Forfeited Revenue: A New Metric to Quantify Telecommunications & Data Center EBITDA Losses due to Late Service Installs

A New Metric to Motivate and Manage Telecom

Every telecommunications carrier and data center operator serving wholesale, enterprise, and SMB customers leaves revenue on the table when they install services after the Customer Request Date (CRD).  CRD is the ultimate Voice of the Customer, the contractually binding date when the customer states they will start paying for service if the provider can deliver it.  Instead, telecom companies typically track performance against the Firm Order Commit date, an install date based on internal processes, inventory, and cycle times.  Some companies do measure the delta from CRD to install date. But “days” as unit of measurement fundamentally fails to motivate behavior, because days fail to capture the financial value of delays, rework, and disappointed customers.  Others track an even more abstract metric called “CRD Met” to capture the percentage of installs completed on CRD.  Instead of relatively meaningless and inward focused metrics, we propose a far more valuable metric:

Forfeited Revenue, which is the total dollar value of services that a customer has agreed to pay for that is permanently lost when a carrier or data center cannot deliver services on time according to CRD.

Forfeited Revenue = Days Installed Late x Daily Recurring Revenue

A Simple Calculation with Powerful Implications

Forfeited Revenue is easily calculated from a company’s existing install report using universally captured fields in the industry.  CRD minus the Bill Start Date (BSD) gives a negative count of days indicating lateness from the customer’s perspective.  Multiply that value by the Daily Recurring Revenue (Monthly Recurring Revenue (MRR) divided by 30 days) to determine the revenue the customer was otherwise willing to pay.  This leads to the simple calculation:

Forfeited Revenue = (CRD – BSD) x MRR / 30

In the actual data below, ARMdcs calculated the sum of the Forfeited Revenue for every order installed during the calendar year of a large North American carrier with roughly $1B in revenue.  The results show that this carrier’s Forfeited Revenue averaged a staggering $563k per week, and totaled $29.85 Million for the year.  The spikes in Forfeited Revenue are attributable to End of Month pushes to complete installs to meet monthly revenue targets, with a year-end (week 53) maximum of $1.83M.  Had this carrier captured the additional 3% of revenue that customers obligated themselves to pay, they would have increased EBITDA almost 10%.

Decision makers can subsequently evaluate, prioritize, select, and execute improvement programs using Forfeited Revenue, cost and duration to calculate standard measures of ROI.  Everything from individual order interventions to multi-year IT system developments can be evaluated in the same framework using motivating financial metrics.  Furthermore, calculating and tracking Forfeited Revenue produces a leading indicator of future Customer Experience (CxP) and Customer Satisfaction (CSAT) scores. The customer already declared that they want to pay for working service on CRD, and every dollar of Forfeited Revenue represents a dollar of customer disappointment.

Root Cause of Forfeited Revenue

Expressing Forfeited Revenue as the dollar-denominated measure of value lost still requires addressing the nature of time and its multiplying effect on revenue.  In other words, no rational carrier will reduce Forfeited Revenue by reducing MRR, and instead will reduce the time required to complete installs to meet CRD as cost effectively as possible.

When it comes to new install cycle times, the actual duration of value added work performed (when done right the first time) is measured in hours.  The rest of the weeks, months, and sometimes years of total install duration is waste in the form of rework and waiting, both of which are the direct result of poor network inventory Data Integrity - when inventory systems of record do not reflect the physical or logical reality.

Consider the ideal situation as a starting point.  If every network element, fiber span, channel, jumper, and port is perfectly captured within the inventory system, every install should be quick, easy, and perfectly accurate on the first try.  Furthermore, with perfect visibility into network inventory, effective capacity planning and critical sparing would enable unprecedented levels of responsiveness with drastically reduced capital tied up in inventory.  True automation in design, provisioning, and installation would become feasible.

Instead the reality is that every new install is a battle from inception, sometimes even before the sales team quotes the order.  Weeks of delay are common when buildings aren’t available to quote, on-net status can’t be determined, and fiber & equipment availability is a mystery requiring site surveys.  Sales teams must force the signed order through the system after a few more weeks of delay. Operations then tries to design circuits with misinformation all around. Field Techs regularly encounter busy ports.  All work up to the defect discovery is waste, and the install pipeline must accommodate the unexpected rework.

