Global Best Practices Benchmark Report: Telecom Finance and Accounting Performance Compared to Other Industries

PricewaterhouseCoopers conducted a Global Telecom Finance and Accounting Benchmarking study of telecommunications companies during 2005. The objective was to analyze 71 performance measures that would enable telcos to compare nance and accounting functions with that of their peers to identify both business strengths and challenges. PwCs Global Best Practices Group distributed the results of this study in a telecom nance and accounting report this past September. In addition to analyzing the telcos against their peers, we also compared the nance and accounting metrics of the telecommunications sector against all other companies in PwCs Global Best Practices database. This extensive database contains information on more than 250 companies worldwide operating in industries ranging from manufacturing and consumer products to commercial services, nancial markets and real estate to healthcare, insurance and nonprots/government. By expanding our original study to include such a diverse control group, we are able to provide a useful context for evaluating the overall nance and accounting performance of the telecom sector.

Manufacturing Energy and Telecommunications Consumer Products Nonprofit/Government

30.2%

Commercial Services Healthcare Financial Markets

6.7% 3.4% 2.6%

Insurance Real Estate

1.9% 0.4%

26.9% 18.3% 9.3%

Unspecified 0.4%

As expected, telecommunications compared very favorably with other industries. The following summary of our ndings provides insights into the strengths of the sector plus identies a few interesting opportunities for improvement.

PWC

Overall Finance Costs

Our review of overall nance costs indicates that the telecommunications industry is inline with other industries. Initially, we thought the telecommunications sector might have higher overall nance costs, but we are pleased to report very similar results when we compare telecom to a line item from the study dened as - All Other industries. Interestingly, we found non-U.S. telcos operate with a slightly higher percentage of costs than U.S. companies. We also identied a wide gap between median performance and best-in-class among telcos. Best-inclass performance in telecoms will be achieved through continued automation, removal of error/defect rework and labour arbitrage via outsourcing and off shoring. We looked at the specic functions typically found within the nance organization and found the telecommunications sector performed well in relation to the median performance of other industries. Functions such as payroll, travel and entertainment and accounts payable performed well above the All Other industry median. Still, there is a substantial gap between best-in-class and the telecom median. We believe this is largely due to the fact that some companies in other industries have changed the systems and processes that support the nance function enabling them to achieve performance levels that set them apart. This raises a question worth discussion: Does the cost of achieving enhanced performance divert scarce resources in an attempt to manage minimal costs? Many telecommunications companies are focused on driving top-line growth. However, if they chose to channel investments to non-revenue activities, such as nance costs, the telecommunications sector and many telecommunications companies could move closer to best-in-class performance levels.

A. Benchmark Group
Minimum Median

optimal
Maximum

Telecom All Other

0.14% 0.13%

0.82% 0.46%

0.99% 0.96%

1.57% 1.59%

4.32% 3.82%

B. Finance department cost as a percentage of revenue by process

Process Telecom Median All Other Median Best in Class

Payroll Travel and entertainment accounting Accounts payable Billing Accounts receivable Close-the-books / nancial reporting Financial budgeting and analysis Fixed-assets accounting Internal audit Tax

0.048% 0.007% 0.045% 0.204% 0.326% 0.057% 0.099% 0.024% 0.037% 0.016%

0.130% 0.021% 0.095% 0.079% 0.099% 0.130% 0.111% 0.021% 0.036% 0.031%

0.010% 0.001% 0.005% 0.000% 0.002% 0.005% 0.002% 0.002% 0.002% 0.001%

Finance Head Count

The telecommunications sector did not compare well to other industries in terms of head count within the nance function. Telcos appear to employ more staff than other industries to perform similar functions. Size of company and volume of transactions particularly in accounts receivable may require more staff to support the function, but telecommunications companies have larger staffs in other areas, such as internal audit and budgeting, that should be similar across all industries. More importantly, there is a signicant gap between the sector and best-in-class. Telecommunications companies may want to look at other industries to gain a better understanding of how to achieve greater efciency by leveraging a different model.

C. Span of control by process (staff-to-management ratio)

Process Payroll Travel and entertainment accounting Accounts payable Billing Accounts receivable Close-the-books / nancial reporting Financial budgeting and analysis Fixed-assets accounting Internal audit Tax Telecom Benchmark Median Median 6.0 6.0 5.3 6.2 12.9 3.0 5.7 6.2 5.0 2.0 5.0 4.1 8.4 6.7 5.6 2.6 2.1 3.3 3.4 2.2 Best in Class 28.1 28.0 37.0 31.0 29.5 21.7 25.0 24.0 9.0 30.0

Payroll
Payroll operations within the telecommunications sector are dauntingly complex and, if mishandled, can create morale issues among employees and legal issues with regulators. The sector must contend with factors ranging from company size, differing payment structures (i.e. commissions, union scales, etc.), state/country-specic taxation and extensive record keeping. In response, the sector has designed both processes and applications that create and distribute high volumes of data in a costeffective manner. When comparing the sector to other industries, we found telecommunications companies performed signicantly better than others. Yet the sectors best performer signicantly lagged behind the best-inclass performer. Culture and tools appear to provide the edge. The best-in-class company leverages automation, e-commerce, on-line forms, electronic signature and direct deposit to effectively manage the transactional cost.

