in making this a beautiful world.
Tried a couple of times to articulate what I want to say in the best way. The truth is the post covers most angles of this issue. There are just two things I wanted to note:
1. Complexity and ignoring it helps profits, so there is no incentive to do away with it (as noted). However, costs are also the additional work hours required to maintain this complexity, fix it when it breaks etc. Therefore, there is a need to quantify more than the accounting costs (read behind the numbers). In addition, retaining customers should be key; everyone wants new customers, but the cost of acquiring them is 6 times that of keeping an existing one (MBA 101). So why piss off existing customers?
2. Regarding the issue of regulation: the government can intervene by competing in the market itself and driving down prices (and complexity) or it can establish the regulation framework. If companies do not see that being open, honest and clear is necessary and has long term benefits (vis a vi short term profits), then they will not only lose customers in the long run but more rules will be put forth in the market. Finally, the economic climate will perpetuate the disappointment of consumers – with wages stagnating and everyone cutting back the last thing one needs is to decipher cryptic bills.
@ Michael, you make some good points, like you always do 🙂
I perceive the trend is against governments intervening by directly competing in a market through publicly-owned companies, but towards them imposing constraints on privately-owned companies. By imposing their wishes on private companies, the government can take credit for all the good things they supposedly force the businesses to do, but don’t take any blame when the business screws up. The hardest part for customers to understand (or care about it) involves the backroom deals where government gives X and expects telcos to do Y. For example, this kind of opaque give-and-take occurs in the context of rolling out high-speed internet services to rural areas. This can also have a knock-on impact on prices and complexity, because some kinds of customer may be subsidizing some other kinds of customer.
I’d rather have all of these things handled as openly, transparently, and as clearly as possible, so the public understands what is going on. As a risk manager, this simple strategy has the benefit of not only reducing complexity and the risk that the business loses track of its goals or how its profits are made, but it also reduces risks relating to: operational inefficiency; poor responsiveness to genuine customer priorities; inconsistency between explaining business performance to shareholders and the other stakeholders; and internal corruption. Maybe I’m a radical, but I’d go so far as saying it is in the customer’s general interest to pay the full, unsubsidized cost of their handsets, and for them to pay a flat recurring fee for access to a network, with additional costs for usage on top. That way the links between the prices and costs are clearest to everybody, with least reason for anyone to complain that their prices are inflated because they’re subsidizing somebody else.
With that in mind, I wouldn’t charge people for complaining about the service they receive, but I would keep an eye on the customers who make the most unjustified complaints, and do the most that is legally possible to encourage them to churn. They also drive up costs and effectively benefit from a subsidy paid by other customers. A genuine policy of treating customers openly and fairly might work well, even in difficult economic times, if customers feel the telco is doing everything possible to ensure the price that they actually pay is closely connected to the costs of providing them with the service they actually use.