A staggering 21% of structured wiring physical inventory (ISP & OSP) data is inaccurate on average, with supposedly usable inventory (that carriers attempt to consume for new installs) showing defect rates as high as 68% across a single data center.  The reasons are endless, but in our experience the major impediments to accurate physical inventory data are:

  • Rapidly changing physical status is not reflected in the inventory system of record including:
    • New installs
    • Next available” practices
    • New disconnects
    • Disconnect backlogs
  • There is simply no possible remote monitoring of passive fiber panels to verify what task has or has not been completed
  • Frequent M&A’s have incomplete integrations and significant data fallout from inventory migrations
  • Spreadsheet based (xls, csv, etc.) audits are not reflected in inventory systems of record
  • LOA/CFA transmission processes are antiquated
  • Inventory systems are isolated between companies

When basic inventory management is inadequate, every decision based on that inventory is similarly flawed, and aggregate decisions fail at exponentially increasing rates.  For example, completing both connections of a fiber cross connect across industry average inventory (21% defect rate) has just a 62% chance of being completed on the first attempt.  A service that requires 5 cross connects, or 10 connections sinks to an abysmal 9.5% first pass yield.

Day to day transactions for new installs consume all available time within the carrier or data center, where rework and waiting accumulate until the final push during End of Month to salvage as much new revenue as possible.  Longer term thinking for capacity and critical spares management is cannibalized for new installs, giving less time to the network to be responsive to less accurate data.  Delays compound on each other as each service becomes more difficult to install, while Forfeited Revenue grows at an accelerating rate.

Targeting Forfeited Revenue Mitigation Efforts

In short, if every operational decision about installs is based on network inventory data, and every inaccuracy in the network data drives a wrong decision that results in a delay beyond CRD, then the best way to eliminate delays is to improve network inventory data.

Carriers and data centers must identify, evaluate, and select the projects most likely to reduce delays beyond CRD as measured by the Forfeited Revenue they will recover vs the cost of such projects.  One perfect example lies in busy Customer Facility Assignment (CFA) causing lengthy circuit redesigns and requiring revised Letters of Authority (LOA-CFA).  Busy CFA stems from all of the sources of error mentioned above, and has a special role highlighting the impact of delays on revenue and Customer Experience.  Each Busy CFA instance:

  • Occurs right before CRD/FOC (1-2 days)
  • Often incurs a 2 – 4 week delay
  • Readily associates Forfeited Revenue to a single event
  • Drives explosive customer reactions

An inventory Data Integrity improvement program must be considered the foundation of any Forfeited Revenue recovery program, as every decision, process, tool, or system improvement will fundamentally depend on the inputs from inventory data to be successful in eliminating delays.

Secondary Impacts of Poor Data Integrity

Aside from Forfeited Revenue, poor network inventory data contributes to excessive Network Expense (Netex) when Access Management and Offnet departments pay for access they are not actually using, because they do not have sufficient information to disconnect or dispute access charges from vendors.  Additionally, not all services that are provided are billed to customers, resulting in Revenue Leakage.  Furthermore, Capex budgets are wasted when managers, facing supposed inventory shortages, buy increasing amounts of capacity they do not need and have degraded ability to manage. 

Ultimately, every effort to automate design and provisioning will fail end to end tests with defect rates this high.  The implication is clear: network operators could plan, consume, operate, and manage their assets, meet CRD much more effectively, and deliver higher EBITDA for the organization with better inventory data.

Drive Service Installs, Customer Experience, and EBITDA

Equipped with the new Forfeited Revenue metric, it is now possible to calculate and demonstrate ROI for Data Integrity projects with the primary goal of reducing install timelines.  Properly executed data integrity programs that deliver actual improvements in the network inventory system of record, as opposed to spreadsheet driven audits, are the fastest and highest available returns on investment that network operators can undertake.  Additionally, Data Integrity projects improve current operations without introducing the risk and costs of new processes, training programs, IT system development, and capital purchases. Every peripheral IT system, such as quoting, ordering, workflow, and provisioning systems will experience secondary improvements in performance that incrementally reduce Forfeited Revenue by reducing rework and accelerating installs.

Furthermore, Forfeited Revenue becomes a metric to incorporate into business cases for proactive fiber route builds instead of waiting for “success-based” criteria, i.e. orders.  Regardless of how aggressive the customer sets CRD in the order, Forfeited Revenue is a valid metric because of the customer’s commitment to pay invoices starting on CRD.  It is up to the carrier or data center to determine cost effective means to meet aggressive CRD’s with the additional visibility and potential benefit captured in Forfeited Revenue.

About ARMdcs™

Asset Recovery Management Data Center Solutions’ mission is to dramatically improve operational and financial performance for our clients through comprehensive and robust solutions to data integrity challenges.  We operate self-contained, multidisciplinary teams of specialists bundled with our proprietary system cARMa™.  ARMdcs recovers Netex, Capex, and unbilled revenue by eliminating inventory defects without impacting clients' revenue bearing operations.  ARMdcs teams consist of telecommunications industry experts experienced in constructing and operating advanced networks and data centers. ARMdcs is a Delaware corporation headquartered in Denver, Colorado.