D. Benchmark Group
Minimum Telecom All Other 2.35 0.06 4.18 5.34 Median 5.07 10.68

optimal
Maximum 17.64 20.54 38.05 73.50

Accounts Payable
Telecommunications companies procure goods and services on par with companies in other industries, though we found telcos lag behind the median performance of All Other industries by US $0.92. More importantly, we found the sector supports/maintains a vendor population that is twice the median value for All Other industries. Telecommunications companies could drive cost out of the business by reducing processing cost and rationalizing the vendor pool. The gap between sector median performance and best-in-class is also signicant. On examining the variance, we attributed enhanced performance to the procurement organization. Through the contracting process, best-in-class companies require vendors to submit invoices, and leverage web-based tools to perform validation routines and route invoices to departments for approval.

E. Benchmark Group
Minimum Telecom All Other 1.45 0.93 3.91 3.00 Median 6.64 5.72

optimal
Maximum 12.52 11.22 21.95 70.69

Billing & Accounts Receivable

The telecommunications sector has made steady progress in managing and maintaining accounts receivable Days Sales Outstanding (DSO) at a reasonable level. Several years ago, we found that many telecommunications companies carried DSO of 50 to 60. Today, the sector is outperforming other industries by employing disciplined credit and collection actions and leveraging third-party tools. Interestingly, there is a large gap between best-inclass and median performance. Obviously, as a company progresses towards best-in-class performance it improves its working capital position. Yet its worth considering the impact on customer experience and overall retention. Customers that have a good experience typically pay bills faster and continue using service longer. Additionally, the telecommunications sector set the bestin-class performance target related to cash remittance due largely to its investment in technology to process, scan, and apply payments. The sector has learned from the nancial services industry, where much of the technology supporting payment processing is tested, tuned, and proven.

F. Days Sales Outstanding Benchmark Group

Minimum Telecom All Other 7 7 31 30 Median 38 49

optimal
Maximum 41 61 75 120

G. Cash Remittance without Errors Benchmark Group optimal

Minimum Telecom All Other 0.01% 0.02% 0.03% 0.82% Median 0.23% 2.16% 0.72% 7.60% Maximum 2.65% 24.0%

Budgeting
Our review of the budgeting process differs from other areas of this study in that instead of comparing processes focused on reducing errors or lowering cost, we looked at the timeline required to prepare the annual budget. We found that telecommunications companies lag behind the median performance of other industries by 15 days. The telecommunication sectors best-in-class performer took nine times longer to complete the budget process than the best performer in All Other industries. Based on the data presented in this survey, it's difcult to identify the cause for the increased preparation time or what affect it might have on the sectors nancial performance. The sector may want to determine if legacy practices and processes are hampering performance. Interestingly, we found there was not a consistent approach to measuring the performance of the function. In fact, there does not even appear to be a widely accepted method. Several companies apply a return-oninvestment methodology; several apply a measure of reducing billing adjustments and customer care calls; and several simply did not measure the function.

Fixed Assets
There does not appear to be a consistent denition for xed asset classes/pools among the survey respondents. We noted that one respondent manages as few as six asset classes, while another manages as many as 860. On average, respondents indicated they manage the business with 400 asset classes. Tracking, computing and accounting for these assets requires signicant effort by the nance and accounting organization. Interestingly, we noted that companies are investing the rate of asset additions exceeds asset disposals by 50%. We had hoped to gather data on asset tagging and tracking, but this section of the survey elicited limited response. We interpreted this to mean companies continue to struggle with asset tagging and tracking. However, the few companies that did respond provided the following: a company in Asia has tagged 100% of its inventory and physically veries 50% of its asset base annually. No other company comes close to this performance level. Several other companies tagged 30% - 80% of the assets but did little annually to validate existence.

H. Benchmark Group
Minimum Telecom All Other 45 5 74 45 Median 90 75

optimal
Maximum 120 91 150 270

Industry-Specic Information
As part of the Finance and Accounting Benchmarking Survey, we asked respondents to provide sector-specic data that could be compared to peers. Although not all sixteen respondents complied, we receive sufcient data to draw some interesting comparisons.

Rating and Invoicing

We noted a large disparity between U.S. and non-U.S. telecommunications companies in the cost of producing an invoice. U.S. companies spent $0.01 - $0.02 to produce an invoice compared to the $0.76 - $1.41 per invoice spent by non-U.S. telcos. This is a large difference for a similar activity. We can only presume non-U.S. companies capture or allocate costs associated with the activity or provided fully loaded costs including postage.

Summary
Telecommunications companies are operating on par with many other large global companies, but the sector does not establish best-in-class performance targets except in cash remittance. Telecom executives may want to ask themselves why, especially in light of increased performance pressures and heightened scrutiny of nance and accounting functions. Would shareholders, regulators and government agencies be more satised if a telecommunications company achieved best in class? Obviously this survey does not address these questions, but it does highlight areas that provide the sector opportunities for improvement. More importantly, the survey provides insights into how companies in other industries are achieving better performance and enables telecom nance and accounting groups to benet by incorporating similar practices. We look forward to the day best-in-class performance targets are set by the telecommunications sector and others are striving to capitalize on our achievements.

Revenue Assurance
The sector continues to invest in revenue assurance. All respondents had a revenue assurance group though they varied in size. U.S. telcos spend approximately $1.6M - $1.8M per annum on the function, while non-U.S. telcos spend from $1.6M - $3.9M. These gures represent signicant investments in human resources, thereby demonstrating the value the function continues to provide the organization.

2006 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member rms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. DL-DL-06-0398